>IPCA LABORATORIES LIMITED (EMKAY)

Consistent performance, PAT impacted by Fx losses

Ipca’s focus on building brands through concentrating on branded formulation business has resulted steady growth in revenues and expansion in operating margins. Company has been consistently outpacing the industry growth in domestic formulation segment driven by increased focus on high growth life style segment. In Q4FY09, revenues grew by 29% to Rs3.1bn on the back of a) 38% growth in export formulation business, & b) 34% growth in domestic formulation business. On the operating front, the company reported a growth of 63% to Rs 533mn in Q4FY09, driven by a) 140 bps reduction in raw material cost & b) 300bps reduction in other expenses. Higher interest cost (up by 71%), tax out go (26.8% vs. 8.5% in Q4FY08) and MTM losses of Rs154mn, the company reported a decline of 65% in the bottom line to Rs 79mn. However adjusting to Forex loss of Rs 154mn and Rs 102mn for provision for investment/ loan in subsidiary, the APAT grew by 30% to Rs 296mn. For FY09, revenue was up by 22% to Rs 12.8bn and APAT was up by 64% to Rs1655mn. At CMP of Rs487, the stock is trading at 6.2x FY10E earnings. We upgrade our price target from Rs637 to Rs660 (8x one year forward rolling EPS of Rs82.5). We reiterate our BUY rating.


■ Branded formulation continue to grow at robust pace
Ipca’s focus on high margin branded formulation segment continued to drive revenue and margin growth for the company. Though the tender business for FY09 declined significantly from Rs 470mn to Rs 79mn, the overall domestic formulation business grew on the back of significant growth from lifestyle segments like CVS, CNS and Pain management. For FY09 the branded formulation business in export markets and domestic market grew by 49% and 24% respectively. The contribution of high margin branded formulation business in India and other semi –regulated market has increasedto 51% in FY08 from 48% of sales in FY09. Management has given a guidance of 18-20% growth in the topline in FY10E.

■ EBIDTA margins expanded by 420bps for FY09
Operating margins during the year expanded by 420bps to 20% on the back of 460 bps reduction in raw material cost. The reduction in raw material cost was mainly because of improved product mix and softening of solvent prices driven by reduction in crude oil prices. Going forward we expect, company to maintain similar operating margins.

■ Adjustment of Forex loss & Provisions
During the year, the company has reported a MTM loss of Rs 756.9mn out of which Rs 495 mn was on account of realized losses on forward contracts and Rs 262mn on account of MTM losses on forward contracts, maturing in next 6 months. The company has transferred Rs305mn in the ‘Foreign Currency Hedging Reserve’ account as MTM losses for the contracts which are maturing beyond 6 months. This amount will be charged to P&L account when this contracts will materialized depending upon the currency movement. Company has sold forward contracts worth $80mn at Rs47.5/USD,which is 43% of the projected export sales in FY10E. The company has also made a
provision of Rs 101.9mn for investment/ loan in Brazilian subsidiary.

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