Sustainable growth and reasonable valuation makes IPCA Labs a good stock idea for investors with a one-two year perspective. Consistent growth in the domestic business coupled with a pick-up in US exports after approval of the company’s Indore facility may improve the company’s performance over the next year. The stock looks attractive at 12.2 times estimated earnings for FY13.
Formulation sales account for 76 per cent of revenue. About 30 per cent is from the domestic market, and the remaining from exports. A strong presence in the fast-growing chronic therapies such as anti-diabetes, pain management and cardiovascular remedies, apart from cost advantages from backward integration, may help IPCA outgrow the domestic pharma market. The company has consciously reduced its dependence on acute therapies such as anti-malarials and anti-infectives. Chronic therapies contribute over 65 per cent to the segment’s sales. Apart from being seasonal, competition in the acute therapies can be quite bruising.
Focus on new products
IPCA’s domestic formulations growth moderated in 2011-12, following a spurt in field force attrition, lower malaria incidence and restructuring of marketing divisions. However, most of these issues have now been resolved. Focus on new products, brand-building initiatives and higher field force productivity will help IPCA sustain ahead-of-the-market growth. The company aims to launch 15-25 products annually over the next few years. This segment grew at a compounded rate of 15 per cent over FY08 to 12, posting revenues of Rs 753 crore in FY12.
IPCA’s formulation exports (46 per cent of revenues) have also gained considerable momentum with a presence across 110 countries. Though US and Europe are the main markets, the company is making inroads into Africa through institutional sales of anti-malarials. In order to capitalise on the robust demand in the US and address capacity bottlenecks, IPCA commissioned its new formulations capacity at Indore last year. The facility was inspected by the US Food and Drug Administration in February and approval is awaited. Once approved, supplies from the Indore facility will help IPCA sharply improve US sales.
Revenues from active ingredients
IPCA is among the world’s leading manufacturers of APIs (active pharma ingredients) such as Atenolol, Metoprolol, Tartrate and Chloroquinine phosphate that constitute 24 per cent of revenue. The company uses its API for captive consumption and also sells to other formulation companies. API revenues grew at a healthy 15 per cent to Rs 550 crore in FY12.
The company's total revenue stood at Rs 2,342 crore in FY12, posting a healthy growth of 24 per cent. Operating margins improved to 21.8 per cent last fiscal. The slow 5 per cent growth in net profit to Rs 277 crore was largely because of forex loss of Rs 53 crore in FY12.