IPCA is on a strong footing and is well placed to capitalize on the growth opportunities across the domestic and exports markets. Performance across the Formulation and API segment is expected to improve as most headwinds that impacted the performance are behind. Management has maintained its salesand profitability guidance. However, given the robust performance inQ2FY2020, we have revised our earnings estimates upwards for FY2020 /FY2021. We expect the company to a report sales/profit CAGR of 19%/32%over FY2019-FY2021. At CMP the stock is trading at an attractive P/E multiple of 17.6x its FY2021 earnings. We maintain our Buy recommendation on the stock with a revised PT of Rs. 1,220. Successful resolution of the USFDA regulatory issues could provide further upside with the potential for upgrade of earnings estimates.
IPCA beats in Q1FY20 as its sales, EBITDA and PAT grew 9%, 15% and 26% above our estimates. IPCA took the benefit of high demand and price of Sartan APIs in global markets (mainly EU) due to contamination issues in API of the major manufacturers. The contribution of APIs however lower to 26% in Q2FY20 vs 30% in Q1FY20. This has resulted in higher gross margins by 210bps QoQ. Strong contribution from India formulations, branded generic exports and tender supplies made the overall growth balanced and improved headline margins. EBITDA margin improved by 227bps QoQ due to better revenue mix and lower remedial costs. IPCA is global leader in volume of losartan API production (Rs1.2bn sales in FY19) and its valsartan sales is improving from current run rate of Rs25m/month. It guided more than 20% growth in API sales in H2FY20E.
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.
Sustained outperformance in branded domestic formulation (DF) space coupled with enhanced opportunities in the API segment and additional business from institutional Anti-Malaria segment shows that IPCA has enough headroom to be on a strong earnings trajectory over the next 2-3 years. We expect IPCA to end FY19 with earnings similar to that in FY14 (pre-import alert from USFDA); despite the USFDA issues being unresolved. This implies healthy performance in the branded generics segment. We raise our EPS estimate by 6%/7% to INR45.3/INR54.4 for FY20/21. We continue to value IPCA at 21x 12M forward earnings to arrive at a price target of INR1,145 (from INR970 earlier). Re-iterate BUY.