ipca laboratories - business standard€¦ · ipca laboratories remediation process done: ready to...

Company Report Industry: Pharma

Surajit Pal ([email protected]) +91-22-66322259

Ipca Laboratories Remediation process done: ready to press restart button

March 09, 2018 2

Ipca Laboratories

Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision.

Please refer to important disclosures and disclaimers at the end of the report

Contents Page No.

IPCA: An integrated play with diversified portfolio .................................................... 4

What went wrong for IPCA post FY14? ............................................................................................. 5

US generics – Request for re-inspection awaited .............................................................................. 6

Exhaustive remediation work completed— New dawn to emerge .................................................. 8

Status of filed ANDAs, pipeline .......................................................................................................... 9

What process changes have been made during remediation? ......................................................... 9

Way forward post resolution: Partnership model to continue ....................................................... 10

New, positive developments in tender business ............................................................................. 12

API to regain better growth with USFDA resolution ....................................................................... 17

Financials .................................................................................................................. 19

Revenue recovery expected FY19E onwards ................................................................................... 19

US revenues to resume with supply of older generics .................................................................... 19

International tender biz growth hinges upon approvals, resolutions ............................................. 20

EBITDA to gain faster on operating leverage ................................................................................... 20

Leverage, tax to decline with lower capex, higher operating leverage ........................................... 21

Improved business to improve return ratios ................................................................................... 23

Other key management guidance ................................................................................................... 23

Risks and Concerns ................................................................................................... 24

Delayed resolution from FDA .......................................................................................................... 24

New observations may affect international tender business .......................................................... 24

New observations may also lead to additional overhead ............................................................... 24

Systemic risk of new NPPA regulations ........................................................................................... 24

Valuations ................................................................................................................. 25

PL v/s Consensus ............................................................................................................................. 26

Ipca Laboratories

Company Report March 09, 2018

Rating BUY

Price Rs666

Target Price Rs837

Implied Upside 25.7%

Sensex 33,352

Nifty 10,243

(Prices as on March 08, 2018)

Trading data

Market Cap. (Rs m) 84,048.6

Shares o/s (m) 126.2

3M Avg. Daily value (Rs m) 244.1

Major shareholders

Promoters 46.21%

Foreign 13.89%

Domestic Inst. 25.51%

Public & Other 14.39%

Stock Performance

(%) 1M 6M 12M

Absolute 11.8 58.2 20.9

Relative 14.9 53.0 5.5

How we differ from Consensus

EPS (Rs) PL Cons. % Diff.

2019 27.6 28.9 -4.6

2020 38.4 38.4 0.0

Price Performance (RIC: IPCA.BO, BB: IPCA IN)

Source: Bloomberg

100

200

300

400

500

600

700

800

Mar

-17

May

-17

Jul-

17

Sep

-17

No

v-1

7

Jan

-18

Mar

-18

(Rs)

IPCA, after a long period of hibernation, they are beginning to see a recovery in all their key business verticals after the earnings reached a nadir with a loss of Rs176mn in Q1FY18. We believe this change to be reflected across the four verticals, namely:

US generics,

International tenders in non-WHO markets,

India formulations and

API

Management has invited USFDA to revisit the three facilities, which are banned to export drugs to the US since FY15. Unlike peers, IPCA completed exhaustive remediation work, including re-modelling of facilities and deployed three consultants for the same to get going. With a co-operative approach of the new commissioner and FDA’s track-record of setting up less tougher yardsticks for Oral and API plants, we expect re-approval of the facilities in FY19E. Re-initiation of anti-malarial tender business for private-fund program and invitation to USFDA for revisit of three plants are the key developments in recent times. With slew of major reforms by both, the Govt. and regulator, India formulations expect to achieve normalised sales in FY18E-20E. Extending learning curve post USFDA issues, IPCA commissioned new API plant in Baroda and de-risked exports of APIs that contribute 18% of sales in FY17.

Valuation - Initiate with ‘BUY’ recommendation, TP-Rs837: IPCA’s recovery began with 15% YoY growth of India formulations in Q3FY18 and reported net profit of Rs1,025mn. We expect the key fundamentals to improve gradually and set-off for bigger momentum once FDA issues resolve. Gross underutilisation of facilities related to US and anti-malaria drugs sets up opportunity for operating leverage, which will lead to faster growth of margins, EBITDA and PAT. To reflect inherent risk of US and International tender business, we assign PER of 22x (40% discount to EPS growth in FY17-20E) on FY20E earnings and derive TP at Rs837. We initiate coverage with ‘BUY’. Delay in attaining triggers for key events to be a major risk, while large orders from the private funds or faster FDA resolution to be catalysts for further upgrade.

Key financials (Y/e March) 2017 2018E 2019E 2020E

Revenues (Rs m) 30,927 31,890 35,219 41,068

Growth (%) 9.4 3.1 10.4 16.6

EBITDA (Rs m) 3,800 4,082 5,793 7,515

PAT (Rs m) 1,918 2,151 3,484 4,851

EPS (Rs) 15.2 17.0 27.6 38.4

Growth (%) 105.9 12.1 62.0 39.3

Net DPS (Rs) — — — —

Profitability & Valuation 2017 2018E 2019E 2020E

EBITDA margin (%) 12.3 12.8 16.5 18.3

RoE (%) 8.1 8.4 12.2 14.9

RoCE (%) 6.8 7.3 10.7 13.4

EV / sales (x) 2.9 2.8 2.5 2.1

EV / EBITDA (x) 23.6 21.6 14.9 11.3

PE (x) 43.8 39.1 24.1 17.3

P / BV (x) 3.4 3.1 2.8 2.4

Net dividend yield (%) — — — —

Source: Company Data; PL Research

Key financials (Y/e March) 2017 2018E 2019E 2020E

Revenues (Rs m) 30,927 31,890 35,219 41,068

Growth (%) 9.4 3.1 10.4 16.6

EBITDA (Rs m) 3,800 4,082 5,793 7,515

PAT (Rs m) 1,918 2,151 3,484 4,851

EPS (Rs) 15.2 17.0 27.6 38.4

Growth (%) 105.9 12.1 62.0 39.3

Net DPS (Rs) — — — —

Profitability & Valuation 2017 2018E 2019E 2020E

EBITDA margin (%) 12.3 12.8 16.5 18.3

RoE (%) 8.1 8.4 12.2 14.9

RoCE (%) 6.8 7.3 10.7 13.4

EV / sales (x) 2.9 2.8 2.5 2.1

EV / EBITDA (x) 23.6 21.6 14.9 11.3

PE (x) 43.8 39.1 24.1 17.3

P / BV (x) 3.4 3.1 2.8 2.4

Net dividend yield (%) — — — —

Source: Company Data; PL Research

Ipca Laboratories

March 09, 2018 4

IPCA: An integrated play with diversified portfolio

IPCA is a vertically integrated Pharma company, with India being a major contributor

to its revenues. Branded formulations, Generic formulations, APIs and

Intermediaries are its major business verticals. Domestic revenues and exports

contribute to 49% and 51% of revenues, respectively. Hence, IPCA’s business is well-

diversified, both geographically as well as product-wise.

Exhibit 1: Revenue Distribution Chart

Source: Company Data, PL Research

India formulations contribute to 44% of revenues, with 80% contribution from Pain

management (PMS), Cardiology (CVS), Diabetology, Anti-infective and Anti-malarial

drugs. Export formulations contribute to 33% of revenues with presence in key ROW

markets. South-East Asia, Russia/CIS, Latin America, Middle-East and Africa are

major destinations of IPCA’s branded generics (with own field force) and contribute

to 28% of exports (9% of revenues). IPCA’s generic business in EU and US as well as

tender business for institutional clients (anti-malarial drugs) together contribute to

72% of exports (22% of revenues). All the manufacturing facilities of IPCA are based

in India, including nine formulation and seven API plants across the country.

IPCA

(FY17)

API (23%)

India (5%)

Exports (18%)

Formulations (76%)

Exports (32%)

Generics (23%)

US (2%)

Non-US (16%) International

Tender (4%)

Branded (9%)

India (44%)

Others (1%)

Ipca Laboratories

March 09, 2018 5

Exhibit 2: Geographic distribution of export (Formulations+API) (%)

Geographies: FY12 FY13 FY14 FY15 FY16 FY17

Europe 32% 28% 29% 37% 38% 39%

USA 21% 21% 20% 17% 19% 16%

CIS 8% 8% 8% 9% 7% 7%

Asia 10% 13% 12% 12% 14% 15%

Africa 27% 27% 28% 20% 15% 17%

Australia 3% 3% 3% 5% 6% 6%

Total 100 100 100 100 100 100


What went wrong for IPCA post FY14?

Issue 1 — cGMP issue with USFDA: USFDA raised concerns over IPCA’s cGMP

practice (Form 483 observations) in multiple plants including Ratlam (API),

Pithampur (Indore SEZ) and Piparia (Silvassa) in July 2014. IPCA voluntarily stopped

export of its drug to US in a quick response to comply with the guidance of the FDA.

The critical observations escalated to an Import alert in Q3FY15 for all the three

plants with a reprieve of exemption for four APIs from Ratlam and one formulation

of HCQS from Piparia. The exempted API contributed 85% of US revenues in FY15.

Exhibit 3: Chronicles of cGMP issues with USFDA in the three plants of IPCA

Date Events

Jul-14 USFDA issued Form-483 with 6 observations for API plant in Ratlam

Jul-14 IPCA voluntarily suspended exports of API and formulations for US markets except products with shortage issue in US

Nov-14 USFDA issued Form 483 with 6 observations for formulations plant in Indore

Dec-14 USFDA issued Form 483 with 5 observations for formulations plant in Silvassa

Jan-15 Ratlam API plant was issued Import Alert though exempted four products (HCQS, Propranolol hcl, Trimethoprim and Ondansetron)

Mar-15 USFDA issued Import Alert for two formulations plant - Silvassa (Piparia) and Indore (Pithampur) though exempted two products

Q2FY16 Received clearance from WHO for the Ratlam API facility

Feb-16 USFDA issued Warning Letters on all three plants: Ratlam (API), SEZ Indore (Pithampur) and Silvassa (Piparia)

Apr-16 The Global Fund declined to source anti-malarial drugs from suppliers having cGMP issues with USFDA

Q4FY17 The Global Fund has asked IPCA to participate in the request for information process for 2018-20 supplies as malarial drug prices shot up with absence of the largest global producer of malaria drugs

Jun-17 USFDA withdraws exemption list of four APIs and two formulations from Ratlam and Silvassa, except for API Chloroquine Phosphate (Ratlam)


Issue 2 — Stoppage of Global Funds in tender business: After a strong revenue

growth of 4x (from FY11-14) to Rs4.4bn in FY14, IPCA’s institutional malaria business

from the Global Funds (UNITAID, Gates Foundation etc.) decreased as the

organisations declined to source medicines which used API from Ratlam plant which

had cGMP issue with USFDA. These global funds used to contribute to 60-65% of

IPCA’s tender business revenues of US$73m in FY14.

Ipca Laboratories

March 09, 2018 6

Issue 3 — Depreciating GBP, Euro, Brexit take toll on EU generic business: EU

contributed between 30-40% of IPCA’s export during FY14-17, of which, 70% was

from the UK. Brexit and resultant steep depreciation in GBP affected IPCA’s revenues

which declined 10% CAGR in FY15-17. The non-UK business of IPCA was also

impacted due to fall in the value of Euro since FY15.

Issue 4 — Steep fall in Rouble, EM currencies spoil branded generics in ROW: Steep

depreciation of Russian Rouble and currencies in LatAM also affected IPCA’s

revenues from ROW markets in FY16. IPCA’s revenues from CIS and Americas (non-

US) fell by 36% and 30% YoY, respectively, in FY16. Revenues from both the

geographies, however, declined by 17% and 20% CAGR in FY15-17.

Issue 5 — API draws collateral damage from USFDA, Global Funds embargo: With

18% of revenue, IPCA is one of the largest API exporters of India. It also reached its

highest revenue of Rs6bn in FY14 but import embargo by US and Global Funds in

malaria business impacted its growth afterwards. API exports of IPCA declined to 2%

CAGR in FY14-17.

Exhibit 4: Contribution of key revenue sources (%)

Major Segments

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

India

47% 44% 38% 37% 35% 42% 48% 49%

Formulations

38% 37% 32% 31% 30% 36% 43% 44%

API

9% 8% 6% 5% 5% 6% 5% 5%

Exports

53% 56% 62% 63% 65% 58% 52% 51%

Branded Formulations

8% 8% 9% 10% 11% 11% 8% 9%

US generics

4% 6% 7% 6% 7% 4% 3% 2%

Non-US Generics

14% 16% 13% 12% 14% 17% 16% 16%

Tender Biz (WHO, Global Fund)

5% 6% 13% 14% 13% 8% 5% 4%

API

20% 18% 17% 19% 18% 16% 18% 18%

Other

1% 2% 2% 2% 2% 3% 2% 2%

Gross Sales (excl Oth Op. Income)

100% 100% 100% 100% 100% 100% 100% 100%


US generics – Request for re-inspection awaited

Our view: IPCA’s US generics business went into a tail spin from FY14. Though

initially it was due to the voluntary withdrawal of exports (since July 14) followed by

import alert of USFDA (Jan 15), IPCA’s US revenue declined by 35% CAGR in FY14-17.

US revenues are likely to decline further by 20% YoY to US$8.5mn in FY18E as FDA

withdrew exemption list (of five products) of import alert since Jun 17. We strongly

believe that IPCA’s slide in US revenues is to bottom-out in FY18E with acceptance of

formal request of re-inspection for all the three plants, currently banned under

import alert.

Ipca Laboratories

March 09, 2018 7

With 40 months of remediation work behind them and new co-operative approach,

we expect the USFDA visit and approval in FY19E. We believe re-approval of the

three plants of IPCA will not be as difficult as other Indian peers due to a)

manufacture of non-complex drugs in oral solids (OSD), b) Ratlam being API plant

and c) Pithampur and Piparia being new plants have small history of US exports.

While we expect US revenue growth at 21% CAGR on a small base in FY17-20E, there

could be a possibility of much higher growth in FY20E though visibility will be clearer

once resolution achieves.

Exhibit 5: US generic revenues poised to grow on expected resolution

-40%

-20%

0%

20%

40%

60%

80%

0.0

5.0

10.0

15.0

20.0

FY17 FY18E FY19E FY20E

Revenues (US$m) Gr (%) (RHS)


Key US generics targeted post resolution: Management expects gToprol XL

(Metoprolol) approval post resolution to be the key driver for US growth. IPCA plans

to garner larger market share with benefits of captive API and economy of scale.

Currently IPCA is the largest/cheapest API producer of Metoprolol as well as supplier

to AstraZeneca (originator of Toprol). Overall, IPCA’s initial target (post resolution) is

to re-enter majority of current ANDAs, which were launched and traded with high

volume in US before the import ban. It also plans to file new ANDAs selectively in

sustained release and controlled substance drugs with bigger volume of demand

(Rx).

Ipca Laboratories

March 09, 2018 8

Exhibit 6: US generic revenues take toll due to import ban (FY12-17)

-60%

-40%

-20%

0%

20%

40%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

FY12 FY13 FY14 FY15 FY16 FY17

US Generics Revenue (US$m) Gr (%) (RHS)


Exhaustive remediation work completed— New dawn to emerge

USFDA Inspection: With the completion of remediation process, IPCA invited USFDA

in August CY17 for re-inspection of its formulation plants in Piparia (Silvassa) and

Pithampur (SEZ Indore). Management also plans to invite the FDA for re-inspection

of its key API plant in Ratlam in Q4FY18. We, however, believe that resolution on

Ratlam unit to be the key for IPCA’s return to strong US growth as it targets volume-

driven older generics with vertical integration of a) APIs and b) lowest manufacturing

cost. Even in the current competitive horizon, when trend of consolidations among

the channel partners are at its peak, these two features are expected to help IPCA to

make re-entry in highly competitive older generics in US.

Exhaustive remediation work spread over 40 months: IPCA took more than three

years to complete the remediation work as FDA wanted IPCA to complete audit of

retrospective manufacturing/QC data of the five years prior to CY2015. With 22 units

and 70 products in Ratlam API plant, it was a huge task for the company to comply

with the demand of data-check (through a third-party consultant) of the last five

years as recommended.

Easier yardstick for API plant to be re-approved: While all ANDAs of IPCA are

vertically integrated, the clearance of Ratlam facility is critical for resumption of US

business. Ratlam being an API plant, and along with current trend of faster re-

approval of API plants of peers like Divis Lab and DRL, we concur the management’s

optimism that Ratlam has higher likelihood to reach resolution in CY18 (FY19E). New

ANDA approvals are likely to depend on resolution in Pithampur plant, while Piparia

is the key for production of current product portfolio of US market

The remediation costs were US$6-8mn in FY17 (~Rs500mn). Going forward, the

consultation cost would continue till these issues are resolved and could see

significant reduction in consultancy fees H2FY18E onwards.

Ipca Laboratories

March 09, 2018 9

Status of filed ANDAs, pipeline

With filing of four ANDAs since import alert raised in FY15, IPCA’s cumulative filings

are 48 ANDAs, of which, it received approvals for 18 ANDAs, while application of 30

ANDAs are pending with FDA. The import alert was raised on 11 SKUs including key

drug, HCQS.

IPCA has 54 cumulative DMF filings. The company indicated that while it continues to

work on new ANDA development, it would file the same only upon resolution of the

FDA issues. IPCA may need to rework the API processes on some of these filings to

make those drugs cost competitive.

Exhibit 7: History of ANDAs: Filing and Pending

History of ANDAs FY12 FY13 FY14 FY15 FY17

Cum. Filed 25 33 40 39 48

Cum. Approved 12 14 18 18 18

Pending pipeline 13 19 22 21 30


In case of resolution in the near term, management plans to file 8-10 ANDAs in a

fiscal year and move up the value chain to complex products segment in the medium

term. IPCA has two products under 505(b) (2) route in its development pipeline and

is working on ophthalmology and hormonal specialities.

What process changes have been made during remediation?

Restructured QA team: IPCA’s quality assurance (QA) team has been restructured as

a part of its remediation work at plant. Its current organizational structure of one

President and two Vice Presidents has replaced previous structure of only one

President in charge of overall QA activities. There are also more suggested SOPs

(Standard Operating Procedure) at corporate level than SOPs at plant level, which

was exactly the opposite scenario before import alert took place. The more SOPs at

corporate level ensure more checks and balances from top management along with

efficient control management at plant level. The current structure will impart better

control for management in comparison to previous structure where management

used to have minimum control on QA activities though deem responsible for the

adverse outcome.

Work of consultants: As suggested by USFDA, IPCA appointed three consultants for

the remediation works since FY15: a) first consultant from US was appointed to

undertake a review of the existing process and on course correction, b) second

consultant (E&Y) appointed to do forensic analysis of its SOPs at the plant and

corporate level and c) third consultant (also from US) was appointed for reviewing

the data of the last 3-5 years. The work of third consultant’s work is currently

ongoing as it takes longer time to verify vast historical data at Ratlam.

Ipca Laboratories

March 09, 2018 10

Costs of remediation works: IPCA paid third-party consultant fees of Rs700-800mn

(US$12mn) in addition to the remediation costs of works at plant (US$20-25mn) in

the last three years of remediation process. The remediation works at plant site is

related to architectural alterations, construction modifications and new software

installations. IPCA paid consultancy fees of Rs40mn in H1FY18 and has guided for an

annual consultancy fees of US$1-2m in operating costs from now on as the

management decides to pay enduring focus on frequent update of its key personnel

through third-party consultant on global best practices followed in plant

management.

Exhibit 8: List of Plant Infrastructure

Location Dosage Forms Regulatory approval

Athal (Silvassa) Formulations: Tabs, Caps UK MHRA, TGA-Aus, MCC-SA, HPB-Canada, WHO-Geneva

Ratlam (MP) Formulations: Tabs, Liquids, Inj, Ointment MCC-SA

API US FDA, TGA-Aus, EDQM, PMDA-Japan, WHO-Geneva, Denish Reg Auth,

Kandla (Gujarat) Formulations: Betalactum-Tabs, Caps, Dry Syrups

UK MHRA, MCC-SA

Silvassa (Piparia) Formulations: Tabs, Caps US FDA, UK MHRA, TGA-Aus, HPB-Canada

Dehradun (Uttaranchal) Formulations: Tabs, Inj (Cephs) WHO-GMP

Indore-SEZ (MP-Pithampur) Formulations: Tabs, Caps US FDA, UK MHRA

Indore API WHO-GMP

Pithampur-Dhar (MP) Formulations: High potency OSD WHO-GMP, INVIMA Colombia

Tarapur-Palghar Formulations: Tabs India GMP

Sikkim Formulations: Tabs, Caps India GMP

Ankleshwar (Gujarat) API PMDA-Japan

Nandesari (Gujarat) API WHO-GMP

Aurangabad (Maharashtra) API WHO-GMP

Mahad (Maharashtra) API India GMP

Renu (Gujarat-Tehsil Padra) API India GMP


Way forward post resolution: Partnership model to continue

IPCA continues to pursue partnership model to distribute its products in the US. Its

existing tie-up with Ranbaxy (now Sun Pharma) will continue even after resolution of

FDA-infested plants. With current tie-up for distribution of 40 products in US,

management is not keen to establish its own sales & distribution team in US due to

adverse cost-benefit outcome. IPCA shared partial profit with Sun Pharma along with

payment of marketing fees for distribution of its products in US.

With growing consolidation and cartelisation among channel partners in US, IPCA

may consider joining larger cartel for direct supply agreements if it benefits from a)

assured larger volume off take, b) higher capacity utilisations and c) sizeable

operating margin. This could well suit its future strategy along with current

partnership model, given that it could leverage a) benefits of scalability with lower

manufacturing costs and 2) gain and sustain market share in comparably stable price

of generics.

Ipca Laboratories

March 09, 2018 11

With major changes in market dynamics of US generics, IPCA sets yardstick of a) high

volume of demands and b) compulsory backward integration for launching

molecules (old and new) in US post resolution of plants. The company being a late

entrant in US, it is imperative for it to leverage low-cost captive APIs to sustain

competitive intensity and rapid price erosion.

Institutional malaria business—Recovery underway

IPCA received tender orders from large global funds in the non-WHO segment. Based

on the positive development in private-funds tender business, IPCA’s revenue from

anti-malaria drugs to increase by 33% CAGR to US$47mn in FY20E. IPCA’s revenues

were Rs1.3bn in FY17 and expected to reach Rs3.1bn in FY20E. IPCA received

revenue of Rs550mn from tender business in H1FY18. Our estimates are with

cautious optimism though IPCA may outperform our estimates once orders from

large funds start seeing momentum return to the earlier levels.

Exhibit 9: Re-entry in private market to drive International Tender Business

-20%

0%

20%

40%

60%

80%

100%

120%

-

500

1,000

1,500

2,000

2,500

3,000

3,500


Tender Business (Rs m) Gr (%) (RHS)


Genesis of non-WHO market: Along with WHO’s tender business, IPCA also actively

participated in tender program of large funds for anti-malaria programme such as

The Global Fund, VPP and AMFm. Overall, its anti-malarial formulations are supplied

to the program of multi-lateral organisations such as UNICEF, WHO, IDA, Mission

Pharma, PSI, SCMS, MSF, MEG and Ministries of Health in Africa.

Current anti-malaria portfolio: IPCA’s current anti-malaria portfolio comprised of

two pre-qualified conventional drugs—combination of Artemether and Lumefantrine

(20/120mg Tabs) and co-blister pack of tablets of Artesunate (50mg) and

Amodiaquine (153.1mg). IPCA also supplies APIs of anti-malarial drug to global

pharma majors such as AstraZeneca, Pfizer, Bayer, Sanofi Aventis, Dafra, Mepha, and

Parke Davis. IPCA stopped supplies of Artemisinin based oral monotherapies among

anti-malarial drugs.

Ipca Laboratories

March 09, 2018 12

Ripple effect of USFDA Import Alert: While WHO-tender order remains stagnant in

offtake of volumes, The Global Fund (US being the largest contributor) declined to

offtake from IPCA from FY15 onwards as the organisation disallowed suppliers with

FDA-related issues in its anti-malaria program. This had led to decline in tender

business to Rs1.3bn (US$20mn) in FY17, as IPCA currently supplies to WHO tender

and individual tender orders of sovereign countries.

Exhibit 10: Non-WHO Tender revenues get collateral damage on FDA ban on US generics

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

-

10

20

30

40

50

60

70

80


Tender Business (US$m) Gr (%) (RHS)


New, positive developments in tender business

Future of anti-malaria business: IPCA is awaiting approval for pre-qualifications of

two new formulations: a) Artesunate inj and b) combination of Artemether and

Lumefantrine dispersible tablets, for its participation of global tender business.

Management expects approvals in H1FY19E and plans to participate in tender of the

two comparatively new drugs in FY19E-20E. The filed dossier of injectable requires a

site inspection of IPCA’s new injectable facility. Approvals of the two new products

will provide fillip to dwindling malaria business from the existing portfolio. There is

limited competition between Novartis and Ajanta Pharma in tender business of

dispersible tablet. IPCA especially plans to target larger market share of dispersible

tablets as soon as supplies to The Global Fund restores.

Formulation exports: Gradual recovery with stable currencies

IPCA has both branded and generic business in non-US formulation exports, which

contributes to 25% of the company’s revenues. While it exports branded drugs in

CIS, Africa, Asia and Latam, IPCA’s major business in UK, Australia and New Zealand

are generics. Other key markets for non-US generics are Germany, Netherlands and

Belgium. IPCA’s both branded and generic formulation exports have been impacted

with volatile currencies since FY15.

Ipca Laboratories

March 09, 2018 13

Exhibit 11: Volatile currencies impact flow of export formulations

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000


Export Formulations (Rs m) Gr (%) (RHS)


Branded formulations: Branded formulations contribute 9% of IPCA’s revenues with

more than 25% operating margin. IPCA promotes more than 60 branded

formulations in 40 ROW markets with 500 dedicated field forces for doctors and

end-users. The key markets are Russia, Brazil, Mexico, Nigeria and Franco-German

Africa. IPCA markets key drugs in anti-infective, PMS, CVS, CNS and anti-malarial

therapeutic areas.

Exhibit 12: Stable currencies in ROW offer growth, profitability in Branded Formulations

0%

5%

10%

15%

20%

25%

0

500

1000

1500

2000

2500

3000

3500

4000

4500


Branded Formulations (Rs m) Gr (%) (RHS)


Aided with stabilized Rouble and other key currencies, IPCA’s management plans for

larger focus in branded formulation exports in the light of a) sizeable growth

prospects, b) better gross margin (20-25%) and c) incremental shift of R&D to ROW

markets due to FDA-related issues in US. We estimate 12% CAGR in branded

formulation revenues of Rs4bn in FY20E from Rs2.9bn in FY17. Branded formulations

reached its peak revenues of Rs3.4bn in FY15 with 22% CAGR in FY11-15. The growth

trajectory was however interrupted due to volatile currencies of Rouble and other

key EM currencies in CIS and ROW markets since FY15.

Ipca Laboratories

March 09, 2018 14

Exhibit 13: Rouble, Latam currencies take toll on Branded formulations (FY14-17)

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000


Branded Formulations (Rs m) Gr (%) (RHS)


Non-US generics: Revenue contribution of non-US generics was 16% in FY17. With

14% CAGR in FY11-15, the non-US generics business reached its peak revenues of

Rs5.2bn (US$84mn) in FY15, driven by new product launches and appreciation of

GBP v/s INR. With volatile Euro and declining GBP v/s INR since Q4FY15, IPCA’s

realisations in non-US generics declined by 1% CAGR in FY15-17.

Exhibit 14: Non-US Generics to have moderate growth on Brexit, Euro

0%

2%

4%

6%

8%

10%

12%

4800

4900

5000

5100

5200

5300

5400

5500

5600

5700


Non-US Generics (Rs m) Gr (%) (RHS)


EU contributes 70-75% of non-US generic sales, of which, UK accounts more than

70% of revenues. There has been challenging scenario in the growth UK sales volume

due to rising competition. IPCA’s EU growth in FY16 was affected due to supply-side

issues. It recovered quickly with 14% YoY growth in FY17. While challenging

scenarios such as Brexit could limit growth in the near term, we expect gradual rise

in revenues in FY19E onwards and estimate 3% CAGR in FY17-20E due to a)

geographic expansion, b) product launch and c) incremental growth in third-party

CMO business.

Ipca Laboratories

March 09, 2018 15

Exhibit 15: Depreciation of GBP being played a major role for decline in non-US Generics

-20%

-10%

0%

10%

20%

30%

40%

0

1000

2000

3000

4000

5000

6000


Non-US Generics (Rs m) Gr (%) (RHS)


India formulations: Lower systemic risk to restore growth on track

IPCA’s India formulations grew at 12% CAGR in FY11-17 on growing share in chronic

therapeutic segments, judicious product selection, product launches and expansion

of field forces. The company’s domestic growth, however, was intermittently

disrupted by multiple factors: lower anti-malaria sales, impact of pricing policy, ban

on FDC drugs, demonetisation and GST implementations.

Exhibit 16: Therapeutic contribution in FY11

CVS & Anti-diabetics

27%

NSAID28%

Anti Malarials17%

Anti Bacterials8%

GI products6%

Neuro Psychiatry (CNS)4%

Cough & Cold preparations

4%

Dermatology4% Neutraceuticals

1% Others1%

FY11


Exhibit 17: Therapeutic contribution in FY17

CVS & Anti-diabetics

21%

NSAID41%

Anti Malarials12%

Anti Bacterials6%

GI products4%

Neuro Psychiatry (CNS)3%

Cough & Cold preparations

5%

Dermatology4%

Urology2%

Neutraceuticals1%

Others1%

FY17


Ipca Laboratories

March 09, 2018 16

Our view: IPCA’s M9FY18 sales declined by 1% YoY due to weaker anti-malaria drug

sales and pre-GST slowdown. The new taxation regime also increases tax incidence

from 8.9% to 12% as well as different base for comparison of growth (i.e. the sales in

Q3/M9 FY18 were net off GST, while it were gross sales in Q3/M9 FY17) as we shift

to GST from excise duty and VAT. The comparatively lower incidence of malaria in

M9FY18 is likely to reduce revenues from anti-malaria drugs to Rs1.1bn in FY18E

from Rs1.8bn in FY17. There could also be a possibility to write-off unsold inventory

(manufactured before July 2017) and cleared off the book in H2FY18E. While

management is hopeful to recover loss of sales (due to GST implementation) in

H2FY18E, we remain cautiously optimistic with 10% CAGR in FY17-20E on the back of

a) line extensions and drugs with new delivery mechanisms, b) normal year in anti-

diabetes, NSAIDs and CVS and c) launch of in-licensed products. IPCA, however, has a

possibility to outperform our estimates with higher incidence of malaria and

normalized sales of key therapeutic areas in H2FY18E.

Exhibit 18: Normalised years of sales expected for India Formulations in FY19E-20E

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0

4000

8000

12000

16000

20000

FY15 FY16 FY17 FY18E FY19E FY20E

India Formulations (Rs m) Gr (%) (RHS)


New strategy: While growing share of chronic therapy drugs helped in IPCA’s India

formulation growth, the acute therapy drugs, especially in PMS (pain management)

and Derma, remain the key focus for the company’s recent past. It has newly

entered in ophthalmology segment and plans to ramp-up its sales from current

revenues of Rs100mn p.a. IPCA plans to cater IPM with 13 marketing division with

4,000 reps. With reduction of headcount workforce by 500 headcount, the current

productivity of the marketing team is Rs2.5lakh/rep and reduction of headcounts

helps to increase average productivity by 10%. Current inventory days at channels

are 33 days in M9FY18, which used to be 40 days before GST implementations.

Management does not expect to regain similar inventory days with channel partners

in FY18E.

Ipca Laboratories

March 09, 2018 17

Exhibit 19: India formulations—Market reps, productivity, wholesalers key brands


Medical reps (Dom. Frml)

3,610 3,950 4,154 4,297 4,500 4,000

Revenue/Medical Rep (Rs in lacs)

13.20 15.14 16.75 17.55 19.51 24.24

Wholesalers 2,000+ 2,000+ 2,000+ 2,000+ 2,000+ 2,000+

Key brands HCQS, Lariago,

Rapither

HCQS, Lariago, Rapither-AB,

Zerodol-P


Zerodol-P, Zerodol-SP








Genesis: IPCA started as a producer of anti-malarial drugs and is a major player in

that segment. IPCA’s anti-malarial drugs are marketed through retail channel/brands

and controls 35% of the segment and these drugs contributes 12% of its domestic

revenues. IPCA never participated in low margin govt.-tenders of anti-malarial drugs

in India.

The company has improved its product portfolio over the years and grew its

positioning in chronic and specialty therapeutic areas. Its leadership in key

therapies such as NSAID, anti-diabetes and CVS contribute over 60% of India

formulation revenues

The current portfolio of products consists of 350 formulations including oral

solids, liquids, dry powder suspensions, injectables (dry and liquid)

IPCA services more than 200,000 physicians and covers more than 500,000

pharmacists through a network of 2,000 wholesalers

API to regain better growth with USFDA resolution

Envisaging approvals from key regulators across geographies for Baroda plant along

with resolution in Ratlam, we expect 7% CAGR in API exports in FY17-20E.

Management guided for 10% YoY growth in FY17-19E. With commissioning of

Baroda API facility in the recent past, IPCA also actively de-risks its API export

business gradually as Ratlam continues to be the only supplier for its API exports

since long. With a) Ratlam being the large API facility for exports, b) contributions of

18% of revenues and c) US and EU being key destinations, the USFDA import alert on

Ratlam plant resulted in a strong impact on revenues of IPCA. API exports grew at

22% CAGR since FY11 to reach its peak revenues of Rs6bn in FY14, while it declined

at 2% CAGR in FY14-17 post USFDA restriction of API exports to US.

Ipca Laboratories

March 09, 2018 18

Exhibit 20: API Exports to make turnaround post USFDA resolutions

0%

2%

4%

6%

8%

10%

12%

14%

0

1000

2000

3000

4000

5000

6000

7000

8000


API Exports API Exports Gr (%) (RHS)


Genesis: IPCA is one of the largest API exporters of India with key destinations being

US, EU, Africa, CIS and Latam. Its major products with large market shares globally

are Chloroquine Phosphate (antimalarial), Atenolol (CVS), Furosemide (diuretic),

HCQS (NSAID), Metoprolol succinate and tartrate (anti-hypertensive) and Pyrantel

salts (anti-thelmintic).

Ipca Laboratories

March 09, 2018 19

Financials

Revenue recovery expected FY19E onwards

IPCA’s current process of revenue recovery to reflect in FY19E onwards on the back

of a) resumption of US generics post resolution, b) renewing large supply of anti-

malaria drugs to The Global Fund and c) normalised sales of India formulations.

Adjusted revenues are expected to increase at 10% and 17% YoY in FY19E and FY20E.

With large unused capacities, IPCA has headroom to scale up in key business

verticals, which are impacted for multiple reasons since FY15 onwards.

Exhibit 21: Segmental revenues from key verticals

Segmental Revenues (INR m) FY14 FY17 FY18E FY19E FY20E

India 11,340 15,330 15,882 16,955 20,162

Formulations 9,694 13,886 14,510 16,542 18,692

API 1,646 1,444 1,372 1,413 1,470

Exports 21,450 16,157 16,493 17,800 21,531

Branded Formulations 3,461 2,870 3,020 3,383 3,992

US generics 2,257 693 556 695 1,216

Non-US Generics 4,563 5,096 5,159 5,314 5,579

Tender Biz (WHO, Global Fund) 4,377 1,300 1,316 1,511 3,058

API 6,002 5,659 5,984 6,462 7,238

Other 790 540 459 436 449

Gross Sales (excl Oth Op. Income) 32,790 31,487 32,376 35,755 41,693


US revenues to resume with supply of older generics

We expect US revenues to resume (post resolution) on the back of continuous

supply of older approvals and new approvals of pending applications. The better

growth, however, expects to rise faster with key approvals like Toprol-XL and exports

of higher volume of older generics with larger Rx base. We currently estimate lower

(YoY) US sales in FY18E due to withdrawal of exception list (of FDA), while expect

US$11-20m sales in FY19E-20E with potentials of larger growth, in case resolution

achieves faster.

Ipca Laboratories

March 09, 2018 20

Exhibit 22: North America revenues & Growth

-40%

-30%

-20%

-10%

0%

10%

20%

30%

-

1,000

2,000

3,000

4,000

5,000

FY14 FY15 FY16 FY17

Formulations API Growth (%) (RHS)


International tender biz growth hinges upon approvals, resolutions

While renewing supply of anti-malarial drugs to the private funds over three years,

we expect revenue growth from tenders to ramp-up with large orders from global

funds once it a) achieves resolutions (FDA) over three plants, especially in Ratlam

and b) receives pre-approval on two pending applications with WHO.

Exhibit 23: Therapeutic contribution from export formulations

Contributions of therapeutic groups: Export Frml FY11 FY12 FY13 FY14 FY15 FY16 FY17

CVS & Anti-diabetics 41% 31% 29% 31% 30% 31% 32%

NSAID 20% 18% 17% 17% 21% 25% 23%

Anti Malarials 19% 33% 37% 35% 24% 17% 16%

Anti Bacterials 11% 10% 9% 10% 11% 12% 13%

GI products 1% 1% 1% 1% 2% 3% 2%

Neuro Psychiatry (CNS) 3% 1% 1% 1% 3% 5% 5%

Cough & Cold preparations 1% 2% 1% 1% 2% 2% 1%

Anthelmintics - - - 3% 5% 3% 6%

Others 4% 4% 5% 1% 2% 2% 2%


EBITDA to gain faster on operating leverage

With unutilised manufacturing capacity and marketing network, we expect IPCA’s

adj. EBITDA margin to increase to 18.3% in FY20E from 12.3% in FY17E. The company

is poised to utilise large operating leverage with improvement in key business

verticals including US generics, international tender and India formulations. The

plants, dedicated for multiple verticals, have been largely unutilised due to many

adverse events since FY15 and current developments suggest management plans for

turnaround in all three key verticals (US, India, International tender).

Ipca Laboratories

March 09, 2018 21

Exhibit 24: EBITDA, Growth and Margins

-60%

-40%

-20%

0%

20%

40%

60%

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

EBITDA EBITDA margin Gr (%) (RHS)


The new business orders will conservatively increase revenues at 10% CAGR in FY17-

20E (with large potentials remain unaccounted) without meaningful capex in plant

infrastructure and sales network in export markets. This operating leverage to

increase EBITDA at 26% CAGR in FY17-20E and expand EBITDA margin to 18.3% in

FY20E in comparison to its peak adjusted EBITDA margin of 23.9% in FY14.

Leverage, tax to decline with lower capex, higher operating leverage

IPCA’s current utilisation is less than 50% across plant infrastructure mainly due to a)

nearly unutilised US-dedicated formulation plants, b) under-utilised Ratlam plant

and c) commissioning of Baroda new API plant. Management spent large capex of

Rs11.8bn in FY14-16 due to a) remediation of three USFDA plants, b) consultant fees,

c) acquisitions of two plants (Rs1.1bn in FY15) and d) new API plant in Baroda

(Rs3bn). The flow of investments reduces to maintenance capex as it spent Rs1.3bn

in FY17.

Exhibit 25: Capex and depreciation

0

1000

2000

3000

4000

5000

6000


Capex (Rs m) Depreciation (Rs m)


Ipca Laboratories

March 09, 2018 22

With major capex behind them in FY15-17, management guided for only

maintenance capex of Rs1bn per annum till FY20E due to large under-utilised

capacity. This will adequately meet the demand of additional production from the

improved business verticals. Lower capex will result in flat depreciation and result in

lower deferred tax and leverage ratio.

Exhibit 26: Tax & Tax Rate

29%

18%

25% 25%23%

22%

0%

5%

10%

15%

20%

25%

30%

0

200

400

600

800

1000

1200

1400

1600


Tax (Rs m) Tax Rate (%) (RHS)


The expected improvement in US generics and International tenders of anti-malarial

drugs will also decrease effective tax rate. We assumed net capex of Rs1.6-1.85bn,

average depreciations growth of 4.5% YoY and gradual reduction of tax provisions to

22% in FY20E from 25% in FY17. These have resulted in lower gross D/E ratio of 0.1x

in FY20E from 0.3x in FY17. Current gross debt is Rs7bn (US$100mn) and net debt is

guided to be Rs5.5bn in FY18E.

Exhibit 27: Debt profile

0.60

0.37

0.270.21

0.120.08

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0

2000

4000

6000

8000

10000

12000

14000


Gross Debt (Rs m) Net Debt (Rs m) Gross Debt-Equity Ratio (RHS)


Ipca Laboratories

March 09, 2018 23

Improved business to improve return ratios

Like other financial parameters, IPCA’s return ratios also peaked in FY14 with ROE,

ROCE and ROIC of 27%, 21% and 20%, respectively. The downfall of business and

earnings since FY15 also affected return ratios of the company. We believe that

earnings degradation has bottomed out and poised to turnaround on the back of

few positive events expected to occur in FY18E-20E. We expect return ratios to

improve as ROE, ROCE and ROIC to improve to 15%, 13% and 14% in FY20E from 8%,

7% and 6% in FY17.

Exhibit 28: ROE, ROCE & ROIC

0.0

5.0

10.0

15.0

20.0

25.0

30.0

FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

ROE (%) ROCE (%) ROIC (%)


Other key management guidance

Revenue growth is guided to be 12-13% and 12% in Q4FY18E and FY19E,

respectively

EBITDA margin is guided to be 13-14% in Q4FY18E (due to high contribution of

WHO-tender supply with lower margin) and 18-18.5% in FY19E

R&D is guided to be 3% of revenues

Current tax rate of 24-25% to continue in the near term. The plant at Sikkim

continues to enjoy tax benefits, while the plant at Uttarakhand completed tax

benefits regime after 10 years since inception

Receivable days (DSO) to be maintained at the current level, while inventory

days to be reduced, going forward

Ipca Laboratories

March 09, 2018 24

Risks and Concerns

Delayed resolution from FDA

Inability to secure resolution post plant visit of USFDA in FY19E to have serious

impact on revenue recovery and remain key risk to our earnings assumptions.

New observations may affect international tender business

In case of new observations on expected FDA visits of the three plants may also

impact IPCA’s prospects to win large contract in anti-malarial business from the

Global fund. This would result in very slow recovery in international tender business.

New observations may also lead to additional overhead

If the expected new FDA visits raise serious observations, then there are possibilities

of additional overheads on remediation works and consultant fees.

Systemic risk of new NPPA regulations

In case of any new restrictions (price/products) by NPPA, it may pose a setback for

our assumptions of normalised year of sales for IPCA’s India formulation business.

Ipca Laboratories

March 09, 2018 25

Valuations

We expect 12% YoY earnings growth in FY18E despite a) GST-ridden India

formulation sales and b) withdrawal of FDA exception list for US exports, we believe

that declining earnings has bottomed out since Q1FY18. The catalyst of recovery to

be driven by a) resumption of supply of anti-malarial drugs to private funds from

Q1FY19E, b) USFDA resolutions of three plants, c) normalisation of India

formulations and d) de-risking of API exports with commissioning of Baroda plant.

Exhibit 29: Revenue, PAT & PAT Growth

8%

3%

6% 7%

10%

12%

0%

2%

4%

6%

8%

10%

12%

14%

0

5000

10000

15000

20000

25000

30000

35000

40000

45000


Revenue (Rs m) PAT (Rs m) PAT Margin (%) (RHS)


With our conservative earnings estimates, IPCA currently trades at PE of 24x in FY19E

and 17x in FY20E, a comparatively cheaper valuation to the mid-cap peers. The

opportunity of value unlocking through gradual improvement in fundamentals will

drive growth in revenues, EBITDA and earnings in the medium term. Operating

leverage is also another catalyst to drive faster margin expansion and bring

favourable sensitivity in earnings. To reflect inherent risk of US resolution,

international tender and India formulations, we have discounted 36% CAGR of EPS

in FY17-20E by 40% and assigned PE of 21.8x on FY20E earnings to arrive at our TP

of Rs837. With 26% upside to our TP, we initiate our coverage with ‘BUY’. Inability

to trigger the key events to achieve projected revenue growth and earnings remains

the key risk to our recommendation, while large orders from the Global Fund or

faster FDA resolution will be a catalyst for an upgrade.

Ipca Laboratories

March 09, 2018 26

Exhibit 30: 1Yr Fwd PE Band Chart

10.0x

20.0x

30.0x

40.0x

50.0x

0

500

1,000

1,500

2,000

Mar

-10

Au

g-10

Jan

-11

Jun

-11

No

v-11

Ap

r-12

Sep

-12

Feb

-13

Jul-

13D

ec-

13M

ay-1

4O

ct-1

4M

ar-1

5A

ug-

15Ja

n-1

6Ju

n-1

6N

ov-

16A

pr-

17Se

p-1

7Fe

b-1

8


Exhibit 31: Mean-Deviation points to undervaluation of IPCA v/s peers

0.0

20.0

40.0

60.0

80.0

100.0

Ap

r-13

Jul-

13Se

p-1

3N

ov-

13Ja

n-1

4A

pr-

14Ju

n-1

4A

ug-

14O

ct-1

4Ja

n-1

5M

ar-1

5M

ay-1

5Ju

l-15

Oct

-15

De

c-15

Feb

-16

Ap

r-16

Jun

-16

Sep

-16

No

v-16

Jan

-17

Mar

-17

Jun

-17

Au

g-17

Oct

-17

De

c-17

Mar

-18

P/E (x) Average (µ) 1*σ 2*σ


PL v/s Consensus

As stated, we are conservative in our estimates of key financial parameters v/s the

consensus estimates, as we believe that improvement in IPCA would be gradual. The

major differences are our: a) estimates of lower tax rate in the medium term and b)

lower depreciations and higher operating leverage to expand EBITDA margin over a

period. With limited downside to the current valuation, we suggest to “BUY” the

stock at the current valuation.

Exhibit 32: PL v/s Consensus - Remain conservative vis-a-vis the street

Our estimates vs. consensus PL Estimates Consensus Estimates Variance (%) (PL vs Cons)

FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E

Revenues (INR m) 31,890 35,219 41,068 32,155 37,058 42,645 -1% -5% -4%

EBITDA (INR m) 4,082 5,793 7,515 4,496 6,360 7,956 -9% -9% -6%

Margin (%) 12.8% 16.5% 18.3% 14.0% 17.2% 18.7%

PAT (INR m) 2,151 3,484 4,851 2,303 3,649 4,847 -7% -5% 0%

EPS (INR) 17.0 27.6 38.4 18.3 28.9 38.4


Ipca Laboratories

March 09, 2018 27

Income Statement (Rs m)

Y/e March 2017 2018E 2019E 2020E

Net Revenue 30,927 31,890 35,219 41,068

Raw Material Expenses 11,130 11,162 11,622 12,936

Gross Profit 19,796 20,729 23,597 28,131

Employee Cost 6,960 7,255 7,572 8,419

Other Expenses 9,037 9,392 10,231 12,197

EBITDA 3,800 4,082 5,793 7,515

Depr. & Amortization 1,730 1,762 1,879 1,970

Net Interest 241 230 173 133

Other Income 845 871 897 924

Profit before Tax 2,675 2,961 4,638 6,336

Total Tax 675 725 1,067 1,394

Profit after Tax 2,000 2,236 3,572 4,942

Ex-Od items / Min. Int. 83 85 88 90

Adj. PAT 1,918 2,151 3,484 4,851

Avg. Shares O/S (m) 126.2 126.2 126.2 126.2

EPS (Rs.) 15.2 17.0 27.6 38.4

Cash Flow Abstract (Rs m)

Y/e March 2017 2018E 2019E 2020E

C/F from Operations 2,764 2,249 3,470 3,443

C/F from Investing (1,432) (1,417) (1,561) (1,655)

C/F from Financing (1,591) (1,033) (1,444) (1,404)

Inc. / Dec. in Cash (259) (201) 466 383

Opening Cash 1,689 1,430 1,229 1,695

Closing Cash 1,430 1,229 1,695 2,078

FCFF 903 1,733 1,875 2,009

FCFE (612) 930 604 738

Key Financial Metrics

Y/e March 2017 2018E 2019E 2020E

Growth

Revenue (%) 9.4 3.1 10.4 16.6

EBITDA (%) 51.8 7.4 41.9 29.7

PAT (%) 105.9 12.1 62.0 39.3

EPS (%) 105.9 12.1 62.0 39.3

Profitability

EBITDA Margin (%) 12.3 12.8 16.5 18.3

PAT Margin (%) 6.2 6.7 9.9 11.8

RoCE (%) 6.8 7.3 10.7 13.4

RoE (%) 8.1 8.4 12.2 14.9

Balance Sheet

Net Debt : Equity 0.2 0.1 0.1 —

Net Wrkng Cap. (days) 198 201 221 242

Valuation

PER (x) 43.8 39.1 24.1 17.3

P / B (x) 3.4 3.1 2.8 2.4

EV / EBITDA (x) 23.6 21.6 14.9 11.3

EV / Sales (x) 2.9 2.8 2.5 2.1

Earnings Quality

Eff. Tax Rate 25.2 24.5 23.0 22.0

Other Inc / PBT 31.6 29.4 19.3 14.6

Eff. Depr. Rate (%) 7.6 7.2 7.2 7.1

FCFE / PAT (31.9) 43.2 17.3 15.2

Source: Company Data, PL Research.

Balance Sheet Abstract (Rs m)

Y/e March 2017 2018E 2019E 2020E

Shareholder's Funds 24,553 26,703 30,187 35,039

Total Debt 7,158 6,355 5,084 3,813

Other Liabilities 1,966 1,880 1,752 1,600

Total Liabilities 33,676 34,938 37,023 40,451

Net Fixed Assets 20,307 20,051 19,851 19,653

Goodwill 472 472 472 472

Investments 222 222 222 222

Net Current Assets 11,421 12,871 15,075 18,421

Cash & Equivalents 1,494 2,365 2,830 3,214

Other Current Assets 15,846 16,305 18,028 21,670

Current Liabilities 5,919 5,799 5,784 6,463

Other Assets 1,254 1,322 1,402 1,683

Total Assets 33,676 34,938 37,023 40,451

Quarterly Financials (Rs m)

Y/e March Q4FY17 Q1FY18 Q2FY18 Q3FY18

Net Revenue 6,658 7,130 8,643 8,592

EBITDA 677 215 1,490 1,612

% of revenue 10.2 3.0 17.2 18.8

Depr. & Amortization 428 433 441 438

Net Interest 44 56 64 56

Other Income 52 62 110 110

Profit before Tax 257 (212) 1,096 1,228

Total Tax (187) (10) 131 172

Profit after Tax 444 (202) 965 1,056

Adj. PAT 444 (202) 965 1,056

Key Operating Metrics (Rs m)

Y/e March 2017 2018E 2019E 2020E

Domestic Formulations 13,325 14,025 16,005 18,067

Export Formulations 9,959 10,051 10,902 13,845

APIs 7,103 7,355 7,875 8,707

Source: Company Data, PL Research.

Ipca Laboratories

March 09, 2018 28

Prabhudas Lilladher Pvt. Ltd.

3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai-400 018, India

Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209

Rating Distribution of Research Coverage PL’s Recommendation Nomenclature

43.8% 44.5%

11.7%

0.0%0%

10%

20%

30%

40%

50%

BUY Accumulate Reduce Sell

% o

f To

tal

Co

vera

ge

BUY : Over 15% Outperformance to Sensex over 12-months

Accumulate : Outperformance to Sensex over 12-months

Reduce : Underperformance to Sensex over 12-months

Sell : Over 15% underperformance to Sensex over 12-months

Trading Buy : Over 10% absolute upside in 1-month

Trading Sell : Over 10% absolute decline in 1-month

Not Rated (NR) : No specific call on the stock

Under Review (UR) : Rating likely to change shortly

DISCLAIMER/DISCLOSURES

ANALYST CERTIFICATION

We/I, Mr. Surajit Pal (PGDBA, CFA, M.Com), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

Terms & conditions and other disclosures:

Prabhudas Lilladher Pvt. Ltd, Mumbai, India (hereinafter referred to as “PL”) is engaged in the business of Stock Broking, Portfolio Manager, Depository Participant and distribution for third party financial products. PL is a subsidiary of Prabhudas Lilladher Advisory Services Pvt Ltd. which has its various subsidiaries engaged in business of commodity broking, investment banking, financial services (margin funding) and distribution of third party financial/other products, details in respect of which are available at www.plindia.com

This document has been prepared by the Research Division of PL and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security.

The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein.

Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor.

Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication.

PL may from time to time solicit or perform investment banking or other services for any company mentioned in this document.

PL is in the process of applying for certificate of registration as Research Analyst under Securities and Exchange Board of India (Research Analysts) Regulations, 2014

PL submits that no material disciplinary action has been taken on us by any Regulatory Authority impacting Equity Research Analysis activities.

PL or its research analysts or its associates or his relatives do not have any financial interest in the subject company.

PL or its research analysts or its associates or his relatives do not have actual/beneficial ownership of one per cent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.

PL or its research analysts or its associates or his relatives do not have any material conflict of interest at the time of publication of the research report.

PL or its associates might have received compensation from the subject company in the past twelve months.

PL or its associates might have managed or co-managed public offering of securities for the subject company in the past twelve months or mandated by the subject company for any other assignment in the past twelve months.

PL or its associates might have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.

PL or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months

PL or its associates might have received any compensation or other benefits from the subject company or third party in connection with the research report.

PL encourages independence in research report preparation and strives to minimize conflict in preparation of research report. PL or its analysts did not receive any compensation or other benefits from the subject Company or third party in connection with the preparation of the research report. PL or its Research Analysts do not have any material conflict of interest at the time of publication of this report.

It is confirmed that Mr. Surajit Pal (PGDBA, CFA, M.Com), Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months

Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.

The Research analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.

The research analysts for this report has not served as an officer, director or employee of the subject company PL or its research analysts have not engaged in market making activity for the subject company

Our sales people, traders, and other professionals or affiliates may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all o the foregoing, among other things, may give rise to real or potential conflicts of interest.

PL and its associates, their directors and employees may (a) from time to time, have a long or short position in, and buy or sell the securities of the subject company or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company or act as an advisor or lender/borrower to the subject company or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions.

DISCLAIMER/DISCLOSURES (FOR US CLIENTS)

ANALYST CERTIFICATION

The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is or will be directly related to the specific recommendation or views expressed in this research report

Terms & conditions and other disclosures:

This research report is a product of Prabhudas Lilladher Pvt. Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.

This report is intended for distribution by Prabhudas Lilladher Pvt. Ltd. only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor.

In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Prabhudas Lilladher Pvt. Ltd. has entered into an agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo").

Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer.

ipca laboratories - business standard€¦ · ipca laboratories remediation process done: ready to...

Documents