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IPCA Laboratories reported results exceeding expectations across all fronts. The revenue reached INR 20,529 mn, showing a growth of 32.8% YoY and remaining flat sequentially. EBITDA at INR 3,313 mn increased by 53.5% YoY and 3.1% QoQ, with a margin expansion of 218bps YoY and 34bps QoQ at 16.1%, driven by stabilization in material costs. APAT at INR 1,799 mn exhibited substantial growth of 66.8% YoY and 24% QoQ. The company experienced robust growth in both acute and chronic markets.

* Formulation business: The total formulation business, constituting 59% of total sales, recorded a 10% YoY increase, reaching INR 12,127mn. The domestic formulation business exhibited an 11% YoY growth at INR 7,796mn, ranking the company as the 11th pharma company in India as per MAT Dec 2023. Exports formulation grew by 8% YoY, reaching INR 4,331mn. However, the branded formulation business in the ROW declined by 18% due to various challenges, including shipment issues to the CIS market, delays in import licenses affecting Myanmar business, and market slowness in West Africa linked to the red sea crisis.

* API business: API, constituting 13.9% of total sales, experienced an 11.6% YoY decline, totaling INR 2,850mn. The decline was observed in both domestic and export markets. The company is encountering volume decline in specific APIs; however, prices are beginning to stabilize. The management anticipates an overall 7-8% decline in the total API business for the year.

* Margin Performance: The gross profit witnessed a substantial YoY increase of 37.8%, reaching INR 13,559mn, although it remained steady compared to the previous quarter. This growth was underpinned by an expanded gross margin of 66%, representing a notable improvement of 239 basis points YoY, albeit contracting slightly by 64 basis points sequentially. Meanwhile, EBITDA soared by an impressive 53.5% YoY to INR 3,313mn, leading to a significant margin expansion of 218 basis points YoY, totaling 16.1%. It's noteworthy that the operational margins are anticipated to withstand potential challenges arising from the red sea crisis in the upcoming periods

* Outlook & Valuation: The outlook for IPCA Labs considers several factors, including anticipated double-digit growth in domestic and branded business, a decline in the API business due to volume reduction, a heightened contribution from the Unichem business, and the significant launch of products in the US market after nearly a decade. The valuation approach involves assessing the company based on the FY26E EPS, resulting in a target price of INR 1,345, valuing it at a multiple of 30x. The recommendation for the stock remains at ADD.

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