Stock Pick From The Pharmaceuticals Sector

Choice Scrip is a Blue Chip stock pick that is expected to give returns within a 6 months-1 year horizon. The recommendation is based on a fundamental analysis of the company.

The company recommended as the Choice Scrip for this issue is one of the oldest companies in the Indian pharmaceuticals sector.

IPCA Laboratories: From Strength To Strength

HERE IS WHY

• The company has seen consistently good financial performance and dividend payment.
• Its new USFDA-approved facility at Indore and additions to its product pipeline are expected to drive revenues.
• High growth is expected in the antimalarials segment.

Established in 1949, Mumbai-based IPCA Laboratories is one of the oldest companies in the Indian pharmaceuticals sector. It is a fully integrated pharma company with a presence in formulations and active pharma ingredients (APIs). The scrip is already up by 60 per cent this year, and even on conservative valuations, it can get an investor another 25 per cent returns from here on. Besides, the company has also been extremely consistent in dividend payments.

Due to its focus on the promising products and high growth markets, IPCA has seen a 10-year CAGR of 19 per cent in revenues and 18 per cent in net profits. The EBITDA margins have also improved from 19 per cent in 2002-03 to 22.5 per cent in FY12. Going ahead, we expect sales growth and margin expansion to continue, led by exports. This makes it a good buy in the current uncertain macro-economic environment.

The revenues of IPCA Laboratories are majorly driven by formulations, which constitute almost 76 per cent of its topline. The remaining 24 per cent come from its APIs business. Exports are a major contributor, making for 61 per cent of the total revenues. Over the years, the contribution of exports has increased consistently. Domestic revenues are also growing by a rate of over 15 per cent, and by FY12, the contribution from the same stood at 39 per cent.

On the exports front, Europe, Africa and America are key markets for IPCA, adding 41 per cent of the company’s revenues. In Africa, it is a dominating player in the antimalarials market, while in the US, it is growing on the generics boom. In Europe, it has started increasing formulations exports in other untapped countries from FY12 onwards, due to which revenues will grow in future.

The World Health Organisation (WHO) has approved its anti-malarial formulation, which has helped IPCA to increase its African revenues by 84 per cent in FY12. The company also has another set of products in the same category which has been approved by WHO and which it expects to launch in India in the second half of the current fiscal. This will provide a further upward thrust to its revenues. India and Africa are the biggest markets for antimalarials, where IPCA has already been successful with its formulations. The new products will garner more revenues for the company in these markets.

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We also expect a rise in US revenues as its capacity constraints have been addressed after the USFDA approved its Indore SEZ facility. According to the management, the Indore SEZ facility can add about USD 80-100 million (Rs 440-550 crore) per year when used at its optimum level. Currently, it has 25 ANDAs filed with 12 approvals. It is moving a total of five ANDAs from its Silvassa facility to the Indore SEZ facility, and hence, we expect higher revenues and margin expansion as well. It is also targeting the addition of eight to 10 products in the USFDA-approved products pipeline, which will lead to sustainable revenues.

In the June 2012 quarter, IPCA’s revenues grew by 20 per cent to Rs 637 crore. However, its net profit was down by 30 per cent to Rs 43 crore due to forex loss of Rs 59 crore. Its EBITDA margins have expanded by 456 basis points showing a robust performance. We expect further expansion of EBITDA margins with higher sales growth in FY13. On the valuations front, the scrip is trading at a PE of 15x its FY13 expected EPS of Rs 28. We advise our readers to buy the scrip with a target price of Rs 525.

Note: The stocks recommended under this section are fundamentally strong stocks. However investors are advised to wait for the correct opportunity to enter these stocks considering the market sentiment right now.