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4Q – an aberration; outlook remains intact

Well-placed to outperform in Branded Generics segment

* Ipca Laboratories (IPCA)’s 4QFY21 performance was below expectations, weighed by moderation in the Domestic Formulation (DF) segment and API sales. However, IPCA remains on track to deliver healthy mid-teen YoY growth in the Branded Generics segment. Increased business share from the integrated manufacturing value chain and better operating leverage in DF would drive improvement in profitability going forward – adjusted for onetime business from Hydroxychloroquine Sulfate (HCQS) in FY21.

* We lower our EPS estimate by 5%/2% for FY22/FY23E, reflecting a) sales growth constraints in the API/Generics segment and b) an increase in marketing and promotional cost with the easing of lockdown-related measures in the Branded Generics segment. We continue to value IPCA on 24x 12M forward earnings to arrive at TP of INR2,400. We remain positive on the stock owing to a) its outperformance of the industry in the DF segment, b) increasing cost efficiency on better backward integration, and c) its capacity enhancement program for the API business. Maintain Buy.

Exports, other income, lower tax drive 4Q earnings

* Sales rose 4% YoY to INR11.1b (est. INR13.4b) in 4QFY21, led by growth in exports (Institutional/Branded Formulations). Institutional exports grew 92% YoY to INR762m (7% of sales). Branded Formulations exports grew 32% YoY to INR1b (9% of sales).

* However, DF sales were almost flat YoY at INR4.3b (39% of sales). API sales declined 6% YoY to INR2.6b (23% of sales) in 4QFY21. Exports (Generic Formulation) declined 3% YoY to INR1.6b (14% of sales).

* The gross margin expanded 360bp YoY to 69.6% on a superior product mix.

* However, the EBITDA margin remained flat YoY at 20.5% (est. 24%) on lower operating leverage (other expenses up 300bp) and higher staff cost (+50bp).

* EBITDA grew 4% YoY to INR2.3b (est. INR3.2b).

* PAT stood at a higher rate of 19% YoY to INR1.6b (est. INR2.3b), led by lower depreciation, higher other income, and lower tax rate.

* FY21 sales/EBITDA/PAT grew 17%/61%/74% to INR54b/INR15b/INR11b.

Highlights from management commentary

* IPCA has guided for 9–10% YoY sales growth and an EBITDA margin of 25% for FY22.

* Particularly, DF sales are expected to grow 16–18% YoY and Branded export sales 13–15% YoY in FY22.

* Generic Formulation sales would grow 5% YoY in FY22; Institutional sales are expected to grow 5% YoY and overall API growth would be ~2% YoY in FY22.

* MR strength stands at ~4000. IPCA is looking to add a maximum of ~200 MRs in FY22 in smaller therapies such as Ophthal, Derma, and CNS.

Valuation and view

* We reduce our earnings estimate by 4%/2% for FY22/FY23, factoring in a) slower growth in the API business due to capacity constraints, b) lockdownrelated impact in the Branded export segment, and c) higher opex in the DF segment in FY22.

* Adjusted for one-time business from HCQS in FY21, we expect an earnings CAGR of 15% (FY21–23) – led by a superior performance from DF and ongoing manufacturing efficiency on account of increased backward integration and cost containment measures.

* We continue to value IPCA on a 24x 12M forward earnings basis to arrive at TP of INR2,400.

* We remain positive on IPCA on the back of a) its outperformance of the industry in the DF/Branded export segment, b) better profitability on improving manufacturing efficiency, and c) capacity expansion in the API segment. Reiterate Buy.

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