Buy Ipca Laboratories Ltd For Target Rs.1,000 - Motilal Oswal

Operational performance above estimates

*   Sales grew 19% YoY to INR8.3b (v/s est. INR8b), EBITDA rose 37% to INR2.2b (higher than est. INR1.8b), with EBITDA margin up 350bp YoY at 26.1% (v/s est. 22.2%). PAT grew 58% YoY to INR1.4b (v/s est. INR1.2b).

*   Revenue growth was led by 20% growth (v/s est. 16%) in export formulations, while domestic formulations grew 16% (v/s est. 14%). Total APIs grew 15% YoY (v/s est. 11%), led by export APIs.

*   Strong operational performance continues to be led by robust expansion in gross margins. Management attributed this to improved sales mix as international branded formulations and institutional tender sales report high margins. PAT was above estimate mainly due to stronger-than-expected operational performance.

*   Guidance: Management has guided to sustain the current growth rate in domestic formulations, while international branded formulations is likely to grow 25-30% over the next few quarters. Ramp-up in Indore SEZ is expected to drive export generics growth above 30%. EBITDA margin is expected to sustain at 25% on account of improving sales mix in the medium term.

Post 3QFY14 result, we have upgraded the FY14E/15E/16E EPS estimate by 8%/6%/5% primarily to reflect the improvement in gross margins reported in 9MFY14. We expect IPCA’s sales to witness a CAGR of 19% over FY13-16E, led by international branded formulations and US, while domestic formulations is expected to grow at 16% over the next two years. Institutional Business could be lumpy on a quarterly basis but is likely to deliver 15% sales CAGR over this period. We see a shift in company’s margin profile and expect further margin expansion through an improving sales mix and vertical integration benefits. We believe current valuations of 15.7x FY15E EPS and 12.7x FY16E EPS do not factor the strong earnings CAGR of 35% over FY13-16E. We maintain a Buy with a revised target price of INR1,000 (16x FY16E EPS), 25% upside. IPCA is our best pick in the mid cap pharma space.

Valuation and view

*   Post the 3QFY14 result, we have upgraded our FY14E/15E/16E EPS estimate by 8%/6%/5% primarily to reflect improvement in gross margins reported in 9MFY14.

*   We expect IPCA’s sales to witness a CAGR of 19% over FY13-FY16 led by international branded formulations and US while domestic formulations is expected to grow at 16% over the next two years. Institutional Business could be lumpy on a quarterly basis but is likely to deliver 15% sales CAGR over this period.

*   We see a shift in margin profile of the company and see further margin expansion through an improving sales mix as well as vertical integration benefits.

*   We believe current valuations of 15.7x FY15E EPS and 12.7x FY16E EPS do not factor in the strong earnings CAGR of 35% over FY13-FY16E.

*   We maintain Buy with a revised target price of INR1,000 (16x FY16E EPS), 25% upside. IPCA is our best pick in the mid cap pharma space.

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