IPCA: Strong prospects, attractively valued

Resolution of US FDA issues key trigger for the stock

On the back of an US FDA overhang, IPCA Laboratories stock has been an underperformer, losing over 10% in the the last six months. In comparison, its peer index the BSE Healthcare has been amongst the highest sectoral gainers with a return of 43%. While there is little doubt that the correction in the stock has been for a reason and the FDA hurdle would remain for a couple of quarters, for investors with a long term view the stock offers good potential. 

IPCA's FY15 sales growth will be in at about 9% given the lack of sales to the US, but analysts expect sales to revive in FY16, with an estimated growth of 20%. The stock, which has gained 14% over the month from its 15-month intra-day low as investors look out for value buys, is still trading at attractive valuations of 15 times its FY16 estimates and should offer decent returns as exports take off.

While exports have been the disappointment, domestic growth continues to be strong for the company. For the September quarter, domestic formulation sales, which constitute over a third of overall revenues, were up 19% year-on-year to Rs 328 crore. The strong performance has led to an upward revision in domestic growth guidance by the company to 17-18% for the current fiscal from 15-16% earlier. The domestic business has been the key growth driver for IPCA as the company has changed focus from being a player in the low margin anti-malarial segment to focus on higher margin chronic/lifestyle diseases space. More than half of its domestic formulation sales comes from chronic/lifestyle segment related therapy areas such as diabetes, central nervous system, cardiovascular system, pain management and dermatology products. Angel Broking's Sarabjit Kour Nangra believes that the domestic formulation business is the cash cow for the company and should grow at an annual rate of 16.5% over FY14-16.

The key trigger, however, would be the sorting out of the US FDA issues which began in August of this year. Given the 483 observations for the Ratlam plant, the company had voluntarily stopped supply of drugs to the US market. Ratlam is the company's only US FDA approved plant and stoppage has impacted formulation and API sales to that geography, which accounted for Rs 300 crore or 10% of sales in FY14. 

The stoppage has impacted its financial performance, with exports for the quarter down 23% year-on-year to Rs 402 crore. Delay in anti-malarial shipments also impacted exports. Share of exports to revenues are down to 52% in the quarter from 60% in FY14. While the company has also received 483 observations for its Indore plant, it has indicated that the same are not as serious in nature compared to the Ratlam plant observations. US FDA review process for the Ratlam plant is expected to take another quarter. Analysts expect these issues to be sorted out in FY16 and estimate exports to grow by 10% in FY15 and by about 25% in FY16.

While this mid-sized company is backward integrated with healthy return ratios and a strong balance sheet with good prospects, investors would have to be patient as any adverse outcome on its plant would impact its exports and extend the overhang beyond the first half of CY16.