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DF strength intact; Unichem drag weighs on 1QFY26 performance

Growth revival measures in place across key geographies

• Ipca Laboratories (IPCA) delivered lower-than-expected 1QFY26 performance with a miss on revenue/EBITDA/PAT by 3%/15%/18%, largely due to an inferior show by Unichem for the quarter. This was further fueled by subdued sales growth in branded formulation exports and a decline in domestic API sales.
• That said, Unichem is working to revive sales through new launches in the US/EU markets. IPCA is also in the process of building a product pipeline from its own site for the US market.
• The domestic formulation (DF) business remains a strong backbone for IPCA, delivering better-than-industry growth in 1QFY26. The company is not only working on enhancing its portfolio but has also restructured its cardiology division to support superior growth.
• The lack of global funding has been impacting the institutional anti-malaria business.
• We reduce our earnings estimates by 2%/4% for FY26/FY27, factoring in: a) disruption of the Unichem business in Asia/Africa/Brazil, b) some delay in the US business from IPCA’s own site, and c) some hiccup in the DF segment on account of restructuring. We value IPCA 30x 12M forward earnings to arrive at a TP of INR1,610.
• IPCA is implementing geography-specific measures to improve growth prospects, such as: a) the addition of MRs in select therapies in DF, b) strengthening its product pipeline for the US/other export markets, and c) implementing synergy measures while integrating the Unichem business. Accordingly, we estimate a 10%/14%/19% CAGR in sales/EBITDA/PAT for FY25-27. Reiterate BUY

Segmental mix benefit offset by higher opex on YoY basis

• IPCA’s 1QFY26 sales grew 10.3% YoY to INR23b (our est: INR23.7b).
• Formulation sales increased 11% YoY to INR14b (62% of sales).
• DF sales grew 10% YoY to INR9.6b (42% of total sales). Exports formulation sales grew 13.7% YoY to INR4.4b (20% of total sales).
• API sales grew 13% YoY to INR3.3b (14% of sales). Domestic API sales grew 18% YoY to INR760m (23% of API sales). Export API sales grew 28% YoY to INR2.5b (77% of API sales).
• Revenue from subsidiaries grew 7% YoY to INR5.6b (24% of sales).
• Gross margin (GM) expanded 80bp YoY to 70% due to a superior product mix/lower RM costs.
• However, EBITDA margin contracted 70bp YoY to 18% (our est: 20.7%), as higher GM was offset by higher opex (other expenses up 130bp YoY as % of sales).
• EBITDA grew 6% YoY to INR4.2b (our est: INR4.9b).
• PAT grew 21% YoY to INR2.3b (our estimate: INR2.8b).

Highlights from the management commentary

• IPCA guided for 9-10% YoY revenue growth in FY26. EBITDA margin is expected to improve gradually by 70-75bp YoY in FY26.
• Unichem lost market share in four products due to competition, while its business was also impacted in Asia/Africa/Brazil. Additionally, a provision of INR120m was made in 1QFY26 due to currency fluctuation. The closure of the Ireland facility further led to an expense of INR100m.
• IPCA restructured its cardiovascular division and added 400MRs, which temporarily impacted business in this therapy during 1QFY26. However, this is expected to improve going forward.
• The company expects about 3-4% addition in the field force on an annual basis over the next 3-5 years, largely for chronic therapies.
• IPCA has filed one product with the USFDA, and 15-16 products are under various stages of development.

Highlights from the management commentary

• API prices are now stable, and the outlook is gradually improving.
• IPCA witnessed 15% YoY growth in chronic therapies vs 9.9% YoY growth exhibited by IPM.
• IPCA witnessed 9.8% YoY growth in acute therapies vs 6.8% YoY growth exhibited by IPM.
• IPCA delivered 13% YoY growth in pain therapy for 1QFY26.
• The institutional business is expected to remain stable due to a lack of global funding.
• GM expansion is largely due to the product mix.
• Onyx reported a loss due to limited projects as a result of inadequate funding from big pharma/smaller innovators.

Strategic measures in place to drive growth in focus markets DF:

Chronic focus; volume uptick propels DF momentum

• IPCA delivered 10% YoY growth in 1QFY26, after delivering 12% YoY growth in FY25.
• Therapy-wise, IPCA exhibited strong YoY growth in the antineoplast/immunomodulator and gastro-intestinal segments for the quarter. The pain-analgesic/cardiac segment were steady; however, derma/antiinfectives dragged overall YoY growth to some extent.
• Interestingly, temporary disruptions in the cardiology therapy, driven by the restructuring of the division and addition of MRs, affected YoY growth to some extent for the quarter.
• IPCA has largely been in line with the industry in 1QFY26. That said, chronic therapies grew 15% YoY vs 9.9% YoY growth for the industry in 1QFY26, according to IMS.
• IPCA remains one of the leading company, where considerable portion of domestic formulation growth is driven by volume. Almost 5% YoY growth has been attributed to volume growth for the past 12M.
• There has been consistent efforts toward improving the share of metro cities in the overall DF segment. There is also a focus to enhance the share of chronic therapies in the overall portfolio. Interestingly, if rheumatoid arthritis is clubbed under chronic, given the medicine in-take is for a prolonged period of time, the overall chronic share is greater than IPM.
• We expect a 12.2% sales CAGR in the DF segment to INR43.5b over FY25-27.

Exports: growth driven by generics/API/Unichem’s US sales for the quarter

• In 1QFY26, IPCA’s exports sales stood at INR7b, up 18% YoY. Specifically, formulation sales grew 13.7% YoY to INR4.5b (64% of exports) and API sales stood at INR2.5b, up 28% YoY (36% of exports) for 1QFY26.
• Within formulation sales, generics grew 19% YoY to INR2.7b and branded generics grew 9.6% YoY to INR1.3b. The institutional anti-malaria business came in at INR580m, stable YoY for 1QFY26.
• Despite increased competition, Unichem delivered 12% YoY growth in the US market in 1QFY26. Unichem continues to progress well in the EU market with 37% YoY growth in sales for the quarter. This was offset by a muted show in other geographies like Asia, Africa and Brazil.
• Subsidiary sales grew 7% YoY to INR5.6b, primarily led by Unichem.
• With a significant reduction in the overlap of R&D, Unichem is also developing its product pipeline independently.
• Considering a gradual revival in IPCA sales for the US market, we expect some moderation in the branded generics business and disruption in Unichem’s performance.
• Accordingly, we expect the overall export formulations (including Unichem) business to clock a 8.5% sales CAGR, reaching INR60b over FY25-27.

API: Exports-led volume gains help stabilize sales amid pricing pressure

• The API segment has been undergoing a challenging time, with sales on a declining trend for past three years.
• The industry has been facing pricing pressure due to excess inventory in the channel. The emand remains stable.
• Considering this backdrop, IPCA’s performance of stable YoY sales in FY25 and 1QFY26 business is quite comforting.
• In fact, IPCA delivered 13% YoY growth in API sales, backed by strong exports for the quarter.
• IPCA continues to optimize the cost of production to maintain market share and gain traction in newer products.
• Accordingly, we expect 10.5% sales CAGR over FY25-27 to reach INR15.5b. Valuation and view
• We reduce our earnings estimate by 2%/4% for FY26/FY27, factoring in: a) disruption of the Unichem business in Asia/Africa/Brazil, b) some delay in the US business from IPCA’s own site, and c) some hiccup in the DF segment on account of restructuring. We value IPCA 30x 12M forward earnings to arrive at a TP of INR1,610.
• IPCA is implementing geography-specific measures to improve growth prospects, such as: a) adding MRs in select therapies in DF, b) strengthening the product pipeline for the US/other exports market, and c) implementing synergy measures while integrating the Unichem business. Accordingly, we estimate 10%/14%/19% CAGR in sales/EBITDA/PAT for FY25-27. Reiterate BUY.

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