Growing presence in the export and domestic markets, expected improvement in the productivity of its sales force and manageable debt on its books make the stock of IPCA Laboratories a good long-term investment bet. At the current market price of Rs 274, the stock trades at about 10 times its likely FY13 per share earnings. This is at a discount to its peers, and leaves sufficient room for the stock price to appreciate in the long term. That the company doesn't have any ongoing altercation with the regulator over its existing manufacturing facilities (unlike some of its peers) puts it at an advantage, what with the export potential opening up in developed markets.

Exports thrust

Given IPCA's established presence in most export markets — it exports to more than 110 countries and is among the top 10 pharma exporters from India — it stands to benefit immensely from the growing demand for generics across the globe. Presently, it has filed 24 Abbreviated New Drug Applications (ANDAs) with US FDA, of which 12 ANDAs have been approved. Further, it has filed 60 Drug Master Files (DMFs) with the FDA for Active Pharmaceutical Ingredients (APls).

The approval of its Indore facility by the US FDA would provide the much-needed additional thrust, as IPCA can then launch more products. An approval can see the launch of five ANDAs in the US. Note that the management expects the revenue from this facility (once fully operational) to peak at about Rs 300-400 crore.

That said, there still is no clear timeline on when the approval can be expected — the FDA has still not scheduled any inspection dates. The management expects it to be in place in the coming three months. But, till such time, the new facility would be a drag on margins given its recurring cost of maintenance. Expected growth in anti-malarial business, tender business in Africa and launches in the branded formulation space in other countries too would help.

Notably, exports make up more than half its revenues (56 per cent of Apr-Sep 2011) and have clocked a compounded growth rate of 24 per cent over the last three years. The export thrust helped IPCA expand its operating margins in the Apr-Sep 2011 period by 174 basis points to 22 per cent. The growth momentum is expected to continue in the coming years, given the many potential upside catalysts.

Domestic business

While IPCA's domestic formulation business has managed decent long-term growth — 17 per cent CAGR over the last three years — its performance in the first half of FY12 has been relatively muted. In the six-month period, its Indian formulation business grew only by six per cent to Rs 509 crore, driven by lower sales in anti-malarial and anti-infectives (in line with industry trend) and high attrition.

But, in November, the company saw a strong bounce back in anti-infectives; this may reflect positively on its December quarter performance. Improved focus on the high-margin pain and CVS segments, given that anti-malarials and anti-infectives typically see pricing pressures too, would help it in the long run. With the company having nearly doubled its sales force to 400 in the last two years, the coming years could also see the benefit of improved productivity kick in.

Even the proposed drug pricing policy would have little impact on its revenues. Though 67 per cent of its products would come under the proposed price control, the impact would be minimal (2-3 per cent) as only a couple of IPCA's products are brand leaders in their respective therapies.

Guidance

The management expects to end FY12 with a 20 per cent revenue growth, driven largely by exports. It expects only a 9-10 per cent growth in domestic business in the second half of the current fiscal. For FY13, it expects a 16-18 per cent growth led by new launches. While it looks achievable, timely regulatory approval of its Indore facility will hold the key.

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