Ipca

Rs768.40 - BUY
Financials
Year to 31 March 12A 13A 14CL 15CL 16CL
Revenue (Rsm) 23,140 27,290 32,041 38,105 44,883
Net profit (Rsm) 2,771 2,989 4,415 6,005 7,127
EPS (Rs) 22.0 23.7 35.0 47.6 56.5
CL/consensus (23) (EPS%) - - 89 101 102
EPS growth (% YoY) 5.0 7.7 47.7 36.0 18.7
PE (x) 34.9 32.4 22.0 16.1 13.6
Dividend yield (%) 0.4 0.5 0.6 0.7 0.8
FCF yield (%) 0.9 0.3 2.6 2.7 3.4
PB (x) 7.7 6.2 5.0 3.9 3.1
ROE (%) 24.0 21.3 25.3 27.4 25.7
Net debt/equity (%) 38.3 27.4 10.8 5.0 (2.8)
Source: CLSA
Find CLSA research on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our evalu@tor proprietary database at clsa.com
Hemant Bakhru
hemant.bakhru@clsa.com
+91 22 6650 5063
28 January 2014
India
Healthcare
Reuters IPCA.BO
Bloomberg IPCA IB
Priced on 27 January 2014
India Sensex @ 20,707.5
12M hi/lo Rs775.20/465.90
12M price target Rs900.00
% potential +17%
Shares in issue 126.2m
Free float (est.) 54.1%
Market cap US$1,536m
3M average daily volume
Rs57.2m (US$1.2m)
Foreign s'holding 25.2%
Major shareholders
Promoters 45.9%
Stock performance (%)
1M 3M 12M
Absolute 7.1 13.8 53.3
Relative 9.6 13.9 48.9
Abs (US$) 5.1 10.8 30.7
0
50
100
150
200
250
310
430
550
670
790
Feb-12 Aug-12 Feb-13 Aug-13
Ipca (LHS)
Rel to Sensex (RHS)
(Rs) (%)
Source: Bloomberg
www.clsa.com
R
e
s
u
l
t
s

r
e
v
i
e
w
Safe and sound
IPCAs 3Q numbers surprised on margin front though sales were largely
in-line. We expect pick up in IPCAs growth driven by exports especially
the US business. India business is likely to revive in FY15 as volumes and
pricing recover after a weak FY14. We see 18% operating profit cagr and
even higher report profit growth over FY14-16CL. We maintain BUY with
target of Rs900 based on 16x one year forward earnings.
Exports lower than expectation though pick up expected
q Net sales grew 18% YoY with recovery in domestic formulations business.
q Exports growth at 20% YoY was slightly lower than expectations considering
postponement of Rs400m worth of supplies to 3Q and benefit of weak rupee.
q The management expects US business to pick up in coming quarters.
q For tender business, the management expects to end scale up to Rs8bn by FY18
with help of injectable anti-malarials.
Recovery expected in domestic formulations
q With the impact of new pricing policy in the base, we expect IPCAs growth in
domestic market to revive in FY15.
q India formulations sales were also impacted due to dealers reusing to off-take
fresh supplies as their margins were impacted with DPCO.
q We also expect some pricing recovery in FY15 as new pricing policy allows
manufacturers to hike prices up to WPI.
Stable to upwards margin trajectory
q Gross margins improved by 577bps YoY to 66% with higher rupee realizations and
softer raw material prices in tender business. Ebitda margins were up 285bps YoY
as labour and other expenditure went up sharply.
q R&D costs as % of sales is expected to go up in FY15. Nonetheless, we expect
Ebitda margins to improve as the company is able to improve utilisation at Indore
SEZ facility and improve domestic growth.
q Further raw material (Artemisinin) prices for anti-malarial formulation for tenders
have been coming off especially after Sanofis facility for synthetic version
commissioned.
Reasonable valuations, BUY
q We expect 18% operating profit cagr over FY14-16CL, and find valuations
reasonable at 16x FY15CL.
q Reported profit growth will be higher due to forex loss in the base.
Prepared for - W: akhatod@kfoc.net
Safe and sound Ipca - BUY
28 January 2014 hemant.bakhru@clsa.com 2
3QFY14 results
Figure 1
Summary financials
(Rs m) Dec 12 Sep 13 Dec 13 % YoY % QoQ
Net Sales 6,924 8,343 8,152 17.7 (2.3)
Raw materials (2,762) (2,834) (2,781) 0.7 (1.9)
Labour (983) (1,208) (1,243) 26.5 3.0
Other expenditure (1,682) (2,080) (2,132) 26.8 2.5
Expenditure (5,426) (6,122) (6,156) 13.4 0.6
Ebitda 1,498 2,221 1,995 33.2 (10.2)
Ebitda margins % 21.6 26.6 24.5 284.9 bps (214.3)bps
Interest (74) (57) (54) (26.5) (5.1)
Depreciation (216) (252) (256) 18.5 1.4
Other Income 126 178 232 84.6 30.7
Forex gain/ (loss) (186) (399) (24) (87.0) (93.9)
Profit before Tax 1,148 1,690 1,893 64.9 12.0
Tax (269) (396) (502) 86.6 26.9
Profit after Tax 879 1,295 1,391 58.3 7.5
Gross margins 60.1 66.0 65.9 577.4 bps (14.3)bps
Tax rate 23.4 23.4 26.5 308.2 bps 311.4 bps
Revenue break-up
(Rs m) Dec 12 Sep 13 Dec 13 % YoY % QoQ
Domestic bulk 373 405 419 12.3 3.5
Domestic formulations 2,127 2,762 2,463 15.8 (10.8)
Export bulk 1,249 1,550 1,451 16.2 (6.3)
Export formulations 3,175 3,626 3,818 20.3 5.3
Source: IPCA, CLSA
Figure 2
Exports split
(Rs m) Dec 12 Sep 13 Dec 13 % YoY % QoQ
Branded 876 845 1,001 14.3 18.6
Tender 1,135 1,014 1,360 19.8 34.1
Generics 1,164 1,768 1,458 25.2 (17.6)
Total export formulations 3,175 3,626 3,818 20.3 5.3
Source: IPCA, CLSA
Sales growth slightly
lower due to exports miss
Gross margins expand
577bps YoY
Part of Ebitda margin
expansion sustainable
Forex loss and higher tax
rate impacts reported PAT
Domestic formulations
growth picks up after
weak 1H
Generics business growth
to pick up led by US
business
Prepared for - W: akhatod@kfoc.net
Safe and sound Ipca - BUY
28 January 2014 hemant.bakhru@clsa.com 3
0
10
20
30
40
50
60
70
80
0
400
800
1,200
1,600
2,000
2,400
2,800
3,200
3,600
4,000
4,400
Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13
Export formulations Growth (%)
(Rs m)
(%)
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Mar 10 Sep 10 Mar 11 Sep 11 Mar 12 Sep 12 Mar 13 Sep 13
Branded generic Tender Generic generic
(Rs m)
Figure 3
Split of generics
(Rs m) Dec 12 Sep 13 Dec 13 % YoY % QoQ
Generics
US 472 607 513 8.7 (15.4)
EU 448 855 718 60.5 (16.0)
S Africa 92 220 112 21.0 (49.1)
Oz/NZ 152 87 114 (24.9) 32.0
Total generics 1,164 1,768 1,458 25.2 (17.5)
Branded generics
CIS 522 355 503 (3.6) 41.6
LatAm 51 78 86 68.0 9.8
S E Asia 72 134 100 38.4 (25.6)
W Africa 140 184 202 44.4 9.8
Africa (others) 91 94 111 21.8 17.9
Total branded 876 845 1,001 14.3 18.4
Source: IPCA, CLSA
Figure 4
Export formulations growth trend
Source: IPCA, CLSA
Figure 5
Exports split
Source: IPCA, CLSA
Exports growth to be
driven by pick up in the
US and branded markets
Prepared for - W: akhatod@kfoc.net
Safe and sound Ipca - BUY
28 January 2014 hemant.bakhru@clsa.com 4
Cardiovascular
and anti-
diabetics
25%
Anti-malarials
17%
Anti-
bacterials
6%
NSAIDs
32%
Gastro intestinal
6%
Neurological
3%
Others
11%
Domestic formulation
revenues (Rs8.9bn)
0
1
2
3
4
5
6
7
8
9
FY09 FY10 FY11 FY12 FY13
0
10
20
30
40
0
400
800
1,200
1,600
2,000
2,400
2,800
3,200
Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13
Domestic formulations Growth (%)
(Rs m)
(%)
Figure 6
IPCAs annual ANDA filings
Source: IPCA, CLSA
Figure 7
Domestic formulations growth trend
Source: IPCA, CLSA
Figure 8
Therapy split of domestic formulation sales (FY13)
Source: IPCA, CLSA
Revival in domestic
growth to be driven by
volumes and some pricing
benefit expected April
onwards
Filing rate set to increase
with Indore facility
ramping up
Prepared for - W: akhatod@kfoc.net
Safe and sound Ipca - BUY
28 January 2014 hemant.bakhru@clsa.com 5
Cardiovascular
and anti-
diabetics
29%
NSAIDs
17%
Anti-
bacterials
9%
Anti-malarials
37%
Gastro intestinal
1%
Others
6%
Export formulation
revenues (Rs12bn)
Figure 9
Therapy split of export formulation sales (FY13)
Source: IPCA, CLSA
Figure 10
Ebitda margin trend
Source: IPCA, CLSA
Figure 11
Return ratios
Source: IPCA, CLSA
17
18
19
20
21
22
23
24
0
2,000
4,000
6,000
8,000
10,000
FY10 FY11 FY12 FY13 FY14CL FY15CL
(Rs m)
(%) Ebitda (Rs m) Ebitda margin (%)
0
5
10
15
20
25
30
FY10 FY11 FY12 FY13 FY14CL FY15CL
(%) RoIC RoE
Improving return ratios
Strong Ebitda growth on
back of improving
margins
Prepared for - W: akhatod@kfoc.net
Safe and sound Ipca - BUY
28 January 2014 hemant.bakhru@clsa.com 6
80
90
100
110
120
130
140
150
Jan13 Mar13 May13 Jul13 Sep13 Nov13 Jan14
Ipca Laboratories (NSE) vs S&P CNX Nifty
8
9
10
11
12
13
14
15
16
17
Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14
(x)
Figure 12
IPCAs price to earnings ratio chart
Source: CLSA
Figure 13
IPCAs relative performance
Source: CLSA
IPCA has strong earnings
growth momentum over
the coming years
Prepared for - W: akhatod@kfoc.net
Safe and sound Ipca - BUY
28 January 2014 hemant.bakhru@clsa.com 7
Summary financials
Year to 31 March 2012A 2013A 2014CL 2015CL 2016CL
Summary P&L forecast (Rsm)
Revenue 23,140 27,290 32,041 38,105 44,883
Op Ebitda 4,687 5,391 7,289 8,574 10,099
Op Ebit 4,016 4,523 6,271 7,348 8,657
Interest income 0 0 0 0 0
Interest expense (413) (334) (300) (228) (195)
Other items 49 99 (85) 887 1,041
Profit before tax 3,652 4,288 5,886 8,007 9,503
Taxation (881) (1,299) (1,472) (2,002) (2,376)
Minorities/Pref divs 0 0 0 0 0
Net profit 2,771 2,989 4,415 6,005 7,127
Summary cashflow forecast (Rsm)
Operating profit 4,016 4,523 6,271 7,348 8,657
Operating adjustments - - - - -
Depreciation/amortisation 671 867 1,018 1,226 1,442
Working capital changes (48) (1,161) 261 (1,354) (1,483)
Net interest/taxes/other (833) (1,201) (1,557) (1,115) (1,335)
Net operating cashflow 3,807 3,029 5,993 6,104 7,280
Capital expenditure (2,934) (2,728) (3,500) (3,500) (4,000)
Free cashflow 874 300 2,493 2,604 3,280
Acq/inv/disposals 68 252 - - 1
Int, invt & associate div (364) (235) (300) (228) (195)
Net investing cashflow (3,230) (2,711) (3,800) (3,728) (4,194)
Increase in loans - (82) (1,234) (1,000) -
Dividends (403) (505) (568) (631) (757)
Net equity raised/other (156) 731 792 (802) (124)
Net financing cashflow (559) 145 (1,010) (2,433) (881)
Incr/(decr) in net cash 18 462 1,183 (57) 2,205
Exch rate movements 0 0 0 0 0
Opening cash 104 122 584 1,767 1,710
Closing cash 122 584 1,767 1,710 3,915
Summary balance sheet forecast (Rsm)
Cash & equivalents 122 584 1,767 1,710 3,915
Debtors 3,491 4,178 4,828 5,742 6,763
Inventories 6,699 7,410 8,477 10,113 11,912
Other current assets 2,235 2,374 2,374 2,374 2,374
Fixed assets 10,386 12,334 13,933 16,907 19,465
Intangible assets - - - - -
Other term assets 341 89 89 89 89
Total assets 23,273 26,970 31,467 36,935 44,519
Short-term debt - - - - -
Creditors 4,099 4,344 6,320 7,517 8,854
Other current liabs 290 421 421 421 421
Long-term debt/CBs 5,315 5,234 4,000 3,000 3,000
Provisions/other LT liabs 0 0 - - -
Minorities/other equity 1,030 1,433 1,433 1,433 1,433
Shareholder funds 12,540 15,538 19,292 24,564 30,811
Total liabs & equity 23,273 26,970 31,467 36,935 44,519
Ratio analysis
Revenue growth (% YoY) 22.9 17.9 17.4 18.9 17.8
Ebitda growth (% YoY) 30.3 15.0 35.2 17.6 17.8
Ebitda margin (%) 20.3 19.8 22.8 22.5 22.5
Net profit margin (%) 12.0 11.0 13.8 15.8 15.9
Dividend payout (%) 14.5 16.9 12.9 10.5 10.6
Effective tax rate (%) 24.1 30.3 25.0 25.0 25.0
Ebitda/net int exp (x) 11.4 16.2 24.3 37.7 51.8
Net debt/equity (%) 38.3 27.4 10.8 5.0 (2.8)
ROE (%) 24.0 21.3 25.3 27.4 25.7
ROIC (%) 17.6 15.8 21.2 22.0 22.2
EVA/IC (%) 5.6 3.8 9.1 10.0 10.2
Source: CLSA
Prepared for - W: akhatod@kfoc.net
Safe and sound Ipca - BUY
28 January 2014 hemant.bakhru@clsa.com 8
Companies mentioned
Ipca (IPCA IB - RS768.40 - BUY)
Recommendation history of Ipca Laboratories Ltd IPCA IB
Date Rec Target Date Rec Target
15 Jan 2014 BUY 900.00 09 Oct 2012 O-PF 500.00
08 Jan 2014 BUY 865.00 01 Aug 2012 O-PF 465.00
25 Oct 2013 O-PF 800.00 11 Apr 2012 BUY 400.00
31 Jul 2013 O-PF 750.00 31 Jan 2012 BUY 360.00
31 May 2013 O-PF 680.00 31 Oct 2011 BUY 335.00
07 Jan 2013 O-PF 575.00 25 May 2011 O-PF 365.00
Source: CLSA
Research subscriptions
To change your report distribution requirements, please contact your CLSA sales representative or email us at cib@clsa.com.
You can also fine-tune your Research Alert email preferences at https://www.clsa.com/member/tools/email_alert/.
Key to CLSA/CAST investment rankings: BUY: Total stock return (including dividends) expected to exceed 20%; O-PF: Total expected return
below 20% but exceeding market return; U-PF: Total expected return positive but below market return; SELL: Total expected return to be
negative. For relative performance, we benchmark the 12-month total forecast return (including dividends) for the stock against the 12-month
forecast return (including dividends) for the market on which the stock trades. We define as Double Baggers stocks we expect to yield 100% or
more (including dividends) within three years.
2014 CLSA Limited (for research compiled by non-Taiwan analyst(s)) and/or Credit Agricole Securities Taiwan Co., Ltd (for research
compiled by Taiwan analyst(s)). Note: In the interests of timeliness, this document has not been edited.
The analyst/s who compiled this publication/communication hereby state/s and confirm/s that the contents hereof truly reflect his/her/their views and
opinions on the subject matter and that the analyst/s has/have not been placed under any undue influence, intervention or pressure by any person/s in
compiling such publication/communication.
CLSA group of companies (excluding CLSA Americas, LLC) (CLSA), Credit Agricole Securities Taiwan Co., Ltd. (CA Taiwan), CLSA/CA Taiwan's
analysts and/or their associates do and from time to time seek to establish business or financial relationships with companies covered in their research
reports. As a result, investors should be aware that CLSA and/or such individuals may have one or more conflicts of interests that could affect the
objectivity of this report. Regulations or market practice of some jurisdictions/markets prescribe certain disclosures to be made for certain actual,
potential or perceived conflicts of interests relating to research reports and such details are available at www.clsa.com/member/research_disclosures/.
Disclosures therein include the position of CLSA, CLSA Americas, LLC and CA Taiwan only and do not reflect those of CITIC Securities International
Company Limited, Credit Agricole Corporate & Investment Bank and/or their respective affiliates. If investors have any difficulty accessing this website,
please contact webadmin@clsa.com or +852 2600 8111. If you require disclosure information on previous dates, please contact
compliance_hk@clsa.com
IMPORTANT: The content of this report is subject to and should be read in conjunction with the disclaimer and CLSA's Legal and Regulatory Notices
as set out at www.clsa.com/disclaimer.html, a hard copy of which may be obtained on request from CLSA Publications or CLSA Compliance Group
(18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone +852 2600 8888) and/or CA Taiwan Compliance (27/F, 95, Section 2 Dun Hua
South Road, Taipei 10682, Taiwan, telephone +886 2 2326 8188). 01/01/2014
400
600
800
S
t
o
c
k
p
r
i
c
e
(
R
s
)
May 11 Sep 11 Jan 12 May 12 Sep 12 Jan 13 May 13 Sep 13 Jan 14
Hemant Bakhru
Other analysts
No coverage
BUY
U-PF
N-R
O-PF
SELL
Prepared for - W: akhatod@kfoc.net