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Rev growth to overcome near term margin challenge

Our view

IPCA clocked a tepid revenue quarter though some bit of price increase and better revenue mix (higher share of India sales) helped gross margin stay flat QoQ despite input cost pressures. While company would give colour on FY23 margin after 4Q results, near term does margin trajectory would be a function of price increases taken to absorb higher input and other expenses like freight, packaging and energy. We now factor in lower margin sequentially in 4Q leading to cut in full year margin estimate. With normalization expected to occur only from Q1 FY23 vs that presumed earlier in Q4, we also trim FY23 gross margin by ~100bps and raise input costs on top of marginally lower revenues leading to a sharp 350bps margin cut and 17% EPS reduction – believe consensus margin at ~26% would also undergo similar pruning with corresponding cuts to EPS too. We introduce and roll over to FY24 EPS and retain target multiple at 27x as believe near term cost pressure does not change the more longer term margin outlook beyond FY23 which can result from consistent 11-13% revenue growth. Retain BUY with revised TP Rs1,370 (earlier Rs1,425) based on 27x FY24 EPS.

Result Highlights

* Revenues up 1.5% YoY at Rs 14,305mn, better than our estimates of -2%.

* Domestic formulations business delivered strong growth at 23% YoY along with branded export formulations growing by 41% YoY. Institutional and generics exports fell 57% and 17% YoY respectively.

* Domestic API revenues were up by 16% YoY while export APIs fell 20% YoY and 22% QoQ.

* Gross margin improved by 40bps QoQ and 170bps YoY at 65.1%.

* Increase in other expenses and staff costs affected the EBITDA margins which were down sequentially by 215bps and 451bps YoY at 21.5%. Increased other expenses might be related higher energy, freight costs; improved gross margin QoQ suggests price increases taking hold as alluded in Q2 call.

Valuations

We introduce and roll over to FY24 EPS and retain target multiple at 27x as believe near term cost pressure does not change the more longer term margin outlook beyond FY23 which can result from consistent 11-13% revenue growth. Retain BUY with revised TP Rs1,370 (earlier Rs1,425) based on 27x FY24 EPS.

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