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Steady quarter

* We maintain our Hold rating on Ipca with a TP of Rs2,150 (unchanged) post a steady Q3. We also retain our FY21/22/23 estimates, which are slightly higher than management guidance.

* Q3 revenue of Rs14bn beat our estimate modestly (+2%). EBITDA of Rs3.7bn came in higher than our estimate by 4%. EBITDA margin of 26% beat our estimate by 50bps, driven by cost optimization and lower employee expenses, partially offset by lower gross margins.

* Management expects EBITDA margin to be in the range of 25-26% going forward. All businesses are expected to post healthy growth in FY22 after adjusting Rs3.5bn one-time revenue in 9MFY21.

* We believe that all near-term upsides are amply reflected in the current valuation of 21x 1P/E on our FY23 EPS. We value the stock at P/E of 22x (unchanged) on our FY23 EPS. Upside risks: US FDA resolution of Import alert, higher than expected growth in API/Formulations business.

* All segments grew, except branded generic: Total revenue rose 4% qoq and 16% yoy. Institutional business posted significant growth of 190% yoy partly due to one-time revenue of Rs340mn. Generics export business grew at 12% YoY. Exports API Business posted 20% growth, while domestic API business was up 39% yoy. Domestic formulations business grew 8% yoy. Branded export was down 31% due to a decline in CIS markets as demand was impacted by Covid-19 and to a certain extent by higher channel inventory. CIS is expected to come back to the growth trajectory from Q4.

* Gross margin contracts but EBITDA margin stable: Gross margins contracted 400bps qoq primarily on account of higher material costs in certain key intermediates due to supply disruption in China and higher freight costs. However, cost optimization and lower employee costs offset most of the impact, limiting EBITDA margin decline at 50bps qoq. Management expects some of the cost savings in branded markets to continue into FY22.

*  Reaffirmed guidance: Management reaffirmed EBITDA margin guidance for FY22 at 25- 26%. Additionally, management expects healthy growth in all businesses in FY22 after adjusting a one-off revenue gain of Rs3.5bn in 9MFY21. Domestic formulations business is likely to post strong growth of 13-14% in FY22 due to a low base. The effective tax rate is expected to remain around 18% for FY22 but could rise to 25% in FY23.

*  Retain HOLD rating and maintain estimates: Our FY22/23 estimates are slightly higher than management guidance. Nonetheless, the stock is trading at ~21x on our FY23 EPS, pricing in all the near-term upside. Hence, we maintain our Hold rating at a TP of Rs2,150, which represents a P/E of 22x on our FY23E EPS. Upside risks: US FDA resolution of Import alert, higher than expected growth in API/Formulations business.

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