>IPCA LABS (ICICI DIRECT)

Forex loss spoils the show…
Ipca Lab ’s results for Q4FY09 were in line with our expectations. The topline grew ~25% YoY to Rs 317 crore. Net profit de-grew 65% YoY to Rs 7.9 crore. Ipca’s EBITDA margin in Q4FY09 expanded by over 243 bps YoY on account of higher revenue from promotional markets and efficient cost control. Lower realisation from the sterling pound had a negative impact on operating profitability. For FY09, the topline grew 22% YoY to Rs 1284 crore. The EBIDTA margin expanded 259 bps but net profit margin declined by 551 bps on account of Rs 76 crore of forex loss. Overall, we are confident about Ipca’s growth momentum and rate the stock as PERFORMER.

Highlight of the quarter
On account of robust growth in the high margin promotional business, the overall EBITDA margin expanded 243 bps. A forex loss of Rs 76 crore, largely translational in nature, dented the bottomline by 65% YoY in Q4FY09. Input cost as a percentage of sales declined by 243 bps but increase in employee cost by 140 bps restricted further expansion in the operating margin.

Valuations
Given the strong traction in the branded business, Ipca is looking to log higher growth in the promotional market. In the domestic market, the company already has a good portfolio of offerings. For FY09, exports witnessed a robust growth of 27% YoY led by 49% YoY growth in the branded business. We expect Ipca’s revenue and profits to grow at a CAGR of 15% and 14.6%, respectively, through FY11E. Due to the recent rally in mid-caps, the stock has run up significantly. Thus, we are revising our rating on the stock to PERFORMER with a target price of Rs 627, 8x FY10E EPS of Rs 78.4.

Result analysis

Topline growth in line with expectations
Ipca’s topline grew at 25% YoY in Q4FY09 to Rs 317 crore buoyed by a robust 31% growth in the exports revenue backed by 38% growth in the export formulation business. During Q4FY09, the domestic business grew strongly by 26% YoY to Rs 124 crore, backed by higher than 14% growth in the fixed dosage business. For the full year, exports grew 27% YoY. Fixed dosage
exports grew 28% YoY to Rs 437 crore on account of entry into the US market in September 2008 and robust growth in promotional markets. API exports logged a robust growth of 25% to Rs 243 crore in FY09.

The generic business grew 17% YoY to Rs 269 crore in FY09 vis-à-vis Rs 229 crore in FY08. The institutional business is showing good growth momentum. However, growth in the UK market has been disappointing as the region is witnessing lot of price fluctuation in the Amoxy based products. The domestic formulation business also grew at a good rate of 15% registering revenues in excess of Rs 600 crore. The company has filed 11 abbreviated new drug applications (ANDAs) in the US and has received approval for nine. Ipca currently has only five formulations selling in the US garnering market share in excess of 15%.

Operating margin instills confidence
The EBITDA margin of 16.8% in Q4FY09 was way above our expectation of 14%. For the full year, the margin improved by a solid 259 bps on account of higher revenue generation from the promotional export markets of CIS countries, LATAM (Latin America) and African markets, etc. The higher margin branded business, which has been growing at a CAGR of 35% for the last four
years registered a 49% YoY increase in sales. Although sales grew over 20% YoY, lower realisation due to the Sterling pound had a negative impact on operating profitability. The company also suffered losses on rupee-dollar hedging. However, a decline in raw material and other expenses as a percentage of sales supported the margin expansion.

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