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DF/generic exports lead to superior operating performance

Work in progress in integrating Unichem

* Ipca Laboratories (IPCA) delivered better-than-expected operating performance in 4QFY24, led by improved domestic formulation (DF) sales and stable pricing in the API segment. Adjusted earnings were lower than our estimate, largely due to higher minority interest.

* We cut our earnings estimates by 12%/14% for FY25/FY26, factoring in: 1) a gradual uptick from the re-launches of ANDAs in the US market, 2) a challenging outlook in the branded generic exports segment, and c) moderation in the growth outlook in acute therapies within the DF segment. We value IPCA at 26x 12M forward earnings to arrive at our TP of INR1,140.

* IPCA continues to progress well on improving the profitability of Unichem and enhancing synergy with it. Management is also working on scaling up the US generics business from its own facility. Further, it remains on track to outperform the industry in the DF segment. Accordingly, we model a 39% earnings CAGR over FY24-26, partly due to the low base of FY24. The current valuation adequately factors in the upside in earnings. Reiterate Neutral.

Product-mix drives margins YoY

* IPCA’s 4QFY24 sales grew 34.5% YoY to INR20.3b (in line). Formulation sales grew 11.8% YoY to INR11.6b (57% of sales). DF sales rose 13.5% YoY to INR6.9b (59% of formulation sales). Export sales increased 9.5% YoY to INR4.7b (41% of formulation sales). Exports of generic formulations grew 15% YoY to INR2.3b (49% of export sales). Exports of branded formulations rose 3.5% YoY to INR1.6b (34% of export sales). Exports of institutional sales grew 7.5% YoY to INR814m (17% of export sales). API sales declined 3.6% YoY to INR3.3b (16% of sales). Domestic API sales declined 19% YoY to INR766m (23% of API sales). Export API sales grew 2.2% YoY to INR2.6b (77% of API sales). Revenue from subsidiaries surged 4.8x YoY to INR5.2b (26% of sales). The revenue growth was largely due to Unichem.

* Gross margin (GM) expanded 540bp YoY to 66.3% due to superior product mix/lower RM costs.

* However, EBITDA margin expanded at a lower rate of 390bp YoY to 15.8% (our est: 13.6%), due to higher employee expenses/other expenses (+130bp/30bp YoY as % of sales).

* EBITDA grew 78% YoY to INR3.2b (our est: INR2.7b).

* There was a one-off charge of INR1.4b on account of a provision for a European commission fine and an impairment of exposure in Associate.

* Adjusting for this charge and FX gain of INR173m, Adj. PAT for the company grew 32.7% YoY to INR930m (our estimate: INR1.3b).

* For FY24, revenue/EBITDA grew 23%/33% YoY to INR77b/INR13b, while PAT was flat YoY at INR5.3b. EBITDA margin expanded 130bp YoY to 17%.

Highlights from the management commentary

* IPCA guided consol. revenue/EBITDA at INR90b/INR16b for FY25

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