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US visibility, margin improvement ahead

Despite reporting a bit sober growth in some of the business segments (India, API, Branded exports) in 4Q, the management has largely maintained 14/15% growth and 18% margins guidance for FY25. It also expects domestic growth to be in double digit (higher than market), and US business to pick up led by 7 to 8 new product launches in FY25 (a few more from 20+ already approved products). API business will likely grow at high single digit while Institutional segment would deliver 14-15% growth. Margin improvement of 100bps+ will come from Unichem as well as the standalone business. While the margin delta has already started reflecting in Unichem’s reported financials, the more tangible synergistic benefits will play out gradually. IPCA’s US business is at an inflection point – supplies have just begun and 6-7 new launches are expected this fiscal. Given the imminent US turnaround, strong domestic franchise and margin improvement, we maintain BUY with a revised Mar’25 TP of INR 1365.

* FY25 guidance: The management guided for 10.5-11.5% revenue growth (standalone basis) with 130-170bps margin improvement to 20.5-21%. At a consol level, the management guided for INR 90bn+ revenues and INR 16bn+ EBITDA (18% EBITDAM).

* Robust India formulations growth: Domestic formulations reported largely in-line revenue of INR 6.9bn. IPCA’s chronic and acute portfolio grew 12%/11% respectively (per IQVIA) vs. market growth of 3%/10% respectively. The non-NLEM portfolio growth was driven by 4-6% price increase, 5-6% volume growth and 2% from new products. Top 6 cities grew at a stellar 16% YoY. The management guided for ~12% revenue growth in FY25.

* Exports are a mixed bag: Exports grew 7% YoY (2% beat) led by +15% YoY growth in Generics business, 4% growth in branded and recovery in institutional business. Institutional/Generics business is expected to grow 14%/12% YoY in FY25. Branded formulations’ growth was impacted by rouble devaluation and issues in West Africa. Accordingly, growth expectations here were tapered down. API segment growth remains subdued (3% beat) with FY25 growth also expected to be modest 7-8%.

* Unichem’s performance has been under-appreciated: The management, detailed a few initiatives:

(1) API process optimisation which could lead to cost reduction; (2) Procurement efficiencies due to bulk purchase as in IPCA does; (3) Reducing utility cost; (4) Reduction in losses in UK and Ireland; (5) Market extension of products – of the 17 US 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. Of the aforesaid initiatives, cost duplications, operational efficiencies and rationalisation of procurement has been factored in the current margin delta. However, the benefit of other initiatives will be realised over time. In FY25, Ipca expects INR 2.25bn EBITDA from Unichem. The distribution of products in the US will be done via Unichem franchise (the company is integrating Bayshore with Unichem). - US recovery is imminent – IPCA has commenced shipment for 1 product this month and expects to launch 6-7 this year. There are 18 approvals in place and 7-8 under WIP. We have factored in US sales benefit in FY25-26 (USD 25mn/ 45mn).

* Subsidiaries are yet to deliver: - Krebs: Ipca has taken an impairment charge (INR 484mn) for Krebs as it was unable to fully utilise the large fermentation capacities. The company is evaluating opportunities like CMO and believes breakeven could be 1-1.5 years away.

- Pisgah: It was created for CRAMS in US primarily to manufacture low volume high value products. It has a small manufacturing facility for narcotic products. Some production may happen at Pisgah for Ipca’s products. It is reporting losses currently.

- Bayshore: It was created to market Ipca’s products in the US but has become redundant now (will be integrated with Unichem which is a bigger and better franchise).

- Trophic Wellness: It operates nutraceutical business and is making profits.

- Onyx: It is a contract manufacturer in the UK and is doing well (GBP 16-17mn profits). - We are also yet to see any meaningful improvement in Lyka Labs.

* Key financials: - Revenue/EBITDA/Adj.PAT of INR 20.3bn/3.2bn/ 1.6bn grew +34%/+78%/+115% YoY and were -2%/-5%/+14% vs. JMFe. The YoY financials are not comparable due to Unichem acquisition. - EBITDA margin improved 390 bps YoY to 15.8% (JMFe: 16.4%)

- Reported PAT includes exceptional item amounting to INR 1.4bn, this is largely a provision for European commission fine (INR 1.26bn). However, Adj. PAT came in at INR 1.6bn and was impacted by higher minority interest (primarily from this gain of Unichem).

- India formulations grew 13%yoy to INR 6.9bn (2% miss). - Overall exports grew 7% YoY (2% beat) above expectations due to growth in branded formulations of 9% YoY (in line) - Export API sales were INR 2.6bn (+2%YoY) and were 3% above estimates.

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SEBI Registration Number is INM000010361