Hope of earnings recovery for Ipca Laboratories

Sorting out regulatory issues would lead to a re-rating

After gaining more than 22 per cent in the past week, Ipca Laboratories shed some of the gains on Monday. Investors, including mutual funds, have been buying the stock in the hope that the pressure on earnings has bottomed out and the inspections of its plants, as well as growth in the India business, would lead to upgrades. The stock had hit a peak of nearly Rs 900 in 2014 before correcting by over 40 per cent to the current levels, following import alerts imposed by the US FDA on its three key plants at Silvassa, Indore and Ratlam.

Nitin Agarwal and Sumit Singhania of IDFC Securities said in a recent note that while earnings have bottomed out in the June quarter, wherein the company recorded an operating profit of Rs 21 crore and operating margin of three per cent, recovery will be gradual. Among the catalysts which should start the recovery is the normalisation of the domestic business from the September quarter. India formulation sales (45 per cent of revenues) were impacted due to de-stocking, channel disruption on account of demonetisation and the run-up to the goods and services tax. 

Despite the challenges, including drugs impacted by price control and ban on fixed dosage combinations, given Ipca’s strong brand franchise in the domestic market, it managed to grow its domestic formulation business by 14 per cent year-on-year (y-o-y) in FY17. What will help the company keep the momentum (mid-teens growth) is its strategy of reducing dependence on the acute therapy segment and focus on fast-growing therapies such as cardiac, diabetes, dermatology and urology, analysts at JM Financial Institutional Securities said.

The other trigger is the resumption of institutional sales of anti-malaria drugs to The Global Fund (an international body based in Switzerland) from the March quarter of FY18. The supplies were suspended by The Global Fund in April 2016, after the US FDA took action against various plants. Given that the company (after receiving an invitation from the fund) has applied for a tender, which is expected to be awarded over the next few weeks, a positive response (winning of the order) on this should help resume anti-malarial supplies and lead to higher institutional sales.

The key catalyst, however, will be resolution of the US FDA issues and resumption of US sales, which is likely from FY19 onwards. This could propel the company’s operating profit growth in FY19 by 36 per cent and consequently net profit growth by 25 per cent over the FY17-19 period. After putting remediation plans in place, Ipca has invited the US FDA to re-inspect its Silvassa and Indore plants. This is expected to be followed by a repeat inspection of the Ratlam plant. But, if Ipca can get US FDA clearances for the three facilities by the end of FY18, it could result in significant earnings upgrades.