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Await fresh triggers on Unichem and US foray

We interacted with IPCA to better assess the progress of Unichem cross selling opportunity and clarity on US trajectory in standalone business. Low hanging fruit in the form of better margin is largely achieved as Unichem would report ~15% OPM in FY25. Further improvement would require revenue traction which in turn is dependent on conducting bio-equivalent studies for large products in run up to dossier filings across new markets. While this would ultimately lead to better Goa site utilization (and margin), we understand the process would take about a years’ time. Company reiterated US would see 5-6 launches in current year coupled with a similar number in next fiscal. We are cognizant IPCA was a market leader in its covered molecules prior to alerts and there has apparently not been much of price erosion in the intervening period. Even so, it would still be a slow ramp up and not a dash towards the erstwhile scale in US. We tweak estimates and still remain 5-6% below consensus expectation for FY26/27. Accordingly, lower rating to Reduce primarily as we await Unichem dossier progress and US clarity before turning constructive. Our revised TP stands at Rs1,575 (earlier Rs1,320) based on a 30x FY27 EPS (vs 28x FY26E EPS)

Stock performance

Unichem – low hanging fruit done, slower pace of change ahead

IPCA has managed to turn around Unichem in a commendable manner as it delivered 14% margin in H1 FY25 and ~15% for full year from -5% margin at the time of acquisition. Margin delivery is on back of low hanging fruit like lowering of API procurement prices, efficiency linked to processes that do not require regulatory intervention. Albeit changes underway on API side that require regulatory approval as well as new dossier filing in new markets typically take time. Hence, we reckon Unichem growth rate might settle at ~8% YoY in FY26 before inching up again along with ~18% margin in FY27. Improvement in margin is likely to accrue from better utilization of Goa site coupled with annual 4-5 product launches. Notably, most of the large product cross selling which require bio-equivalence data would take about years’ time before impact can be seen in Unichem revenues.

Standalone US foray could be a gradual ramp up than a dash

The clearance of 2 formulation and an API site at Ratlam opens up potential for scaling up IPCA US business after a prolonged absence. In our interaction with company, management indicated that on standalone basis, IPCA would launch 6 products in current year followed by a similar number next year. R&D spend is at about 3% of consolidated revenue and it expects US ramp up to be a gradual uplift rather than a fast scale up to historic Rs4-5bn of API and formulation revenues. Ongoing changes include updating API manufacturing process, allowance for expiry of existing contracts which would result in a slow start in FY26. R&D would also inch up by 1-1.25% to 4.25% in as it commissions biotech plant followed by batch production and clinical work in run up to filings.

Domestic growth a bright spot but remain below consensus as await US clarity and Unichem dossier monetization

Domestic growth has been a bright spot with healthy 11-12% growth in FY25 and a similar outlook in FY26. API business has seen falling prices though we now expect some stability along with better volume growth. There is no change to our branded and generic export growth assumptions through FY26. We remain 6-7% below consensus estimates for FY26/27 primarily (we believe) on back of Unichem and US growth assumptions and 21.5% margin (vs 22.7% for consensus in FY27). Assign Reduce as we await clarity on US scale up and account for slower ramp up in Unichem vs recent past. Roll over to FY27 with 30x target PE with a revised TP Rs1,575 (Rs1,320 earlier on 28x FY26E EPS).

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