Buy Ipca Laboratories Ltd For Target Rs. 580 By JM Financial Services
Margins expand; Unichem opportunity yet to unravel
IPCA Laboratories reported a moderate topline growth of 11% YoY in 4QFY25, with expanding margins (+325bps in operating margin) leading to EBITDA growth of 33% YoY and Adj. PAT growth of 39%. The topline growth was supported by performance across verticals, with exception of API exports (-3% YoY) and Generic (+7% YoY) & Branded (+3% YoY) formulation exports. Domestic formulations grew 11% YoY, Institutional export (tender) saw uptick of 36% YoY (primarily on account of muted Q4FY24 base), and subsidiaries, led by Unichem, achieving 16% YoY growth. The company exceeded its FY25 EBITDA margin guidance, delivering 18.9% against a target of 18%. Looking ahead, IPCA provided an 8-10% revenue growth guidance for FY26, with a 100bps improvement in consolidated EBITDA margins. The company also plans to invest INR 4bn in CapEx in FY26, focusing on new facilities and capacity expansion. The management maintains their confidence of sustaining the domestic formulation growth of ~1.5x the IPM growth on the back of penetration in metro cities. Further, value unlocking is due on the front of crossselling opportunities available from the Unichem portfolio. The potential expansion of Unichem margins to IPCA margins too will result in significant value creation for the investors. Thus, we remain positive on the company and maintain BUY with a TP of INR 1,810.
* Domestic Formulations: IPCA's domestic formulations business grew 11% YoY to INR 7.6bn in 4QFY25. The company is ranked 16th in MAT IQVIA and is the fastest-growing among the top 20 pharmaceutical companies in India. IPCA's market share improved by 9 basis points to 2.07% in Q4FY25. IPCA's growth outpaced the market at 13% vs. 8% for market as per MAT; this is driven by increased presence in metro markets post-COVID. The company expects to grow at 1.5x the market rate for the next 3-4 years.
* Export Formulations: Branded export formulations grew 3% YoY to INR 1.7bn in 4QFY25. Institutional (tender) exports grew 26% YoY to INR 1.1bn, driven by the upgraded injectables line. Generic exports grew 7% YoY to INR 2.5bn. Branded formulation exports grew 10% YoY in FY25, with varied performance across regions: CIS markets grew 10% (muted due to currency fluctuations, but positive volume growth), West Africa 34%, Latin America 17%, Southeast Asia 24%, Middle East declined 21%, Europe grew 10%, Australia and New Zealand declined 11%, Canada was flat at INR 1.1bn, and South Africa declined 65% due to lost tenders. IPCA plans to ship ~7 new products in FY26, targeting INR 1bn in US revenues from current INR 250mn. For FY26, IPCA guides for 10- 11% growth in export formulations and 10% growth in institutional and generic segments, Unichem's filings are underway but not included in FY26 guidance.
* APIs: IPCA's API business grew 2% YoY to INR 3.4bn in 4QFY25. Domestic API sales grew 18% YoY to INR 906mn, while export API sales declined 3% YoY to INR 2.5bn. Despite volume improvements since COVID, pricing pressures have impacted topline growth. However, Q4FY25 saw volume and price growth in the domestic market. For FY26, IPCA expects 6-7% growth in the API segment, driven by continued volume growth and stabilizing prices.
* Subsidiaries: IPCA's subsidiaries grew 16% YoY to INR 6.1bn in 4QFY25. Unichem, a key subsidiary, delivered 18% topline growth in FY25 and improved EBITDA margins to 12.55% from 4.87%. For Unichem, IPCA targets a 1% improvement in EBITDA margins in FY26, along with 8-9% topline growth. Over the next 2-3 years, Unichem aims to achieve 18% EBITDA margins with 10-12% topline growth. Unichem has significant capacity available, reducing the need for fresh CapEx in the near term. Cross-selling benefits from Unichem's products are expected to materialize in FY28, as the products are currently under approval.
* Guidance: IPCA Laboratories provided guidance for FY26, projecting 8-10% revenue growth. The company expects this growth rate to increase to 12-13% once the Unichem integration is fully realized in the future. Additionally, IPCA aims to improve its consolidated EBITDA margins by 1% in FY26. The company also announced a CapEx guidance of INR 4bn for FY26. Key projects over FY25 and FY26 – a $20 million injectable and oral liquid facility in North Carolina, USA; an INR 2.5bn formulation facility for the domestic market in Dewas; an INR 2-2.5bn API and intermediate facility in Nagpur; and an INR 2.5bn monoclonal antibody facility in Pithampur, Madhya Pradesh. These projects are expected to be capitalized in the current year, with test batches in FY26 and ramp up in FY27 onwards.
* Financial Highlights: - Revenue for the quarter grew 11% YoY to INR 22.5bn (In line); - EBITDA was at INR 4.3bn with 33% YoY growth (5% miss) - EBITDA margin was at 19.1% , up 325bps YoY (137bps miss); - PAT came in at INR 678mn, up 14% YoY (74% miss); impacted by exceptional items of INR 2bn in Q4FY25 and INR 1.4bn in Q4FY24 - Adj PAT at INR 2.7bn, up 39% YoY (4% beat)
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