Buy Ipca Laboratories Ltd For Target Rs.1,940 by Motilal Oswal Financial Services Ltd
India and Unichem fuel profitable growth
Efforts in progress to improve business prospects across segments
* Ipca Laboratories (IPCA) delivered a better-than-expected performance in 3QFY25. It has consistently outperformed the industry in the domestic formulation (DF) market. However, this was partly offset by muted business in the South African market. The API prices have been stable, and inventories are moving towards normalized quantum at the industry level.
* We raise our earnings estimates by 4%/3%/2% for FY25/FY26/FY27 factoring in: 1) the increased share of higher-margin products, 2) better operating leverage for the US business of both IPCA and Unichem, and 3) a revival in the South African business. We value IPCA at 36x 12M forward earnings to arrive at our TP of INR1,940 on a 12M forward earnings basis.
* IPCA remains on track to: a) revive the US business from its own site as well as integrate/scale Unichem operations, b) increase offerings/enhance reach/gain market share in the DF segment, c) drive improvement in operating leverage. We model a 28% earnings CAGR over FY25-27. Reiterate BUY.
Better segmental mix partly offset by higher opex on a YoY basis
* IPCA’s 3QFY25 sales grew 9.4% YoY to INR22.5b (our est: INR22.9b). DF sales grew 12.5% YoY to INR8.8b (39% of total sales). Exports formulation sales increased 5.8% YoY to INR4.6b (20% of total sales). Exports-branded sales rose 52.7% YoY to INR1.6b. Exports-generics sales dipped 11% YoY to INR2.2b. Exports-institutional sales declined 3.1% YoY to INR741m. API sales grew 11.6% YoY to INR3.2b (14% of sales).
* Revenue from subsidiaries grew 2% YoY to INR5.8b (23% of sales). The revenue growth is largely due to Unichem.
* Gross margin (GM) expanded 420bp YoY to 70.2%, due to superior product mix/lower RM costs.
* In line with gross margin, EBITDA margin expanded 450bp YoY to 20.6% (our est: 17.8%), as lower employee expenses (70bp YoY as a % of sales) were partly offset by higher other expenses (+40bp YoY as a % of sales).
* EBITDA rose 40% YoY to INR4.6b (our est: INR4.1b). ? Adj. PAT for the company grew 122.5% YoY to INR2.5b (our est: INR2.0b).
* Revenue/EBITDA/PAT grew 17.9%/31.7%/54.4% YoY in 9MFY25.
Highlights from the management commentary
* IPCA guided a standalone EBITDA margin of 23-24% and a consolidated EBITDA margin of 19.0-19.5% for FY25.
* GM for 3QFY25 was high due to a reduction in material costs. While the pricing was stable, a better product mix led to better GM. The chronic portfolio has done well, driving better GM.
* The Generics business was hit mainly by lower off-take for the South African market (INR1.2b to INR400m sales on an annualized basis). This was largely due to the loss of tender. Significant improvement is likely in FY26.
* IPCA reported volume growth of 6-7% and the price hike was 5-6% YoY for the quarter.
Highlights from the management commentary
* IPCA shipped four products and seven to eight products are in the pipeline for the US market.
* IPCA’s Acute segment reported YoY sales growth of 8.7% vs. +6.0% for IPM in3Q.
* IPCA posted a sales growth of 17.1% YoY for the Chronic segment vs. +9.7% for IPM in 3QFY25.
* Backward integration, using IPCA API for Unichem formulation, to start reflecting in a couple of quarters.
* API segment has scope to grow 8-10% YoY. The Dewas facility started and running at 30-35% capacity utilization.
* Unichem – 3 / 4 product launches can be expected on an annual basis for the next 4-5 years. Unichem would not need any further formulation capacity expansion over the next 4-5 years. IPCA would also file 5-6 ANDAs every year going forward.
* The Zerodol portfolio continues to grow well. However, it was offset partly by subdued growth in anti-malaria, infective, and cough & cold.
* IPCA’s MR strength stood at ~6,700 in 3QFY25 (vs. 6,300 in 3QFY24) with per month MR productivity of INR0.45m in 9MFY25 vs. INR0.43m in 9MFY24. Going ahead, the company expects per month productivity improvement of INR25-30k
* Expected to add 300MR in the cardiology segment and add one more division in dermatology/cosmetology to sustain industry outperformance in the DF segment.
* ETR- 27-28% for FY25.
Enhancing scope to deliver sustainable growth/margins
Superior execution/additional MR force to drive the DF segment
* In 9MFY25, the DF segment grew 11.8% YoY to INR26.9b, led by growth across key therapies.
* IPCA’s top therapy, i.e., pain, contributed ~39% of total revenue and grew 10% in 3QFY25. Cardiac therapy (13% of DF sales) grew 12.8% YoY for 3QFY25. While Derma contributes 6% of DF sales, it has grown at a phenomenal rate of 19.4% YoY for 3QFY25.
* Additionally, IPCA continues to implement efforts toward increasing its fieldforce productivity.
* Accordingly, we expect 14% sales CAGR in the DF segment to INR44.9b over FY25-27, led by increased traction in key therapies and MR productivity.
Portfolio expansion/synergies with Unichem to drive export growth
* During 9MFY25, IPCA’s export sales grew 7.2% YoY to INR13.9b, led by ~32% YoY growth in the institutional business, followed by 14% YoY growth in the branded formulation business. This was partly offset by a 2% YoY decline in the generic business.
* Subsidiary sales grew 59% YoY to INR16.5b, primarily led by ~13% YoY growth in Unichem sales to INR14.4b.
* Product launches and increasing synergy between operations of IPCA and Unichem are likely to improve overall prospects of the US generics over the next 2-3 years.
* Accordingly, we expect the overall export formulations (including Unichem) business to clock 15% sales CAGR to reach INR55b over FY25-27.
Cost efficiency to propel market share gains in the API segment
* During 9MFY25, API sales grew 7.2% YoY to INR14b due to a stable pricing environment.
* IPCA continues to gain market share in its key product, arresting the impact of price decline to some extent.
* With new introductions and improved cost efficiency, we expect a 14.3% sales CAGR in this segment to INR16.4b over FY25-27.
Valuation and view
* We raise our earnings estimates by 4%/3%/2% for FY25/FY26/FY27 factoring in: 1) the increased share of higher-margin products, 2) better operating leverage for the US business of both IPCA and Unichem, and 3) a revival in the South African business. We value IPCA at 36x 12M forward earnings to arrive at our TP of INR1,940 on a 12M forward earnings basis.
* IPCA remains on track to: a) revive the US business from its own site as well as integrate/scale Unichem operations, b) increase offerings/enhance reach/gain market share in the DF segment, c) drive improvement in operating leverage. We model a 28% earnings CAGR over FY25-27. Reiterate BUY.
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