1. business and industrial

11 November 2014
2QFY15Results Update | Sector: Healthcare
Ipca Laboratories
BSE SENSEX
27,875
Bloomberg
S&P CNX
8,344
IPCA IN
CMP: INR637
TP: INR809
Buy
One-time events drive 2Q miss, small bump in structural story
Sales declined 8% YoY to INR7.8b (miss of 17%). Hence, EBITDA fell 43% to INR1.3b
(miss of 39%), with EBITDA margin down 10% YoY to 17% (v/s est. 23%). PAT stood
52-Week Range (INR)
907/630
at INR613m (v/s est. of INR1.4b).
1, 6, 12 Rel.Per (%)
-12/-30/-82 n Revenue was lower than expected due to 68% miss in Institutional and South
Africa business. Temporary supply constraints have impacted Institution sales in
Financials & Valuation (INR m)
2Q, which are expected to pick up from 2HFY15 onwards. In South Africa, payment
Y/E Mar 2015E 2016E 2017E
issues from a vendor meant that IPCA cautiously withheld sales. Issues have been
Net Sales 33,374 38,124 45,095
addressed and 2H will see a return to normal growth. As expected, US sales were
EBITDA
6,935 8,248 10,153
also lower due to voluntary supply stoppage from the company.
Adj PAT
3,948 4,796 6,006
n EBITDA margin was down by 10% to 17%, led by lower sales during the quarter. In
EPS (INR) 31.3
38.0
47.6
line with operational performance, PAT declined 53% YoY to INR613m.
Gr. (%)
-17
21
25
n 2HFY15 guidance: Domestic formulations and international branded generics to
BV/Sh.INR 182
214
255
grow 17-18% and 15% respectively. International generics sales expected at INR3b
RoE (%)
18.6
19.2
20.3
in 2HFY15. Institution sales are expected at INR2.2-2.5b in 2HFY15. In APIs,
RoCE (%)
21.6
22.4
24.0
Domestic to grow 20% and export may remain flat. Operating margin for FY15
P/E (x)
20.4
16.8
13.4
seen at 20.5-21%.
P/BV (X)
3.5
3.0
2.5
Valuation and view: Post the 2Q miss, we lower the earnings estimates by 20% each
for FY15E, FY16E and FY17E. Our estimates assume no sales in the US in FY16 and a
partial recovery of USD10m in FY17. Our numbers may hold an upside potential if a)
US FDA issues at Ratlam are resolved faster than expected and b) site transfer for key
API products comes through, thus restarting formulation supplies to the US. Even if US
recovery does not come in FY17, we do not see significant downside to our estimates.
We believe IPCA is undergoing a transitory phase and in our view the management is
capable of overcoming these challenges. Company’s unique positioning (backward
integration capabilities), solid RoE profile (25% maintained over the last four years)
and strong execution track record makes the stock very attractive at 17x trailing
earnings (most attractive among peers). We maintain a Buy on the stock with a
revised target price of INR809 (17x FY17E EPS). Key risk to our view is escalation of
current observations at Ratlam/Indore to import alert or warning letter status.
Equity Shares (m)
M.Cap. (INRb)/(USDb)
126.2
n
80.4/1.3
Alok Dalal (Alok.Dalal@MotilalOswal.com);+91 22 3982 5584
Amey Chalke (Amey.Chalke@MotilalOswal.com);+91 22 3982 5423
Investors are advised to refer through disclosures made at the end of the Research Report.
Ipca Laboratories
Key takeaways
n
n
n
n
n
n
11 November 2014
Guidance for FY15E: In 2HFY15, domestic and export branded business to grow
at 17-18% and 15% YoY respectively. International generics sales expected at
INR3b in 2HFY15.Institution sales expected at INR2.2b-2.5b in 2HFY15. In APIs,
Domestic to grow 20%, export may remain flat. EBITDA margins would be
around 20-21% for FY15.
US FDA issues at Ratlam/Indore: Most remedial actions to be over by December
2014. IPCA will approach FDA by January ‘15. The Company is in process of
automating the facilities further. It will spend on newer systems which will
reduce paper work and increase efficiency. Resumption of operation at Ratlam
is contingent on US FDA response. Management also sounded confident of
successful inspection at Silvassa (due by end 2014). Regulatory head does not
believe there will be an import alert from Ratlam due to the company’s
proactive response. Gravity of Indore observations is lighter than Ratlam.
According to management, source of issues at Indore were already spotted and
addressed before FDA inspection.
Institutional business: Lower sales (declined 65% YoY) from institution business
during this quarter. With recent changes in procedures, International agencies
have started testing for all batches, instead of earlier practice of inspecting
random batches which has led to delay. The delay is unlikely to happen in
subsequent quarters. However, management has reduced its guidance to INR
2.2-2.5b for 2HFY15E. WHO has also inspected Ratlam facility, their viewpoint is
awaited.
International formulations: Branded formulation business grew 19% to INR1.0b.
For South Africa (declined 90% YoY) payment issues from a vendor meant
company cautiously withheld sales. Issues have been addressed and 2H will see
return to normal growth. Russia/CIS was impacted by currency devaluation;
IPCA has taken price increases to offset the same. International generic business
stayed flat at INR1.7b, supported by 26% growth in UK for this quarter. US
business declined to INR330m against INR610m in 2QFY14 due to stoppage of
supply to US market since July’14. Business in Canada did not see any material
impact by the import alert as (1) the agency has given certain exemptions and
(2) most APIs are sourced from outside Ratlam.
APIs – Domestic API business grew 10% YoY to INR 445m while Exports API
declined 38% to INR90m. Stoppage of US business and delay in release of
batches at plants level due to change in procedures has led to this decline.
Company expects it to normalize once US issue is resolved.
R&D: The 505(b)2 drug is under phase 2 trials whereas Artesunate Injection is
under stability testing. The company expects to file this product in Q1FY16 and
likely to get approval in FY17. Overall R&D was at 4% to sales for this quarter.
Management has guided for 4.5-5% to sales R&D expenses going forward.
2
Ipca Laboratories
Exhibit 1: Sales growth impacted by temporary issues
in institution business and US FDA issues at Ratlam
Exhibit 2: Gross margins improvement due to better
sales mix
Source: Company, MOSL
Source: Company, MOSL
Exhibit 3: EBITDA margins expected to recover in 2HFY15
Exhibit 4: Domestic formulations growth picking up
Source: Company, MOSL
Source: Company, MOSL
Exhibit 5: Export formulations to slowdown in 2HFY15
due USFDA issues
Exhibit 6: Key highlights
n
n
n
n
n
Revenue miss primarily led by decline in US,
Institutional business and South Africa.
Growth in domestic formulations was in line with
estimates, 17-18% growth to continue.
Institutional business to recover in 2HFY15.
US business outlook contingent on early US FDA
resolution.
Gross margins improved to 65% despite lower sales
from US and Inst business. EBITDA margins have
declined to 17%, expect to bounce back to 20% levels.
Source: Company, MOSL
11 November 2014
3
Ipca Laboratories
Exhibit 7: Domestic formulations to grow faster
than the industry
Source: Company, MOSL
Exhibit 9: Export generics to be impacted by US FDA issues
Source: Company, MOSL
Exhibit 11: Margins to be impacted by US FDA issues;
to recover in FY17E
Source: Company, MOSL
11 November 2014
Exhibit 8: Branded business seeing growth on low base
Source: Company, MOSL
Exhibit 10: Institutional sales driven by
increasing market share but lumpy in nature
Source: Company, MOSL
Exhibit 12: Expect 17% earnings CAGR over FY14-17E
Source: Company, MOSL
4
Ipca Laboratories
Valuation & view
n
n
n
11 November 2014
Post the 2Q miss, we have revised our earnings estimates downwards by 20%
each for FY15-FY17. Our estimates assume no sales in US in FY16 and a partial
recovery of USD10m in FY17. Our numbers may hold an upside potential if a) US
FDA issues at Ratlam are resolved faster than expected and b) site transfer for
key API products comes through thus restarting formulation supplies to US.
Even if US recovery does not come in FY17, we do not see significant downside
to our estimates.
We believe IPCA is undergoing a transitory phase and in our view the
management is capable of overcoming these challenges. IPCA’s unique
positioning (backward integration capabilities), solid RoE profile (25%
maintained over the last 4 years) and strong execution track record makes the
stock very attractive at 17x trailing earnings (most attractive amongst peer
group).
We maintain Buy on the stock with a revised target price of INR809 (17x FY17E
EPS). Key risk to our call is escalation of current observations at Ratlam/Indore
to import alert or warning letter status.
5
Ipca Laboratories
Ipca Laboratories: an investment profile
Company description
Key investment risks
Established in 1949, IPCA Labs is one of India's better
managed mid-sized pharma companies. It has presence
in (1) domestic branded formulations, (2) global
branded and generic formulations, and (3) global APIs
(active pharmaceutical ingredients). IPCA's core
business strategy is to leverage its strength in
manufacturing API to develop vertically integrated and
highly competitive formulations. Most of the company's
formulations are backed by its own APIs.
n
Government mandated price controls for the
domestic formulations business can have an adverse
impact.
A weak malaria season in India can adversely impact
the growth for IPCA's domestic formulations
business.
n
Valuation and view
IPCA’s unique positioning (backward integration
capabilities), solid RoE profile (25% maintained over
the last 4 years) and strong execution track record
makes the stock very attractive at 17x trailing
earnings.
We maintain Buy on the stock with a revised target
price of INR809 (17x FY17E EPS). Key risk to our call
is escalation of current observations at
Ratlam/Indore to import alert or warning letter
status.
n
Key investment arguments
n
n
n
Strong capability in API manufacturing is at the core
of IPCA's business success. The company has
attained global leadership position in select APIs
where it is the lowest cost producer which gives the
company vertical integration advantage.
IPCA has outperformed the domestic industry
growth over the past 5 years on the back of its rising
presence in fast-growing chronic therapy segments.
We expect a significant ramp-up in IPCA's
international formulations revenues led by 40%
CAGR for the US business and 28% CAGR for
branded formulations business.
n
Sector view
Differentiated portfolio for regulated markets and
emerging markets would remain the key sales and
profit drivers in the medium term. Japan is expected
to emerge as the next growth driver, particularly for
companies with a direct marketing presence.
We are overweight on companies that are towards
the end of the investment phase, with benefits
expected to start coming in from the next fiscal.
n
n
Comparative valuations
P/E (x)
P/BV (x)
EV/Sales (x)
EV/EBITDA (x)
FY15E
FY16E
FY15E
FY16E
FY15E
FY16E
FY15E
FY16E
EPS: MOSL forecast v/s consensus (INR)
IPCA Torrent Pharma
20.4
23.2
16.8
20.1
3.5
6.6
3.0
5.4
2.5
3.7
2.2
3.0
12.2
14.7
10.3
12.2
Glenmark
27.5
35.0
5.7
4.6
3.4
2.9
16.0
13.2
Shareholding pattern (%)
Consensus
Forecast
31.3
38.0
42.4
51.3
Variation
(%)
-26.2
-25.9
Target price and recommendation
Current
Price (INR)
637
Target
Price (INR)
Upside
(%)
Reco.
809
27.0
Buy
Stock performance (1-year)
Sep-14
Jun-14
45.9
45.9
45.9
DII
11.6
11.0
12.3
FII
24.2
25.3
25.2
Others
18.3
17.9
16.6
Note: FII Includes depository receipts
IPCA Labs
Sep-13
Promoter
11 November 2014
FY15
FY16
MOSL
Forecast
Sensex - Rebased
1,300
1,100
900
700
500
Nov-13
Feb-14
May-14
Aug-14
Nov-14
6
Ipca Laboratories
Financials and valuations
Income statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Min. Int. & Assoc. Share
Reported PAT
Adjusted PAT
Change (%)
Margins (%)
(INR Million)
2014
32,818
17
8,106
24.7
1,031
7,074
269
-500
0
6,306
1,524
24.2
0
4,782
4,782
47
15
2015E
33,374
2
6,935
20.8
1,645
5,290
229
259
0
5,320
1,372
25.8
0
3,948
3,948
-17
12
Balance sheet
Y/E Mar
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
11 November 2014
2016E
38,124
14
8,248
21.6
1,986
6,263
263
311
0
6,311
1,515
24.0
0
4,796
4,796
21
13
2017E
45,095
18
10,153
22.5
2,361
7,792
263
373
0
7,903
1,897
24.0
0
6,006
6,006
25
13
(INR Million)
2014
252
19,344
19,597
4,379
1,471
25,447
18,976
5,785
13,192
1,649
92
16,827
8,476
4,495
763
3,093
6,656
5,950
706
10,171
25,447
2015E
252
22,700
22,952
4,379
1,673
29,005
23,976
7,430
16,546
1,649
92
16,681
8,684
4,754
318
2,925
6,308
5,668
640
10,373
29,005
2016E
2017E
252
252
26,777 31,882
27,029 32,134
4,379
4,379
1,799
1,957
33,207 38,471
28,976 33,976
9,416 11,776
19,561 22,200
1,649
1,649
92
92
18,765 22,704
9,918 11,728
5,429
6,419
183
483
3,236
4,074
7,203
8,518
6,473
7,654
731
864
11,562 14,186
33,207 38,471
E: MOSL Estimates
Ratios
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2014
2015E
2016E
2017E
37.9
46.1
155.3
5.8
15.4
31.3
44.3
181.9
4.7
15.0
38.0
53.7
214.2
5.7
15.0
47.6
66.3
254.6
7.1
15.0
16.8
13.8
4.1
2.6
10.4
0.9
20.4
14.4
3.5
2.5
12.2
0.7
16.8
11.9
3.0
2.2
10.3
0.9
13.4
9.6
2.5
1.9
8.3
1.1
27.2
29.4
18.6
21.6
19.2
22.4
20.3
24.0
1.7
49.7
94.3
87.9
1.4
51.6
95.0
78.2
1.3
51.6
95.0
79.1
1.3
51.5
94.9
80.0
0.2
0.2
0.2
0.1
2014
6,306
1,031
0
269
-1,357
-339
5,910
-3,887
-1
0
-3,888
0
-854
-269
-738
-1,841
180
582
763
2015E
5,320
1,645
0
229
-1,170
-648
5,376
-5,000
0
0
-5,000
0
0
-229
-592
-821
-445
763
318
2016E
6,311
1,986
0
263
-1,388
-1,323
5,847
-5,000
0
0
-5,000
0
0
-263
-719
-982
-135
318
183
Cash flow statement
Y/E Mar
OP/(Loss) before Tax
Depreciation
Others
Interest
Direct Taxes Paid
(Inc)/Dec in Wkg Cap
CF from Op. Activity
(Inc)/Dec in FA & CWIP
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax)
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
(INR Million)
2017E
7,903
2,361
0
263
-1,739
-2,324
6,464
-5,000
0
0
-5,000
0
0
-263
-901
-1,164
300
183
483
7
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8