SSKI Research report on Ipca Labs:
Ipca Labs (Ipca) is a formulation-focused and vertically integrated mid-sized generics company with a multi-pronged and geographically diversified business model. Ipca uses superior API development capabilities to attain global leadership in select APIs and is leveraging it to create strong formulation businesses in high profit branded formulation markets like CIS, Asia and Africa as also generic markets like USA and UK. With very strong product pipelines across geographies, we expect 22% CAGR in earnings over FY07-10. At 12.2x FY08E and 10.1x FY09E earnings, valuations are compelling given the upside possibilities. Initiating coverage with Outperformer and a price target of Rs 1013 (14x FY09E earnings).
Firing on all cylinders:
We expect 22% CAGR in Ipca’s consolidated revenues over FY07-10 driven by 27% CAGR in exports and 16% CAGR in domestic business. More profitable branded formulation exports are expected to register 32% CAGR while generic exports could clock 33% CAGR driven by scale-up in US sales. Ipca’s focus on chronic segments and brand building would drive branded formulations sales in international markets as well in India. Ipca’s ability to generate such strong organic growth momentum clearly reflects the effectiveness of its model.
Expect steady margins:
We estimate Ipca’s operating margin to remain steady at 20- 21% over FY07-10. While we expect margin improvements given faster growth in higher margin international branded formulations and scale-up in regulated market, we have conservatively built in steady gross margins to factor in rupee appreciation.
Attractive business model; Outperformer:
Leveraging its strong presence in chronic segment and brand building focus along with a 500 sales people network across multiple non-regulated markets (excluding India), Ipca is aiming at the USD 77 billion (by 2010) generics opportunity in non-US markets. Further Ipca’s US strategy of leveraging its lowest cost API production capabilities to launch select products and partnering with Ranbaxy would be a winner. At 10.1x FY09E earnings and 26.3% RoCE, Ipca is at sharp discount to peers and deserves to be re-rated.
Investment Argument:
Ipca’s initiatives for building a strong international business have started to pay off, as reflected in the 100% yoy profit growth in FY07 following two soft years. We believe Ipca’s focus on vertical integration and competencies in building successful branded businesses, combined with tight operational control, would continue to drive growth. Ipca has invested significantly in building sales networks in multiple non-regulated markets, which will start paying off handsomely with expanding product portfolios. We are positive on Ipca’s product selection strategy for the US market, which leverages its lowest cost producer status for multiple APIs. Likely deals with innovators for large scale manufacture of off patent APIs has opened yet another growth avenue for Ipca.
Financial Analysis:
We expect 22% CAGR in Ipca’s revenues and profits over FY07-10, driven by continued strong growth across business segments. Topline is expected to be driven by 27% CAGR in exports on the back of continued momentum in international formulations, initiation of US generic sales and strong scale-up in API exports. Domestic business would remain steady (16% CAGR expected). A consistently improving revenue mix, along with scale effect, would drive a 50bp EBITDA improvement over FY07-10. We expect Ipca to maintain strong return ratios (25-26%) over the period. Incremental API supply contracts with innovators and scale-up in malaria tender business will be upside triggers.
Valuations
With its geographically diversified business and strong emphasis on vertical integration as also branded formulations, Ipca is a strong business model to play the global generics opportunity. In our view, Ipca’s judicious investments in API development capabilities and for building sales front end have built a strong platform for sustained steady growth in its exports business. We remain confident of Ipca’s ability to deliver 20-25% CAGR in profit in the medium term. At 12.2x FY08E and 10.1x FY09E earnings, high growth visibility and 25%+ RoCE, Ipca is one of the cheapest stocks in the Indian pharma industry and deserves a higher rating. Initiating coverage with an Outperformer rating and a 12-month price target of Rs 1013 (16.9x FY08E and 14x FY09E earnings).