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Exports/API drag earnings

The Domestic Formulation segment remains an outperformer

* IPCA’s 3QFY22 earnings was lower than our estimate. The reduced business in Sartans and muted business in the UK outweighed the robust performance in the Domestic Formulation (DF) segment.

* We cut our EPS estimate by 11%/10%/10% for FY22E/FY23E/FY24E to factor in: a) a gradual recovery in Losartan offtake, b) delay in product approvals in the UK market, c) higher raw material cost, and d) increased logistics cost.

* We value IPCA at 24x 12-month forward earnings to arrive at our TP of INR1,190. We maintain our Buy rating.

* IPCA continues to outperform the DF segment on the back of steady market share gain in key therapies. It intends to strengthen its MR force to sustain the growth momentum. The company is on track to build its API facility in Dewas to enhance its manufacturing capacity.

Product mix benefit offset by lower operating leverage

* Sales were flat YoY at INR14.3b (est. INR14.8b) in 3QFY22. DF sales grew 23% YoY to INR6.4b (45% of sales). Export of branded Formulations grew 41% YoY to INR1b (8% of sales). Exports (generic Formulations) declined by 17% YoY to INR1.8b (13% of sales). API sales fell 12% YoY to INR3.1b (21% of sales). Exports (institutional sales) fell 57% YoY to INR592m (4% of sales).

* Other operating income and revenue from subsidiaries grew 24% YoY to INR1.3b.

* Gross margin expanded by 170bp YoY to 65% on a superior product mix.

* EBITDA margin contracted by 450bp YoY to 21.5% (est. 23.3%) due to reduced operating leverage (employee cost/other expenses up 250bp/380bp YoY as a percentage of sales).

* EBITDA declined by 16% YoY to INR3.1b (est. INR3.5b).

* PAT declined by 26% YoY to INR2b (est. INR2.6b).

* Revenue rose 5% YoY to INR45b, whereas EBITDA/PAT fell 16%/19% YoY to INR11b/INR8b in 9MFY22.

Highlights from the management commentary

* The management guided at a standalone YoY growth of ~20% in 4QFY22.

* API sales were impacted in 3QFY22 due to re-working of the process validation aspect of Losartan. The API business is expected to stabilize from 1QFY23 onwards.

* The generic business in the UK remained impacted due to prolonged delays in approvals from the regulatory agency for the supply of products through its own distribution channel.

* It guided at an institutional Antimalarial revenue of INR3.5b in FY22.

* The management expects an INR500m benefit from a WPI-linked price hike in the portfolio under NLEM in FY24.

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