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At an inflexion point

* After three years of earnings deterioration, IPCA is well-poised to deliver strong earnings growth over FY24-27.

* With broad-based growth in volume and pricing, IPCA has been able to outperform the industry significantly in the domestic formulation (DF) market, with 15% YoY growth in MAT Aug’24 and a 15% CAGR in MAT Aug’21-24.

* IPCA is making efforts to augment its export prospects through new launches and market share gains in generics exports. It is also working to drive synergies from the Unichem acquisition.

* After a muted performance in the US generics business over the last 10 years due to compliance issues, IPCA is geared up to revive its US business through improving USFDA compliance, new launches over the next 6-8 months, and synergies from the Unichem acquisition.

* Considering a 29% earnings CAGR and an anticipated improvement in the return ratio to ~17% over FY24-26, we value IPCA at 38x 12M forward earnings to arrive at a TP of INR1950. We upgrade IPCA to BUY as we factor in better operational efficiency, a revival in US business, synergies from the Unichem acquisition, and well-established DF business.

DF: Geared up to sustain industry-beating growth

* Given the highest share of acute therapies in the DF market (68% of DF sales MAT Aug’24) and chronic therapies (32% of DF sales MAT Aug’24), IPCA has outperformed IPM consistently over MAT Aug’21-24, led by strong brand equity, efficient management of seasonality, increase in MR productivity and market share gain.

* IPCA’s Cardiac/Anti-infective/Derma outperformed IPM by 6%/10.6%/ 13.1% in MAT Aug’24, led by superior execution.

* Although the pharma industry has been witnessing a decline in Pain therapy, IPCA has outperformed IPM by ~680bp over MAT Aug’21-24, led by strong execution and growth in its key brands, including Zerodol and combination.

* IPCA is focusing on improving MR productivity, new launches and market share gain in existing and new launches.

* We expect a 14% sales CAGR in the DF segment over FY25-27.

Exports: Healthy momentum in generics formulation business

* The company’s export formulation business grew slowly at a CAGR of 3.6% over FY21-FY24, dragged down by a decline in its institutional business (- 11.5%) and slower growth in its generics business (6.7% CAGR).

* We expect IPCA to deliver a 27% CAGR in exports over FY24-27 on the back of a healthy approval pace, a sound compliance record, and new product launches.

Valuation and view

* We believe that the positive factors for IPCA include strong domestic brand franchise, improved USFDA compliance, US business revival, synergic benefits of the Unichem acquisition, and improving operational efficiency.

* We value IPCA at 38x 12M forward earnings to arrive at a TP of INR1,950. We upgrade to BUY.

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