The stock of mid-cap pharma player IPCA Labs has made an impressive 36 per cent gain since Business Line’s previous recommendation in July 2012. Though the long-term growth drivers are intact, rich valuations may limit the upside in the near term. At the current price of Rs 500, the stock trades 13.6 times the FY14 earnings. Investors may hence consider partial profit-booking in the stock.

Domestic formulations account for over a third of the company’s revenues.

Though IPCA has expanded presence in chronic therapies such as cardiovascular and anti-diabetes, seasonal therapies such as anti-malarials, anti-bacterials, gastro-intestinal and pain management continue to account for almost three-fourths of domestic sales.

Despite a pick up in the monsoon this year, malaria incidence has been lower. Slow demand for anti-malarial drugs may impact IPCA’s domestic growth in FY13. Further, the demand for cardiovascular and anti-diabetes therapies are showing signs of moderation. Given that IPCA derives 26 per cent of domestic sales from these, a slowdown in demand may impact its domestic business. In addition, the new pharma pricing policy, if implemented, can have a negative impact on the company’s revenues and profitability. In the first half of this fiscal, domestic formulation revenues rose 16 per cent to Rs 487 crore.

US business

Capacity constraint has been the key limitation to IPCA’s US business. The company’s SEZ at Indore was approved by US Food and Drug Administration (FDA) in July 2012. However, during the course of an internal review, the company noticed some non-conformances at the plant and the same have been reported to the FDA. The regulator’s response is awaited.

Though a prudent step, this could delay revenue ramp up from the US, which may be key to sustaining growth.

Despite sedate anti-malarial sales in the home market, the company’s institutional anti-malarial business, which caters to Africa and other export markets, continues to grow at a healthy pace. Export revenues for the first half of the fiscal stood at Rs 831 crore, a 28 per cent year-on-year growth.

In the first half of 2012-13, the company’s revenues grew 22 per cent to Rs 1,406 crore compared to the same period last year. Operating margins expanded 0.7 per cent year-on-year to 21.9 per cent. And, net profit rose 20 per cent to Rs 168 crore in the first half of the fiscal compared to the same period last year.

(This article was published on January 26, 2013)
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