Ipca 4Q FY 2013

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Ipca Laboratories | 4QFY2013 Result Update

June 3, 2013 2

Exhibit 1:4QFY2013 Standalone performanceY/E March (` cr) 4QFY2013 3QFY2013 % chg (qoq) 4QFY2012 % chg (yoy) FY2013 FY2012 % chg (yoy)Net sales 659 692 (4.9) 553 19.1 2,739 2,300 19.1Other income 16 13 24.2 7 137.4 58 43 35.3Total income 674 705 (4.4) 560 20.5 2,797 2,43 19.4Gross profit 401 416 (3.8) 334 20.0 1648 1393 18.3

Gross margins (%) 60.8 60.1 60.4 60.2 60.6Operating profit 129 168 (23.2) 104 24.7 582 484 20.3

Operating margin (%) 19.6 21.6 18.7 21.2 21.0Interest 6 26 6 (7.9) 31 39 (20.5)

Depreciation 22 22 0.2 14 52.3 84 65 28.6

PBT 118 133 (11.7) 90 30.8 525 422 24.4

Provision for taxation 50 27 86.2 19 169.7 130 89 46.4

Less: Exceptional Items (gains)/ loss (8) 19 (5) 63 53 19.9

Reported Net profit 75 88 (14.2) 77 (1.5) 331 280 18.3Adj. Net profit 72 92 (21.3) 76 (4.5) 347 291 19.2EPS (`) 5.7 7.3 6.0 27.5 23.1

Source: Company, Angel Research

Exhibit 2:4QFY2013 Actual vs. Angel estimates

(` cr) Actual Estimates Variation (%)Net sales 659 770 (14.4)Other income 16 14 9.9

Operating profit 129 146 (11.6)

Interest 6 7 (18.0)

Tax 50 17 195.9

Adjusted Net profit 72 121 (40.5)Source: Company, Angel Research

Revenue up 15.1%; lower than our estimate: Ipca reported net sales of`659cr, up19.1% yoy, but lower than our expectation of`770cr.

Segment wise, for 4QFY2013, the overall formulations business grew by 27.0% to

`492cr, contributing 74.6% to the companys total revenue. The API business was

flat, reporting a growth of 0.6% to`167cr, contributing 25.4% to the total revenue.

On the domestic front, the company posted sales of `216cr, registering a growth

of 18.7% yoy, while exports grew by 19.3% yoy to`443cr.

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Exhibit 3:Domestic sales trend

148

224

263

213

178

34 39 30.4 3738

0

40

80

120

160

200

240

280

4QFY2012 1QFY2013 2QFY2013 3QFY2013 4QFY2013

Formulation API

(`cr)


Exhibit 4:Export sales trend

239225

339317 313

132142

125 125 130

0

40

80

120

160

200

240

280

320

360


Formulation API

(`

cr)


OPM comes mostly in line with expectations: Ipcas gross margin came in at60.8%, down 45bp yoy for the quarter. The OPM expanded to 19.6% from 18.7%

in the corresponding quarter of last year. Forex gains for the quarter stood at

`7.8cr vs a loss of`18.6cr in 4QFY2012.

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Exhibit 5:OPM trend

18.7

21.8 21.8

21.6

19.6

18

19

20

21

22

23


(%)


Reported net profit lower than expected: The expansion in the OPM however didnot translate into net profit growth as deprecation and tax expenses witnessed a

rise. The adj. net profit declined 4.5% yoy to`72cr (`76cr in 4QFY2012) while we

had expected it to come in at`121cr.

Exhibit 6:Net profit trend

77

115

125

88

75

0

20

40

60

80

100

120

140


(`

cr)


Concall takeaways The Management expects sales to grow at 16-17% for FY2014 (not including

incremental sales from the Indore SEZ). The growth would be driven by the

branded business (domestic and international). The institutional business is

expected to be ~`475cr for FY2014 vs `391cr in FY2013. The international

API business is expected to grow at 20% in FY2014.

The Management believes the impact of the new DPCO would not be

significant as the company will be able to hike prices of non-DPCO products

by upto 3%. Products currently under DPCO and on their way out of price

control would contribute`6-7cr of savings.

The OPM is expected to be at 22.4% - 22.8% for FY2014; material costs are

expected to reduce by 50bps due to lower raw material costs.

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June 3, 2013 5

R & D expenses guided to increase to ~4% for FY2014.

The field force currently stands at 4,000 employees in India and 500 in the

global markets; no field force expansion has been guided for FY2014.

The Indore SEZ was inspected in April 2013; the Management expects the

clearance to come in in the next 3 months. The plant is expected to contribute

a revenue of US$100mn over the coming 2-3 years. 2 approvals have been

received from the facility with 33 products having been filed (14 already

approved and 8 commercialized).

Tax rate is expected to be 24-25% of PBT (incl deferred tax) for FY2014.

A capex of around`350cr is estimated in FY2014.

Investment arguments

Domestic formulations business the cash cow: Ipca has been successful inchanging its business focus to the high-margin chronic and lifestyle segments from

the low-margin anti-malarial segment. The chronic and lifestyle segments,

comprising CVS, anti-diabetics, pain-management, CNS and dermatology

products, constitute more than 50% of the companys domestic formulation sales.

The Management has ramped up its field force significantly with addition of

divisions in the domestic formulations segment, taking the current total strength to

nearly 4,000 MRs. We expect the domestic formulation business to grow at a

CAGR of 17% during FY2013-15E.

Exports to be the next growth avenue: On the formulations front, Ipca has beenincreasing its penetration in regulated markets, viz Europe and US, by expanding

the list of generic drugs backed by its own API. In the emerging and

semi-regulated markets, Ipca plans to focus on building brands in the CVS, CNS,

pain-management and anti-malarial segments along with tapping new

geographies. On the API front, where the company is among the low-cost

producers, it is aggressively pursuing supply tie-ups with pharmaceutical MNCs.

We expect exports to grow at a CAGR of 17% over FY2013-15E.

Indore SEZ approval and tender business to enhance momentum: Ipca is awaitingUSFDA approval for its Indore SEZ. Once the approval is received, the facilitywould cater to the US generic market and potentially post sales of US$100mn in

the next 2-3 years. The Indore SEZ was inspected in April 2013; the Management

estimates the clearance to come in in the next 3 months time frame.

Valuation: We expect net sales to post a 17.9% CAGR to `3,826cr and EPS toregister a 28.3% CAGR to `44.4 over FY201315E, driven by the US and the

domestic markets and the API segment. At the current levels, the stock is trading at

16.8x and 13.7x FY2014E and FY2015E earnings, respectively. We revise ourtarget price to `665 and recommend Accumulate on the stock.

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Exhibit 7:Key Assumptions

FY2014E FY2015ESales growth (%) 17.8 18.0

Operating margins (%) 20.5 21.5R&D Exp ( % of sales) 4.0 4.0

Capex (`cr) 350 350


Exhibit 8:One-year forward PE band

-

100

200

300

400

500

600

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

Apr-13

4x 8x 12x 16x


Exhibit 9:Recommendation summary

Company Reco CMP Tgt. price Upside FY2015E FY12-15E FY2015E(`) (`) % PE (x) EV/Sales (x) EV/EBITDA (x) CAGR in EPS (%) RoCE (%) RoE (%)

Alembic Pharma. Neutral 137 - - 9.8 1.3 6.9 26.1 34.0 34.7

Aurobindo Pharma Buy 178 264 48.3 9.3 1.1 7.1 58.2 12.0 18.0

Cadila Healthcare Buy 772 909 17.7 16.1 2.0 11.1 12.7 15.4 23.1

Cipla Buy 369 444 20.3 16.6 2.5 11.3 15.9 15.7 15.9Dr Reddy's Buy 2,113 2,535 19.9 16.7 2.4 11.9 12.8 18.3 21.8

Dishman Pharma Buy 69 206 198.5 3.3 0.8 3.8 38.8 12.0 13.7

GSK Pharma* Neutral 2,661 - - 31.9 6.3 22.0 6.1 36.1 31.0

Indoco Remedies Buy 65 78 20.0 8.3 0.8 5.5 15.8 15.3 14.7Ipca labs Accumulate 606 665 9.8 13.7 2.1 9.7 24.9 24.8 25.4Lupin Buy 753 877 16.5 18.0 2.4 11.2 29.1 28.5 24.8

Ranbaxy* Neutral 362 - - 16.1 1.2 9.3 (6.8) 13.1 19.1Sanofi India* Neutral 2,608 - - 26.3 2.6 15.7 13.4 15.9 16.7

Sun Pharma Neutral 1018 - - 25.6 6.0 14.5 18.8 29.4 22.0

Source: Company, Angel Research; Note: * December year ending

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Company Background

Formed in 1949, Ipca is a market leader in the Anti-Malarials and Rheumatoid

Arthritis segment. The company is a notable name in the domestic formulationsegment with 150 formulations across major therapeutic segments like

cardiovascular (CVS), anti-diabetes, anti-malaria, pain-management (NSAID),

anti-bacterial, central nervous system (CNS) and gastro-intestinal. The company

has 7 production units which have been approved by most of the discerning

regulatory authorities including USFDA, UKMHRA, Australia-TGA, South Africa-

MCC and Brazil-ANVISA. Its new US-dedicated facility at the Indore SEZ is awaiting

USFDA approval.

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Profit & loss statement (Consolidated)

Y/E March (` cr) FY2010 FY2011 FY2012 FY2013 FY2014E FY2015EGross sales 1,602.8 1,954 2,378 2,776 3,275 3,865Less: Excise duty 43 13 19 22 33 39Net Sales 1,560 1,941 2,359 2,754 3,243 3,826Other operating income 7 37 12 59 59 59

Total operating income 1,567 1,978 2,371 2,813 3,302 3,886% chg 21.2 26.3 19.8 18.7 17.4 17.7

Total expenditure 1,233 1,559 1,842 2,190 2,579 3,003

Net raw materials 646 776 913 1,097 1,291 1,524

Other mfg costs 158 194 208 243 286 298

Personnel 221 266 335 392 461 544

Other 208 322 385 458 540 637

EBITDA 326 382 517 564 664 823% chg 27.4 17.1 35.1 9.1 17.8 23.9

(% of Net Sales) 20.9 19.7 21.9 20.5 20.5 21.5

Depreciation & amortisation 47 56 67 87 97 114

EBIT 280 327 450 477 567 709% chg 29.2 16.7 37.7 6.1 18.9 24.9

(% of Net Sales) 17.9 16.8 19.1 17.3 17.5 18.5

Interest & other charges 26 31 44 33 33 33

Other Income 3 8 - 14 14 14

(% of PBT) 1.0 2.4 - 2.8 2.4 1.9

Recurring PBT 263 341 417 517 608 749% chg 35.3 29.5 22.5 24.0 17.4 23.3

Extraordinary expense/(Inc.) (3.3) (0.8) 52.8 63.3 -

PBT (reported) 266 341 364 454 608 749Tax 62.7 78.3 88.1 129.9 151.9 187.2

(% of PBT) 23.6 22.9 24.2 28.6 25.0 25.0

PAT (reported) 204 263 276 324 456 562Add: Share of earnings of asso. 2 (0) (1) - - -

PAT after MI (reported) 205 263 276 324 455 560ADJ. PAT 202 263 287 340 455 560% chg 14.3 30.0 9.3 18.4 33.7 23.1

(% of Net Sales) 13.2 13.5 11.7 11.8 14.0 14.6Basic EPS (`) 16.1 20.9 22.8 26.9 36.0 44.4Fully Diluted EPS ( ) 16.1 20.9 22.8 26.9 36.0 44.4% chg 14.1 29.5 8.9 18.4 33.7 23.1

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Balance sheet (Consolidated)

Y/E March (` cr) FY2010 FY2011 FY2012 FY2013 FY2014E FY2015ESOURCES OF FUNDSEquity share capital 25 25 25 25 25 25Reserves & surplus 840 1,026 1,229 1,529 1,924 2,425

Shareholders Funds 865 1,052 1,254 1,554 1,949 2,450Minority interest (1) (1) - - - -Total loans 455 458 532 523 523 523

Other Long Term Liabilities 2 1 1 1 1

Long Term Provisions 5 9 12 12 12

Deferred tax liability 79 81 93 130 130 130

Total Liabilities 1,398 1,597 1,889 2,221 2,603 3,104APPLICATION OF FUNDSGross block 881 988 1,315 1,587 1,937 2,287

Less: Acc. depreciation 243 289 394 472 569 683

Net Block 638 699 920 1,115 1,368 1,604Goodwill - 24 24 24 24Capital work-in-progress 38 95 95 95 95 95

Investments 33 41 34 9 9 9Long Term Loans and Adv. 38 38 48 52 61

Current assets 899 1,040 1,217 1,407 1,734 2,106

Cash 11 11 12 58 77 151

Loans & advances 120 63 35 42 48 57

Other 768 966 1,170 1,307 1,609 1,898

Current liabilities 210 315 439 477 603 712Net Current Assets 689 725 778 930 1,130 1,394Total Assets 1,398 1,597 1,889 2,221 2,603 3,104

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Cash flow statement (Consolidated)

Y/E March (` cr) FY2010 FY2011 FY2012 FY2013 FY2014E FY2015EProfit before tax 266 341 364 454 608 749

Depreciation 47 56 67 87 97 114(Inc)/Dec in working capital (98) (35) (52) (116) (185) (199)

Direct taxes paid (46) (78) (88) (130) (152) (187)

Cash Flow from Operations 169 284 291 295 367 477(Inc.)/Dec.in fixed assets (134) (164) (326) (272) (350) (350)

(Inc.)/Dec. in Investments - (8) - - - -

Cash Flow from Investing (134) (172) (326) (272) (350) (350)Issue of Equity 0 0 0 0 - -

Inc./(Dec.) in loans (7) 3 76 (5) 0 -

Dividend Paid (Incl. Tax) (38) (61) (55) (59) (59) (59)

Others 10 (54) 14 88 60 6

Cash Flow from Financing (35) (112) 36 24 1 (53)Inc./(Dec.) in Cash (1) (0) 1 46 19 74

Opening Cash balances 12 11 11 12 58 77Closing Cash balances 11 11 12 58 77 151

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Key Ratios

Y/E March FY2010 FY2011 FY2012 FY2013 FY2014E FY2015EValuation Ratio (x)P/E (on FDEPS) 37.6 29.0 26.6 22.5 16.8 13.7P/CEPS 30.1 23.9 22.3 18.6 13.9 11.3

P/BV 8.8 7.2 6.1 4.9 3.9 3.1

Dividend yield (%) 0.5 0.7 0.5 0.7 0.7 0.7

EV/Sales 5.2 4.1 3.4 2.9 2.5 2.1

EV/EBITDA 24.6 21.0 15.8 14.3 12.1 9.7

EV / Total Assets 5.7 5.0 4.3 3.6 3.1 2.6

Per Share Data (`)EPS (Basic) 16.1 20.9 22.8 26.9 36.0 44.4

EPS (fully diluted) 16.1 20.9 22.8 26.9 36.0 44.4

Cash EPS 20.1 25.3 27.2 32.6 43.7 53.4

DPS 2.8 4.2 3.2 4.0 4.0 4.0

Book Value 69.1 83.7 99.4 123.1 154.5 194.1

Dupont AnalysisEBIT margin 17.9 16.8 19.1 17.3 17.5 18.5

Tax retention ratio 76.4 77.1 75.8 71.4 75.0 75.0

Asset turnover (x) 1.2 1.3 1.4 1.4 1.4 1.4

ROIC (Post-tax) 17.0 17.2 19.8 17.2 18.5 19.7

Cost of Debt (Post Tax) 4.4 5.3 6.8 4.5 4.8 4.8

Leverage (x) 0.6 0.5 0.4 0.4 0.3 0.2

Operating ROE 24.6 22.9 25.2 21.8 22.1 22.5

Returns (%)RoCE (Pre-tax) 21.9 21.8 25.8 23.2 23.5 24.8

Angel RoIC (Pre-tax) 22.6 23.0 27.5 24.8 25.2 26.8

RoE 27.0 27.4 24.9 24.2 26.0 25.4

Turnover ratios (x)Asset Turnover (Gross Block) 1.9 2.1 2.1 1.9 1.9 1.8

Inventory / Sales (days) 80 78 87 92 96 99

Receivables (days) 85 70 55 49 52 53

Payables (days) 26 25 41 42 36 39

WC cycle (ex-cash) (days) 139 128 114 106 106 108

Solvency ratios (x)Net debt to equity 0.5 0.4 0.4 0.3 0.2 0.2

Net debt to EBITDA 1.4 1.2 1.0 0.8 0.7 0.5

Interest Coverage (EBIT / Int.) 10.6 10.4 10.1 14.3 17.0 21.2

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Research Team Tel: 022 - 3935 7800 E-mail: [email protected] Website: www.angelbroking.com

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Disclosure of Interest Statement Ipca Laboratories

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock No

3. Angel and its Group companies' Directors ownership of the stock No

4. Broking relationship with company covered No

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors.

Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to -15%) Sell (< -15%)

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Ipca 4Q FY 2013