Domestic business guidance of 13-15% is ahead of prior indication while API growth has surprised on the upside. This leads to a cut in margin due to rise in API share even as the reduction is cushioned by larger base of absolute EBIDTA. We like the revenue visibility coupled with lack of margin volatility due to absence of US business. Retain BUY based on 21x FY21 PE, at a premium to the sector valuation with unchanged 1-year PT of Rs1,100.
ACCUMULATE | CMP: Rs940 | TP: Rs1,008 EBITDA margin is guided to improve by 100-200bps in FY20E due to the benefits operating leverage. We expect slower offtake of Global Fund business may shift some of its sales to FY21E. IPCA trades at PER of 22x (FY20E) and 18.3x (FY21E). With better visibility of exports, we increase our TP to Rs1,008 (from Rs908) on PE 20xof FY21 earnings while downgrade ourratings to ‘Accumulate’ as upside potential at current valuation is 8%.
The company has demonstrated significant improvement in the financials in FY19 with ~15% sales growth, 450 bps improvement in EBITDA margins and more importantly 630 bps improvement in ROCE. This, we believe was attributable to industry beating growth in the domestic formulations and strong growth in APIs. Going ahead, with firm growth tempo in the domestic formulations and good prospects both for API exports and formulation exports we expect further improvement in the financial parameters. The company will continue to remain a compelling bet on the back of well- rounded growth prospects for FY19–21E- sales, EBITDA and PAT CAGR of 14%, 22% and 27%, respectively. We arrive at our target price of Rs 1130 (20x FY21E EPS of | 56.4).
We reduce our Revenues by 3.4%/2.7% for FY20E/FY21E due to downgrade in Generics and Branded business. We upgrade our EBITDAM for FY20E/FY21E by 180 bps for both the years to 21.6 % /22.4 %respectively. We upgrade our EPS estimates by 8.2% /6.2% to Rs 46.9/Rs 58.3 for FY 20E/FY21E. We maintain our BUY rating and price target of Rs 1090 based on 18.6x FY21E.