PL Stock Report: Ipca Laboratories (IPCA IN) - Q1FY24 Result Update - Mixed bag - Margin recovery while muted export business - HOLD

Ipca Laboratories (IPCA IN) - Param Desai - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: HOLD | CMP: Rs905 | TP: Rs880

Q1FY24 Result Update - Mixed bag - Margin recovery while muted export business

Quick Pointers:

§ Domestic formulation business continues to outperform market

§ Guided for 19-19.5% margin with 6-8% revenue growth in FY24

Ipca Labs (IPCA) Q1 EBITDA of Rs2.95bn was broadly in line with our estimate. Domestic formulation business continues to outperform and grow at healthy levels however export business (50% of total sales) outlook remains muted and will drag profitability. We reduce our FY24/FY25E EPS estimates by 12%/6% to factor in lower revenue growth from export business. The Unichem acquisition will allow IPCA to re-enter US formulation generic market, however it may be margin and return ratios dilutive in near term. At CMP, the stock is trading at 26x FY25E factoring in near term recovery. Maintain our ‘Hold’ rating with revised TP of Rs880/share (Rs750 earlier), valuing at 25x (20x earlier) FY25E EPS.

§ Revenues miss led by lower API sales: IPCA’s revenues came in at Rs 16bn (flat YoY) vs our estimate of Rs 17bn. The miss was on account of lower API sales. Domestic formulations grew healthy at 14% YoY to Rs7.8bn. Export formulation declined by 1% YoY to Rs 4bn. Branded and generic business growth was healthy at 23% and 11% YoY respectively. Institutional business was down by 50% YoY. Overall API business was largely impacted due to lower realization and ant-malaria sales; down 23% YoY. Export API declined 24% YoY while domestic API was down 20% YoY. Revenue from subsidiaries came at Rs 1bn.

§ In line EBIDTA; higher gross margins: Gross margins were up by 400bps YoY and 650bps QoQ at 67.5% (we estimate 65%). There was a forex gain of Rs 135mn booked under other expenses in Q1FY24. Adj for this EBITDA was at Rs 2.9bn; up 4% YoY; broadly in line with our estimate. Consolidated EBITDA margins came in at 18.5%, up 60bps YoY. Lower KSM prices and revision in NLEM benefited margins in Q1FY24. Tax rate stood at higher at 34%. PAT improved by 15% YoY to Rs 1.65bn vs our estimates of Rs 1.7bn.

§ Key Concall takeaways: (1) Domestic Formulation: Robust growth was witnessed across key therapies like Pain, cardiac, derma, Opthal and CNS segments. Gained rank by 2 in chronic segment. Achieved break even within one-year launch of cardiac division. Similar productivity improvement was seen in other divisions where people were added (2) API business – Revenue decline due to lower anti-malarial sales and reduction in KSM prices. Guided for ~10% revenue decline in FY24. (3) Institutional business- Lower offtake and plnat shutdown for injectable biz led to lower sales however expect recovery from H2FY24. Guided for 15% YoY decline (4) GMs improvement aided by better product mix and softening of API prices. Guided GMs to sustain at current level of ~67%. Overall guided for 300-350bps margin improvement in standalone biz. During Q1 subsidiaries reported Rs30mn of loss at PAT level which is likely to come down (5) Among other export business; generic business likely to grow at 6-8% while branded generic business to grow by 12-13%. UK generic sales is recovering and likely to report Rs1.3-1.4bn of sales in FY24. Unichem business likely to be consolidated from H2FY24

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