IPCA Labs

Investments can be considered in the stock of IPCA Laboratories as the company has a stronghold in the domestic formulations business and may see higher exports on regulatory approval of its new facility. At the current market price of Rs 332, the stock trades at about 14 times its likely FY-12 per share earnings. This is at a discount to its larger peers. The stock's valuation could improve in the next couple of years as the company puts in sustained improvement in performance. The stock, therefore, makes a good bet for the long term.



Strong domestic presence

IPCA's domestic formulation business, which has grown at 19 per cent CAGR over the last three years, holds significant potential. It is expected to grow at a faster clip driven by the improving productivity of its field agents, shift in focus to high-margin product segments and product launches. With competition hotting up, IPCA has substantially added to its field strength, taking the total count to 4,000-plus now. This will help the company expand reach and better penetrate the domestic pharmaceutical market. IPCA has also upped its focus on the high-margin pain and CVS segments. This will help as the anti-malarials and the anti-infectives segment, its mainstay otherwise, typically see pricing pressures. Their prices are largely capped as they come under the government's price control ambit.

Moreover, the anti-malarials business is seasonal and dependant on raw material sourcing from China. IPCA's reasonable track record of nurturing new products is also a positive. While it launched eight products last year, it currently has 19 ongoing clinical trials. Note that new products introduced in the last five years made up 14 per cent of its domestic formulation business in FY-10.

The domestic formulation segment has 11 therapy-focussed marketing divisions, including three new ones — 3D (cardiovascular), nephro sciences and uro sciences. It also has a network of over 1,500 wholesalers and boasts of fairly well-known brands such as HCQS, Lariago, Perinorm and Raptiher in its portfolio.

Exports perking up

The global demand for generics is likely to increase further in the coming year and this would open up export opportunities for even the smaller Indian companies. IPCA already exports to more than 110 countries and is among the top ten pharma exporters from India. It derives more than half its revenues through exports, which have grown at a compounded rate of 19 per cent over the last three years. Regulatory-compliant manufacturing facilities and API strength together can help IPCA make deeper inroads in the exports market.

The company is already present in major markets such as the EU, Australia, South Africa and Russia. It plans to focus on building brands in the CVS, CNS, pain management and anti-malarial segments and has recently entered the US generics market with a strategic tie up with Ranbaxy Inc. to market around 25 generic formulations. It also plans to file 10-12 ANDAs every year for the next three years in the US with most of them backed by its own APIs, and is exploring contract development and manufacturing opportunities in the US. Positive developments in these areas, besides the expected USFDA approval (by end of this fiscal year) of its new Indore SEZ facility, would trigger further growth in exports. The WHO prequalification programme approval for its anti-malarial finished dose combination formulation too would help.

Financials

Over the last three years, IPCA has grown its sales and profits at a compounded rate of about 18 per cent each. During this period, it has managed to sustain its 21 per cent operating margin levels, in spite of a dip last year. In the half year ended September 2010, IPCA delivered 18 per cent sales growth while profits grew by 17 per cent. Margins were pegged at 20.2 per cent.

Excessive forex fluctuations (given its export exposure) and delay in USFDA approval of its Indore facility pose near-term risks to our recommendation.