IPCA Labs (Buy)

CMP: ₹763

Target: ₹893

In H1 FY19 Ipca’s domestic formulations revenue grew about 21 per cent y-o-y. Also, its dependence on anti-malaria therapy has come down now, to about 8 per cent of domestic formulations sales, with focus on CVS, derma, neurology and anti-bacterial therapies, where IPCA has registered double-digit growth during the quarter. We believe the domestic formulations business has become normal and would clock a 15 per cent CAGR over FY18-21.

In H1 FY19, the institutional business registered about 50 per cent y-o-y growth (on a low base) to ₹85.3 crore.

We believe that, with a favourable product mix because of the reduced dependence on i) low margin anti malarials in domestic formulations and focus on high margin profile therapies, ii) UK (earlier contributes 90 per cent, now about 60 per cent to EU sales) within EU and focus on other EU countries where margins are better than UK would generate better gross margins. Along with this, reduced remediation cost from FY20 onwards would support IPCA’s EBITDA margin to improve.

Valuation: We upgrade our recommendation on the stock to a ‘Buy’ and roll forward our target to FY21 at ₹893 (earlier ₹713), based on 18x FY20e EPS.

Risks: Currency fluctuations, escalation of regulatory issues on facilities.