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IPCA consolidated Unichem w.e.f. Aug’23, which reflected in Sep-Q’s 27% revenue growth and lower margin of ~16%. Generic formulations grew 32% YoY, which compelled the management to revise its guidance upwards to 20% YoY growth in FY24. This partly offset weakness in the institutional business on account of loss of tender in South Africa. Domestic business reported healthy 10% growth – the management reaffirmed its FY24 growth guidance of 12-14% this year. IPCA’s US business is at an inflection point – regulatory issues at its facilities have been resolved and supplies are expected to start w.e.f. 1Q25. Unichem's integration remains management’s top priority with various initiatives such as API process improvement, procurement, utility and logistic cost optimisation, market extension of existing products, synergies, etc. While near-term upside remains limited due to the Unichem acquisition, gradual US ramp-up and API/ institutional business weakness, our long-term thesis on US turnaround, strong domestic and exports growth remains intact. BUY.

* Domestic guidance reaffirmed, institutional business weak: Domestic formulations reported a revenue of INR 8.5bn (in line). Ipca’s strong growth across CNS, Pain etc. offset lower anti-bacterial and cough & cold sales. The management reiterated their guidance of 12-14% growth in FY24 as MR productivity improves (PCPM at INR4.5L). Exports growth was strong at 15% YoY (11% beat) led by Generic (+32% YoY) and Branded (+15% YoY) business. However, institutional business disappointed by declining 21% YoY (2% miss), due to loss of a tender in South Africa (INR 600mn annual impact). The company upgraded their FY24 outlook for generics business due to strong ramp-up in Europe / UK markets. API segment grew 6%YoY due to decline in sartans and anti malarials and earlier guidance of 10-12% decline was lowered to 7-8% decline this year.

* Unichem integration and US outlook: IPCA completed the acquisition of Unichem Laboratories by acquiring 33.38% promoter stake for INR 9.45bn and 19.3% stake via open offer worth INR 6bn (Ipca now holds 52.7% stake in Unichem). The management is targeting INR 18bn top-line with INR 3bn EBITDA in the next two years. The management is focusing on integration and detailed a few initiatives: (1) API process optimisation which could lead to 30-40% cost reduction; (2) Procurement efficiencies due to bulk purchase as in IPCA does; (3) Reducing utility cost by 12-14cr; (4) Reducing logistic costs by reducing % of air shipments; (5) Reduction in losses in UK and Ireland; (6) Market extension of products – of the 17 ANDAs identified, 5 products can also be filed in Europe, Australia, New Zealand, Canada and 12 products where biostudy needs to be repeated can also be filed in these geographies. We expect major turnaround through overhead optimisation, and higher growth. Post clearance of US facilities, IPCA aims to resume supplies to the US by 1Q25. 10 products can be started quickly post revalidation and also plans to launch 9 ANDAs next year (incl. 3 Para IVs). Most of the pending ANDA filings are from Pithampur. The current utilisation of Piparia is 15-20% and Pithampur is 30%. The distribution of products in the US will be done via Unichem franchise (the company is integrating Bayshore with Unichem).

* Key financials: Revenue/ EBITDA/ PAT of INR 20.3bn/3.2bn/1.5bn grew +27%/+23%/+1% YoY and were +19%/-2%/-20% vs. our estimates and +18%/-4%/- 24% YoY vs. consensus estimates. EBITDA margin declined 50bps YoY to 15.8% (JMFe/consensus: c. 19%) dragged by higher staff costs and other expenses ( includes INR 393mn related to acquisition costs of Unichem). Adjusted EBITDA was INR 3.6bn with margins at 17.7%. Domestic formulations were in line with JMFe at INR 8.5bn (+10%YoY). Export formulations were grew 16% YoY at INR 4.7bn (10% beat), Generic and Branded formulations grew strong at 32%/15% YoY respectively while institutional business declined 21% YoY. Export API sales were INR 2.5bn (+11%YoY) and were 11% above estimates.

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