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Scaling US operations/outpacing IPM to aid robust earnings growth

* Following a muted performance in the US over the past eight years due to compliance issues, IPCA is well-poised to revive its US business through new product launches, relaunches, stable pricing in its base business, and the integration of the Unichem business over the next 12-24M.

* Further, its (ex-US) business is in a strong position, with a better outlook driven by enhanced offerings in the export markets such as Australia, New Zealand, and Europe (EU) by adding Unichem’s products to the existing portfolio.

* With the top 10 therapies experiencing double-digit growth over MAT Nov’20-24, IPCA is focusing on launching new divisions in the fast-growing therapies such as cosmetodermatology and orthopedics. Additionally, the company is working towards creating new divisions and adding 500-700 MRs, as well as improving its MR productivity.

* Considering a 27% earnings CAGR and an anticipated improvement in the return ratio to ~16% over FY24-27, we value IPCA at 36x 12M forward earnings to arrive at our TP of INR1,980. We reiterate our BUY rating on IPCA as we factor in better operational efficiency, a revival in the US business, synergies from the Unichem acquisition, and a well-established DF business.

US – the key growth driver over the next two years

* Given that IPCA’s sites are now regulatory compliant, it received 11 approvals from the USFDA over the 12 months ended Sep’24.

* Further, the company is relaunching the earlier approved products in the US market. Interestingly, the price erosions that were visible in the portfolio are now stable.

* While IPCA has already shipped the products to the US market, it is planning to file 15-17 products in the US market over the next two years.

* IPCA's efforts to improve Unichem's profitability are evident, with its EBITDA improving from breakeven in 1QFY23 to 12.4% in 2QFY25. Additionally, IPCA is sourcing its own APIs for Unichem, thereby further enhancing the margins.

* Having said this, we expect 52% sales CAGR over FY24-27 led by process efficiency, improving utilization of existing plants, filing new drugs, and integrating the front end of Unichem.

Ex-US, exports to sustain the strong growth momentum

* With the Unichem acquisition, IPCA is leveraging its presence in Australia, New Zealand, Europe, and ROW markets to cross-sell Unichem’s products, where the latter currently has a minimal presence.

* With a shorter gestation period and faster approvals thanks to the local drug authority's acceptance of USFDA-approved medications, IPCA intends to enter the Chilean market.

* We expect its exports to post 23% CAGR over FY24-27 (ex-US), fueled by the filing of more products in the Russian market and setting up its own distribution in the EU market.

* Additionally, IPCA is also building a niche pipeline of eight biosimilars in oncology, ophthalmology, and anti-inflammatory therapies that are under various stages of development.

* The company is focusing on long-term growth opportunities in key markets such as India, the UK, the EU, ROW, and subsequently, the US markets.

Domestic business is well-positioned to outperform IPM

* Backed by strong brand recall, improvement in MR productivity, a rise in volume, and effective management of seasonality, IPCA has witnessed doubledigit growth in the top 10 therapies over the past four years.

* To further continue the strong growth momentum, the company is focusing on launching new fast-growing divisions such as comesto-dermatology and orthopedics in derma and pain therapies.

* Further, IPCA is creating new specialized divisions for its key therapies and adding around 500-700 MRs in its field force.

* Supported by new product launches and market share gains, we expect the DF segment to register 14% CAGR over FY25-27.

Valuation and view

* During FY19-FY24, IPCA's earnings recorded a meager 3% CAGR, led by a 200bp drop in its EBITDA margin. Nonetheless, we anticipate that the company would generate a robust earnings growth of 27% during FY25-FY27, driven by the 170bp improvement in margin. Despite enjoying a strong position in the export and DF markets, IPCA is reviving its US business through new and relaunched products as well as the integration with Unichem. To further improve Unichem's margin, IPCA is optimizing its processes, improving operational efficiency, and sourcing raw materials from its site.

* We value the stock at 36x 12M forward earnings to arrive at our TP of INR1,980. We reiterate our BUY rating on the stock.

Key downside risks

* Pricing pressure in the API segment to hurt growth.

* Higher freight costs and delays in exports due to geopolitical challenges.

* Inclusion of brands in the NLEM price list.

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