3QFY15 Result Update

Institutional Equities

Ipca Laboratories
10 February 2015
Reuters: IPCA.BO; Bloomberg: IPCA IN

US Regulatory Compliance Problems Continue To Weigh

UNDER REVIEW

Ipca Laboratories (ILL) 3QFY15 performance was hit by the US Food and Drug
Administration or USFDA-related compliance problems (import alert issued by it in January
2015 for Ratlam plant post voluntary shutdown, Form 483s issued for Indore and Silvassa
plants) impacting API supply to the US market and also currency impact in CIS markets
owing to which it reported revenue of Rs7.4bn, down 11%/5% YoY/QoQ and 16%/9% below
our/Bloomberg consensus estimates, respectively. ILL reported lowest-ever EBITDA margin
in the past 26 quarters of 16.4%, down 970bps/90bps YoY/QoQ and 360bps/220bps below
our/Bloomberg consensus estimates, respectively, and also lowest PAT of Rs415mn in the
past 22 quarters, down 70%/32% YoY/QoQ and 60%/53% below our/ Bloomberg consensus
estimates, respectively. With the management expecting to commence the supply to the US, ,
the uncertainty still persists as to whether the recent 483s received in respect of Indore SEZ
and Silvassa units culminate into something serious (i.e. an import alert). We have cut our
FY15/FY16/FY17 EPS estimates by 25%/24%/30%, respectively.
Significant miss on earnings because of subdued branded business and generic business:
ILLs formulations revenue in 3QFY15 stood at Rs5.8bn down 7% YoY/QoQ, respectively, on
account of the fall in export formulations by 20% YoY led by the generic (ex-institutional) segment,
down 13% QoQ, mostly because of US and Canada, down 88%/81%, respectively, following
USFDA-related compliance problems (all other geographies also posted a decline for the quarter
with UK/Europe down 2% QoQ, Australia/New Zealand down 19% QoQ except South Africa, which
posted Rs110mn compared to Rs10mn in 2QFY15 on account of resolution of the payment
problem with customers. The branded generics business, down 26%/22% YoY/QoQ, respectively,
because of currency impact, mainly in the CIS region, posted revenue of Rs200mn compared to
Rs500mn in 3QFY14, down 60% YoY, but the institutional business recovered from the problem
faced post Ratlam units 483s, wherein it was mandated by the funding agencies to test all product
batches (as against random product batches tested earlier) which delayed shipment in 2QFY15 (as
the batches have to be sent to their facility in Vietnam) thereby hurting the institutional generic
business, which although down 40% YoY to Rs820mn, improved 132% QoQ (Rs353mn in 2QFY15).
Margins at 26-quarter low following lower revenue, PAT at 22-quarter low: EBITDA stood at
Rs1.2bn, down 44%/10% YoY/QoQ and 31%/20% below our/Bloomberg consensus estimates,
respectively, and margins at 16.4%, lowest in the past 26 quarters and below our/Bloomberg
consensus estimates of 20%/18.6% by 360bps/220bps, respectively. The fall in EBITDA margin was
on account of the decline in gross margin by 340bps/210bps YoY/QoQ ,respectively, increase in
staff costs as a percentage of sales to 18.1% compared to 14.9% in 3QFY14 and 17.6% in 2QFY15,
which we believe could be on account of consultant costs for remedial measures undertaken to
resolve the USFDA-related problems. Following lower margins, PAT stood at Rs415mn, down
70%/32% YoY/QoQ and 60%/53% below our/Bloomberg consensus estimates, respectively. PAT
was lower on account of a higher tax rate of 39.0% in 3QFY15 compared to 30.9% in 2QFY15 and
26.5% in 3QFY14, but depreciation was higher, up 64%/6% YoY/QoQ, respectively.
Key conference-call highlights: 1) The API facility at Ratlam was inspected by three authorities
last month which include the EU authorities, WHO (World Health Organisation) and TGA
(Therapeutic Goods Administration) of Australia and their reports are expected next week.
Y/E March (Rsmn)
3QFY14
2QFY15
Net revenue
8,330
7,806
Raw material costs
2,781
2,710
% of revenue
33.4
34.7
Personnel costs
1,243
1,375
% of revenue
14.9
17.6
Other expenses
2,132
2,373
% of revenue
25.6
30.4
EBITDA
2,173
1,348
EBITDA margin (%)
26.1
17.3
Forex gains /(loss)
(24)
(94)
Other income
54
87
Depreciation
256
396
Interest expenses
54
57
PBT
1,893
888
Tax
502
275
Tax rate (%)
26.5
30.9
Net profit
1,391
613
Source: Company, Nirmal Bang Institutional Equities Research

3QFY15
7,407
2,726
36.8
1,344
18.1
2,125
28.7
1,211
16.4
(112)
64
420
59
686
270
39.4
415

YoY (%)
(11.1)
(2.0)
8.1
(0.3)
(44.2)
360.7
18.8
64.2
8.3
(63.8)
(46.2)
(70.1)

Sector: Pharmaceuticals
CMP: Rs639
Sumit Singhania
sumit.s@nirmalbang.com
+91-22-3926 8111
Key Data
Current Shares O/S (mn)

126.2

Mkt Cap (Rsbn/US$bn)

80.6/1.3

52 Wk H / L (Rs)

907/591

Daily Vol. (3M NSE Avg.)

278,973

Price Performance (%)

Ipca Labs.
Nifty Index
Source: Bloomberg

QoQ (%)
(5.1)
0.6
(2.3)
(10.5)
(10.1)
19.1
(26.1)
6.0
2.6
(22.8)
(1.6)
(32.3)

Please refer to the disclaimer towards the end of the document.

9MFY14
24,852
8,853
35.6
3,594
14.5
6,176
24.9
6,228
25.1
(903)
152
749
183
4,545
1,148
25.2
3,398

1M

6M

1 Yr

(13.5)

(7.7)

(21.5)

2.9

12.7

40.6

9MFY15
24,572
8,862
36.1
4,108
16.7
6,734
27.4
4,868
19.8
(183)
214
1,195
174
3,532
1,048
29.7
2,483

YoY (%)
(1.1)
0.1
14.3
9.0
(21.8)
41.1
59.5
(5.2)
(22.3)
(8.6)
(26.9)

Institutional Equities
Key conference-call highlights
1)

2)

3)

IPCAs Ratlam API facility received an import alert from the USFDA after Form 483 observations were
issued in July 2014. IPCA had voluntarily halted supply to the US (including formulations). The company
had 42 ANDA (Abbreviated New Drug Application) filings, of which 18 have been approved and 8
products already launched in the US.
Out of the four APIs manufactured at its manufacturing facility in Ratlam, which has been excluded from
the import alert, ILL is expected to commence supply to the US in the coming two-three weeks of two
products, namely Hydroxychloroquine Sulfate and Propanolol Hydrochloride, which accounted for around
45% of total US sales in FY14.
Ranbaxy will continue to remain as ILLs US partner for API supply.

4)

ILL will invite the USFDA authorities to inspect its Ratlam facility in March 2015 for resolution of the
warning letter problem.

5)

ILL has already replied to the USFDA regarding the latters observations.
For Indore and Silvassa units, the USFDA inspection will take place as and when it is due.

6)
7)

ILL has spent around US$1.2mn till now for remedial measures, most of which have been accounted in
3QFY15 and it is likely that a further US$3mn-US$4mn will be spent in 4QFY15.

8)

ILL is evaluating other suppliers to source APIs for its formulation plants and is in negotiations with a party
for the same. However, it will take another 18-20 months before APIs can be utilised because of the
regulatory approval process.
ILLs research and development or R&D costs stood at 4.5% of sales in 9MFY15, at Rs1.1bn, compared
to Rs0.9bn in 9MFY14.

9)

Exhibit 1: Financial summary

Y/E March (Rsmn)
Net sales
YoY (%)
EBITDA
EBITDA margin (%)
Reported net profit
YoY (%)
Adjusted profit (ex-forex impact)
YoY (%)
Reported EPS
Adjusted EPS
RoE (%)
RoCE (%)
P/E (x)
EV/EBITDA (x)

FY13

FY14

FY15E

FY16E

FY17E

28,131
19.3
6,232
22.2
3,236
16.8
3,741
17.3
25.6
29.6
23.0
25.2
21.5
13.9

32,818
16.7
8,106
24.7
4,764
47.2
5,341
42.8
37.7
42.3
27.1
28.2
15.1
10.6

31,690
(3.4)
6,053
19.1
3,212
(32.6)
3,212
(39.9)
25.5
25.5
15.3
15.8
25.1
14.2

36,630
15.6
7,326
20.0
4,263
32.7
4,263
32.7
33.8
33.8
17.6
17.8
18.9
11.7

41,525
13.4
8,928
21.5
5,348
25.4
5,348
25.4
42.4
42.4
18.9
19.9
15.1
9.5

Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 2: Revenue break-up

Revenue summary (Rsmn)
Formulations
Domestic
Exports
Branded business
Generic business
(excluding institutional business)
Institutional business
API & intermediates
Domestic
Exports
Total

3QFY14

2QFY15

3QFY15

YoY (%)

QoQ (%)

9MFY14

9MFY15

YoY (%)

6,274
2,463
3,811
1,001

6,288
3,279
3,009
951

5,827
2,787
3,040
740

(7.1)
13.1
(20.2)
(26.1)

(7.3)
(15.0)
1.0
(22.2)

18,462
7,725
10,737
2,578

18,924
8,998
9,926
2,850

2.5
16.5
(7.6)
10.6

1,450

1,705

1,480

2.1

(13.2)

4,948

4,767

(3.7)

1,360
1,870
419
1,451
8,144

353
1,407
445
962
7,695

820
1,504
370
1,134
7,330

(39.7)
(19.6)
(11.6)
(21.9)
(10.0)

132.4
6.8
(16.9)
17.8
(4.7)

3,212
5,947
1,280
4,667
24,409

2,309
5,384
1,457
3,927
24,308

(28.1)
(9.5)
13.8
(15.8)
(0.4)

Source: Company, Nirmal Bang Institutional Equities Research

Ipca Laboratories

Institutional Equities
Exhibit 3: Actual performance versus our estimates, Bloomberg consensus estimates
Particulars (Rsmn)

Actual

Our estimate

Variation (%)

Bloomberg cons.est.

Variation (%)

Revenue
EBITDA
EBITDA margin (%)
Reported PAT
PAT (excl. forex loss)

7,407
1,211
16.4
415
505

8,830
1,766
20.0
1,050
1,050

(16.1)
(31.4)
(360)bps
(60.4)
(51.9)

8,129
1,513
18.6
875
875

(8.9)
(19.9)
(220)bps
(52.5)
(42.3)

Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 4: P/E ratio

(x)
40

35
30
25
20
15
10
5
0
6-Feb-10

6-Feb-11

6-Feb-12

6-Feb-13

6-Feb-14

6-Feb-15

Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 5: Change in our earnings estimates

FY15E
(Rsmn)
Revenue
EBITDA
EBITDA margin (%)
PAT

FY16E

FY17E

Old

New

Variation (%)

Old

New

Variation (%)

Old

New

Variation (%)

34,084
7,089
20.8
4,302

31,690
6,053
19.1
3,212

(7.0)
(14.6)
(170)bps
(25.3)

39,973
8,834
22.1
5,606

36,630
7,326
20.0
4,263

(8.4)
(17.1)
(190)bps
(24.0)

47,879
11,515
24.1
7,582

41,525
8,928
21.5
5,348

(13.3)
(22.5)
(260)bps
(29.5)

Source: Nirmal Bang Institutional Equities Research

Ipca Laboratories

Institutional Equities
Financials
Exhibit 6: Income statement
Y/E March (Rsmn)
Net sales (incl. other oper. income)
% growth
Raw material costs
Staff costs
Other expenses
Total expenditure

Exhibit 7: Cash flow

FY13

FY14

FY15E

FY16E

FY17E

Y/E March (Rsmn)

28,131

32,818

31,690

36,630

41,525

EBIT

19.3

16.7

(3.4)

15.6

13.4

(Inc.)/dec. in working capital

(10,966) (11,366) (11,852) (13,370) (14,949)

Cash flow from operations

Other income

(3,918)

(4,980)

(5,070)

(5,678)

(6,436)

(7,015)

(8,366)

(8,715) (10,256) (11,212)

(21,899) (24,712) (25,638) (29,304) (32,597)

Depreciation
Interest paid (-)

FY14

FY15E

FY16E

FY17E

5,365

7,074

4,458

5,509

6,866

(1,495)

(1,176)

(406)

(1,551)

(1,658)

3,870

5,899

4,052

3,958

5,208

(488)

(521)

350

300

350
2,062

867

1,031

1,595

1,817

(334)

(269)

(219)

(200)

(180)

(1,299)

(1,524)

(1,377)

(1,346)

(1,689)

(469)

(664)

(593)

(521)

(670)

EBITDA

6,232

8,106

6,053

7,326

8,928

% growth

21.4

30.1

(25.3)

21.0

21.9

Dividends paid (-)

EBITDA margin (%)

22.2

24.7

19.1

20.0

21.5

Minority Interest

143

200

350

300

350

Net cash from operations

2,146

3,952

3,808

4,008

5,083

(631)

(721)

Capital expenditure (-)

(2,737)

(3,819)

(3,500)

(3,500)

(3,500)

Other income
Forex gain/(loss)

Tax paid (-)

FY13

Interest costs

(334)

(269)

(219)

(200)

(180)

Net cash after capex

(591)

133

308

508

1,583

Gross profit

5,410

7,316

6,183

7,426

9,098

Inc./(dec.) in short-term borrowing

(442)

(132)

% growth

25.4

35.2

(15.5)

20.1

22.5

Inc./(dec.) in long-term borrowing

602

(13)

(539)

(499)

(500)

Depreciation

(867)

(1,031)

(1,595)

(1,817)

(2,062)

Inc./(dec.) in borrowings

160

(145)

(539)

(499)

(500)

Profit before tax

4,543

6,285

4,589

5,609

7,036

(Inc.)/dec. in investments

251

24.7

38.3

(27.0)

22.2

25.4

(1,299)

(1,524)

(1,377)

(1,346)

(1,689)

Cash from financial activities

410

(145)

(538)

(499)

(500)

28.6

24.2

30.0

24.0

24.0

Others

641

192

(8)

Opening cash

122

582

Net profit

3,236

4,764

3,212

4,263

5,348

Closing cash

582

% growth

16.8

47.2

(32.6)

32.7

25.4

Change in cash

461

% growth
Tax
Effective tax rate (%)
Minority interest

Equity issue/(buyback)

763

533

542

763

533

542

1,623

180

(230)

1,082

Source: Company, Nirmal Bang Institutional Equities Research

Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 8: Balance sheet

Exhibit 9: Key ratios

Y/E March (Rsmn)

Equity

FY13

FY14

FY15E

FY16E

FY17E

Y/E March

FY13

FY14

FY15E

FY16E

FY17E

252

252

252

252

252

Reserves

15,285

19,344

22,108

25,777

30,379

Reported EPS

25.6

37.7

25.5

33.8

42.4

Net worth

15,538

19,597

22,361

26,029

30,631

Adjusted EPS

29.7

42.3

25.5

33.8

42.4

Short-term loans

1,571

1,439

1,439

1,439

1,439

DPS

Long-term loans

4,599

4,586

4,048

3,549

3,049

BV/share

Total loans

6,170

6,026

5,487

4,988

4,488

Dividend payout (%)

Deferred tax liability

1,304

1,470

1,471

1,472

1,472

Performance ratios (%)

Liabilities

23,012

27,092

29,319

32,489

36,592

Gross block

15,762

19,305

22,805

26,305

Depreciation

4,638

5,606

7,201

9,018

11,124

13,699

15,604

1,210

1,486

1,486

Net block
Capital work-in-progress
Long-term investments

Per share (Rs)

4.0

5.0

3.1

4.1

5.1

123.1

155.3

177.2

206.3

242.7

18.2

15.5

13.9

13.9

13.9

RoE

23.0

27.1

15.3

17.6

18.9

29,805

RoCE

25.2

28.2

15.8

17.8

19.9

11,081

Valuation ratios (x)

17,287

18,724

P/E

21.5

15.1

25.1

18.9

15.1

1,486

1,486

P/BV

5.2

4.1

3.6

3.1

2.6

90

90

92

92

92

Inventories

7,410

8,476

9,190

10,622

12,042

Debtors

4,178

4,495

4,814

5,564

6,308

Efficiency ratios

582

763

533

542

1,623

Cash

EV/net sales

3.1

2.6

2.7

2.3

2.0

EV/EBITDA

13.9

10.6

14.2

11.7

9.5

Asset turnover (x)

1.7

1.6

1.3

1.3

1.3

Working capital/sales (x)

0.4

0.4

0.4

0.4

0.4

Receivable days

54

50

55

55

55

Other current assets

2,374

3,093

2,916

2,917

2,917

Total current assets

14,545

16,827

17,452

19,645

22,890

Creditors

2,684

3,413

3,863

4,496

5,001

Inventory days

96

94

106

106

106

Other current liabilities

1,274

1,597

1,451

1,525

1,600

Payable days

45

50

55

56

56

Total current liabilities

3,958

5,010

5,315

6,021

6,602

Source: Company, Nirmal Bang Institutional Equities Research

Net current assets

10,588

11,817

12,138

13,624

16,289

Total assets

23,012

27,092

29,319

32,489

36,592

Source: Company, Nirmal Bang Institutional Equities Research

Ipca Laboratories

Institutional Equities
Rating track
Date
31 December 2012
7 January 2013
31 January 2013
9 April 2013
31 May 2013
9 July 2013
31 July 2013
7 October 2013
28 October 2013
7 January 2014
29 January 2014
11 April 2014
2 June 2014
19 June 2014
10 July 2014
24 July 2014
4 August 2014
10 October 2014
12 November 2014
6 January 2015

Rating
Buy
Buy
Buy
Buy
Hold
Hold
Hold
Hold
Hold
Hold
Buy
Buy
Buy
Hold
Accumulate*
Accumulate
Accumulate
Accumulate
Accumulate
Accumulate

Market price (Rs)

522
506
479
505
599
695
664
697
689
270
798
820
788
836
863
727
725
740
669
729

Target price (Rs)

641
641
641
641
665
702
702
702
736
736
947
947
929
937
937
794
815
815
732
732

*As per the revised rating system

Ipca Laboratories

Institutional Equities
Disclaimer
Stock Ratings Absolute Returns
BUY > 15%
ACCUMULATE -5% to15%
SELL < -5%
This report is published by Nirmal Bangs Institutional Equities Research desk. Nirmal Bang has other business units with independent research teams separated by
Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. This report is for the personal information of the authorised
recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information
for the clients of Nirmal Bang Equities Pvt. Ltd., a division of Nirmal Bang, and should not be construed as an offer or solicitation of an offer to buy/sell any securities.
We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical
information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be
subject to change from time to time without notice.
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The views expressed are based solely on information available publicly and believed to be true. Investors are advised to independently evaluate the market
conditions/risks involved before making any investment decision.

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Board No. : 91 22 3926 8000/1; Fax. : 022 3926 8010

Ipca Laboratories