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Temporary margin hiccup; rev drivers intact

Our view

IPCA domestic business continues to exhibit robust strength though exports formulations were largely affected with all segments falling sequentially after a strong Q1. APIs business was disrupted majorly due to sartan issue which is expected to be resolved by Q4 FY22. Q3 is expected to be underwhelming with pressures on revenues as well as margin front. Albeit, domestic business is trending better than guidance and reckon it would cushion some of the input cost pressures and export revenue led weakness in H2. Overall, we believe cost pressure led weakness in margin is relatively quick to resolve (through price hikes if it lasts longer or, as is expected, RM costs cool off) rather than any sluggishness emanating from slower revenue growth. We firmly see IPCA’s lower margin outlook of the first variety; hence, FY23 estimates do not undergo any change while cut current year EPS by 6%. Retain BUY based on 28x FY23 EPS for unchanged TP Rs2,850.

Result Highlights

* Revenue was up by 13.5% YoY to Rs 15.4bn, in line with our estimate of 14% YoY.

* Strong growth in domestic formulation of 30% YoY helped the company post good 14% growth in overall formulation business despite 23% YoY degrowth in institutional exports. Branded and generics portfolio were up 4% and 1% YoY respectively.

* Gross margin fell by 40bps QoQ and 270bps YoY to 64.8% and normalization of other costs from low base of last year brought EBITDA margins to 23.7% below our estimates of 26%.

Valuations

FY23 estimates do not undergo any change while cut current year EPS by 6%. Retain BUY based on 28x FY23 EPS for unchanged TP Rs2,850.

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