Accumulate This Multibagger Mid Cap Pharma Stock, Target Price Rs 1000: Prabhudas Lilladher

In its recent report, ICICI Securities rated "Add" IPCA Laboratories (IPCA) Ltd. stock with a target price of Rs 1000 per share. Given the current market price of the stock and the target price, the stock might surge up to 10%.

IPCA is a mid-cap pharma sector company with a market capitalisation of Rs 23,047.76 crore. IPCA is a fully integrated pharmaceutical company manufacturing and marketing over 350 formulations and 80 API's covering various therapeutic segments.

Stock Outlook & Returns

The current market price (CMP) of the IPCA is Rs 910.20 apiece on NSE, trading 1.63% up from its previous close. It was opened at Rs 909.60 apiece. Its 52-week low is Rs 831.05 apiece, and its 52-week high is Rs 1,228.35, respectively.

Over the past 1 week, the shares surged by 3.42%. Over the past 1 year, the stock has given 22.94% negative return. Whereas, over the past 3 years, it gave 96.75% positive return. In the past 5 years, it gave a multibagger return of 272.52%.

India Business on strong footing

Company has announced likely addition of 1200 MRs in FY23 which will result in total field force of 6000. Around 1000 have been added so far. Further 500 will be added in Cardiac division, 250 in Pain, 400 in Derma and CNS and 100 in Opthal. Expect MR productivity of additional MRs to reach company level over next 2-3 years.

Q2FY23 growth will be impacted due to continued weakness in anti-malaria and anti-bacteria sales. NLEM (25% of domestic formulation revenues) benefit of +10% price hike will be fully reflected from Q2FY23.

Zerodol franchise (~30% of total domestic formulation) continues to see strong double digit volume growth. Overall management expects growth of 13-15% over next 2-3 years; Guided for 12-13% growth in FY23.

Export formulation business- gradual recovery

Branded generics: Due to geopolitical issues businesses across Sri-lanka, Mynamar and Ukraine have been impacted. Overall these geographies contribute Rs400-500mn to total branded generic revenues. On other hand, Russia/CIS sales (Rs2.5bn; 50% of total branded generic sales) continue to remain healthy and will likely see growth of +20% in FY23. Overall guided for 13-15% YoY growth in total branded generic sales in medium term.

Non-US generics: Total sales -Rs7.5bn in FY22 (13% of total sales). Of total Rs7.5bn sales from export generics in FY22- Rs2.45bn came in from Australia/NZ, Rs2.2bn from EU, Rs1.1bn from Canada, Rs900mn from South Africa and Rs850mn from UK markets. Growth may remain muted in near term due to currency volatility in Euro/GBP/Aus dollar. Further IPCA owned distribution network in UK will take ~2-3 quarters to fully normalize the business. Overall guided for 3-5% growth in generic segment in FY23 and +10-12% growth from FY24.

US generics: Status quo - remediation across plants being completed are awaiting USFDA re-inspection. Company has 40 ANDAs of which 23 are approved. Given most ANDAs are backward integrated, company expect to scale up business when it resumes.

Institutional business: New orders have floated and mgmt. guided for better offtake than previous one. Benefit of that should be reflected Q3/Q4FY23 onwards. Overall we see institutional business in range of Rs3-4bn.

Export API business- Rs20bn guidance over next 5-6 years

Sartan issues have been resolved, however due to competitive intensity there is lower pricing and market share. Pre Azido impurity issues, sales from Losartan were to tune of Rs3.5bn, which have now recovered only to tune of 60-65%.

Dewas commercialization will enhance incremental capacity by 25%. Company is in process to validate certain products and expects revenue contribution to start from Q1FY24. Peak revenues to reflect from FY25/26.

Company is witnessing difficulty in passing entire increase in raw material prices to end API customers.

Overall guided for doubling of export API sales to Rs20bn over next 5-6 years.

Margins - improvement likely

Management sees easing of raw materials, which will see GMs improvement from Q2. Overall guided for 66-67% GMs from FY24 vs 63-64% in Q1. Operating cost/overheads like freight cost, power & fuel are also on downward trend, though still at higher levels vs historical run-rate. Staff costs related to new MR addition will be fully reflected from Q2/Q3 onwards. Expect increase in employment expenses on sequential basis. Reiterated its EBITDA margins guidance for 20.5%-21% in FY23 and 150-200 bps margin expansion from FY24.

Profitability to improve

The brokerage said, "We reduce our FY23/FY24 EPS estimates by 6% and introduce FY25 EPS at Rs49/share, even as we upgrade IPCA Lab (IPCA) to 'Accumulate' from Hold at TP of Rs 1,000 (earlier Rs 1,010) based on 22x Sept 2024E earnings. We believe earnings are likely to remain muted over FY21-23E impacted by high COVID base, weak margins and one time issues related to UK and export API business, resulting in stock underperformance. However, in our recent management interaction, the company highlighted that margins are likely to recover as revenues scale up with easing of certain overheads and raw material prices."

Valuation - Target price Rs 1000

The brokerage said, "We expect 31% EPS CAGR over FY23-25E vs 20% EPS decline over FY21-23E on back of strong domestic formulation business (45% of total sales), which continues to outperform IPM. Additionally, export business is also on a gradual recovery mode with UK and export API business expected to normalize by Q4F23. At CMP, stock is trading at 22x FY24E and 18x FY25E
P/E. Upgrade to 'Accumulate'."

Disclaimer

The stock has been picked from the brokerage report of Prabhudas Lilladher. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.