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Domestic formulation outperforms; API/branded exports underperforms

Work-in-progress to strengthen US generics prospects

* IPCA delivered operationally in-line 3QFY24 performance. It continues to deliver robust YoY growth in the domestic formulation (DF) segment. However, this is offset by deceleration in exports/API business.

* We cut our earnings estimate by 9%/4%/4% for FY24/FY25FY26 to factor in a) prolonged subdued outlook in the API segment, b) lower off-take in branded generics segment, and c) reduced operating leverage. We value IPCA at 23x 12M forward earnings to arrive at a price target of INR1,080.

* IPCA remains on track to deliver better-than-industry growth in the domestic formulation segment. Its efforts are underway to rebuild US business from its site, given successful compliance in place. However, the branded generics segment would need enhanced efforts to improve growth prospects. We estimate 17%/27%/45% sales/EBITDA/PAT growth over FY24- 26. The current valuation adequately factors in the upside in earnings. We reiterate our Neutral stance on the stock.

Product-mix benefit partly offset by higher opex

* 3QFY24 Sales grew 33% YoY to INR20.5b (our est: INR21.2b).

* DF sales grew 11% YoY to INR7.8b (38% of sales). Exports (generics formulation) grew 33% YoY to INR2.5b (12% of sales). Exports (branded formulation) declined 18% YoY to INR1b (5% of sales). Exports (institutional sales) declined 8% YoY to INR766m (4% of sales). API sales declined 12% YoY to INR2.9b (14% of sales). Revenue from subsidiaries grew 5x YoY to INR5.7b (28% of sales). The revenue growth is largely due to Unichem.

* GM expanded 240bp YoY to 66%, due to superior product mix/lower RM cost.

* However, EBITDA margin expanded at a lower rate of 110bp YoY to 16.1% (our est: 15.8%), due to higher employee expenses (up 180bp YoY as percentage of sales) offset by lower other expenses (down 50bp YoY as percentage of sales).

* EBITDA grew 43% YoY to INR3.3b (our est: INR3.4b).

* Unichem recorded a one-time income of INR684m from the sale of remaining equity shares, as outlined in the SPA.

* Adjusting for this income and FX gain of INR3.6m, Adj. PAT declined 6% YoY to INR1.1b (our estimate: INR1.6b), due to higher depreciation/interest.

* For 9MFY24, Revenue/EBITDA grew 20%/25% YoY to INR56.7b/INR9.9b, while PAT declined 5% YoY to INR4.3b. Meanwhile, EBITDA margins expanded 70bp YoY to 17.4%.

Highlights from the management commentary

* Branded Exports business was adversely impacted by the delay in obtaining licenses. Further, the Red sea issue affected the business in West Africa. IPCA expects 10% YoY growth in branded exports business in FY25.

* IPCA delivered 15.9% YoY growth in the chronic category against 11% YoY growth at industry level for 12M ending Dec’23. It exhibited 11% YoY growth in acute category against 9% YoY growth at industry level.

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