Ipca Labs HOLD. Deferment in Generic and Institutional Business Downgrade to HOLD. Pharmaceuticals January 31, Outlook & Valuation:

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1 Institutional Equities India Research Pharmaceuticals January 31, 2013 RESULT REVIEW Bloomberg: IPCA IN Reuters: IPCA.BO HOLD Deferment in Generic and Institutional Business Downgrade to HOLD IPCA s revenues are increased by 14%YoY to Rs. 7010mn in Q3FY13, as against our estimates of Rs. 7370mn mainly on account of UK business. Operating margins reduced on higher material and employee cost on a y oy basis. Net Profit has shown growth of 37%YoY to Rs mn in Q3FY13. Deferment of USFDA inspection and lowering guidance of institutional business are concerns which we factor in our model. We downgrade our rating to HOLD. Quarter Details: The Company s Domestic branded Formulations (DF) business grew 13.4%YoY to Rs.2127mn (our expectations Rs.2050mn), while its Exports formulations rose 9.5%YoY to Rs. 3175mn. EBITDA is at 22.6% in Q3FY13, higher than our estimate of 19.9% due to lower overheads as against our expectation. Net profit is at Rs.878.9mn for the quarter as against our estimate of Rs 915mn (up by 35%YoY). Company has provided Rs 186 mn forex loss for the quarter. Outlook & Valuation: We downgrade our revenues on account of deferment of US revenues and lowering the Generics and Institutional business for FY13 and FY14. We downgrade our EDBITAM from 23.2% to 22.4% for FY 13E and from 23% to 22.4% for FY 14E. We downgrade our EPS by 16.2 % to Rs 26.9 for FY13E (inclusive of forex loss of Rs 711 mn) and by 1.8 % to Rs We downgrade our rating to HOLD and our price target by 8.6 % to Rs 530 based on 14x FY 2014E. Recommendation CMP: Rs481 Target Price: Rs530 Upside (%) 10% Stock Information Market Cap. (Rs bn / US$ mn) 61/1, week High/Low (Rs) 537/281 3m ADV (Rs mn /US$ mn) 125/2.3 Beta 0.5 Sensex/ Nifty 20,005/6,056 Share outstanding (mn) 126 Stock Performance (%) 1M 3M 12M YTD Absolute (7.6) (7.2) Rel. to Sensex (10.2) (1.7) 43.5 (9.9) Performance 21,500 19,500 17,500 15,500 Jan 12 Feb 12 Apr 12 May 12 Jun 12 Aug 12 Sep 12 Oct 12 Dec 12 Jan 13 Sensex (LHS) Source: Bloomberg (RHS) Key Financials Y/E Mar (Rs mn) FY10 FY11 FY12 FY13E FY14E Net sales 15,666 18,988 23,587 28,432 34,079 EBITDA 3,335 3,761 5,135 6,361 7,635 Net Profit 2,180 2,672 2,898 3,398 4,772 EPS(Rs) EPS growth (%) EBITDA margin(%) PER(x) EV/EBITDA (x) RoCE(x) RoE(%) P/S Analysts Contact Rahul Sharma rahul.sharma@karvy.com Source: Karvy Institutional Research, Company..Indian GAAP Consolidated

2 Results Review Revenue Analysis In Q3FY13, Export formulations revenues have grown at 9.5%YoY to Rs.3175mn. The key negative has been generics business where UK has shown a shown degrowth of 43.8% to Rs 438 mn due 45 days halt in production. Institutional business has grown by 22.6 % to Rs 1134 mn. US has grown at 13.9%YoY to Rs468.7 mn, where as Exports API has grown significantly at 37%YoY to Rs1249mn on account of spare capacity due to deferment of Indore SEZ US business. In Domestic Formulation, revenues have grown at 13.4% on account of low growth of 8 9 % in Anti malarial business which constitutes 25 % of revenues Older brands have shown only 5 % growth. EBIDTA Margin IPCA s EBITDA was reported at 22.6% for the quarter which was lower than 24.6% in Q3FY12. Higher raw material and employee cost have contributed in lower margins for this quarter. Non Operating Items Other income was reported at Rs.39.7mn, at par with Rs.39.4mn during the Q3FY12. The company had a forex loss of Rs 185.8mn in Q3FY13. Effective tax rate was 23.4% for the quarter compared to 26% in Q3FY12. Net Profit Growth The Companyʹs net profit stood at Rs mn in Q3FY13 lower than our estimates of Rs. 915mn. 2

3 Key highlights: As per management, around Rs 2 bn of drug portfolio would come under pricing policy.. The estimated impact on account of this new pricing policy would be around Rs 200 mn for year. Lower growth in Domestic Formulation business is due to seasonal impact on the demand of Anti malarial Drugs which constitutes 25 % of the company s domestic revenues. Anti malarial segment has grown 8% YoY in this Quarter. Other Segments like Cardio vascular, Pain management, CNS have shown more than 15% YoY growth. USFDA approval of Indore SEZ plant has been postponed to April from Feb this year. Company expects that revenues from this plant for US will start in latter half of FY14. We have reduced the number of launches to 4 from 8 previously. In Q3FY13, company s export revenues from UK has largely been impacted on the back of delay in getting goods clearance from UK based Government agency (November 2012 clearance). This halted company s production process for 45 days. Exhibit 1: Quarterly performance Y/E Mar (Rs mn) Q3FY12 Q2FY13 Q3FY13 QoQ% YoY% Net Sales (9.1) 14.0 Cost (8.4) 17.1 EBITDA (11.4) 4.7 EBITDA Margin (%) Other Income (56.7) 0.8 Interest (16.7) (31.7) Forex Loss/(Gain) 399 (64) 186 (391.2) (53.4) Depreciation Profit before Tax (30.3) 32.9 Tax (31.9) 19.8 Tax rate (%) Net Profit (29.7) 37.5 Source: Karvy Institutional Research, Company 3

4 Exhibit 2: Change in Estimates Rs. mn FY13E FY14E Comments Domestic formulations New Old % change New Old % change 8,724 8,815 (1.0) 10,120 10,225 (1.0) Downgarde in line with the 9month trend Tender 3,800 4,000 (5.0) 4,500 5,000 (10.0) lower mgt guidance UK (USDmn) (27.7) (19.6) problems with a brand having an impact Branded 3,023 2, ,756 3, Increased traction in CIS and other markets Exports API 5,638 5, ,756 5, Spare capacity reason for ramp up Revenues 28,432 29,187 (2.6) 34,079 34,239 (0.5) EBITDA 6,361 6,775 (6.1) 7,635 7,880 (3.1) EBITDA margin (%) Other income (20.4) (19.2) in line with 9 mth FY13 Interest charges (25.2) (25.2) in line with 9 mth FY13 Net Profit 3,398 4,044 (16.0) 4,772 4,863 (1.9) Tax Rate EPS(in Rs.) (16.0) (1.9) Source: Karvy Institutional Research, Company Exhibit 3: Profit & Loss Rsmn FY10 FY11 FY12 FY13E FY14E Net Domestic Form 7,395 8,403 8,973 10,184 11,580 Export Revenues 8,201 10,422 14,359 17,795 21,984 Operating Income Net Revenues 15,666 18,988 23,587 28,432 34,079 Raw Material 6,456 7,764 9,131 11,127 13,308 Staff 2,207 2,663 3,355 4,052 4,637 Other expenses 3,668 4,800 5,966 6,892 8,500 Total Expenditure 12,331 15,227 18,452 22,071 26,445 EBITDA 3,335 3,761 5,135 6,361 7,635 EBITDA margin (%) Other income Interest expense Extraordinary expense Depreciation ,010 Forex fluctuation net (63) (434) Profit Before Tax 2,655 3,405 3,643 4,491 6,290 Tax ,093 1,519 Effective tax rate % Net Profit 2,038 2,658 2,762 3,398 4,772 EOI 15 (30) Reported Net Profit 2,053 2,628 2,771 3,398 4,772 Source: Company, Karvy Institutional Research 4

5 Exhibit 4: Balance Sheet Y/E Mar (Rs mn) FY10 FY11 FY12 FY13E FY14E Equity Reserves 8,398 10,265 12,288 15,133 19,129 Net worth 8,649 10,516 12,540 15,385 19,381 Deferred Tax Liabilty Short term Loans 2,346 2,639 2,014 2,372 2,651 Long term Loans 2,199 2,670 3,313 3,644 4,008 Total Loans 4,545 5,308 5,326 6,016 6,659 Minority Interest Liabilities 13,981 16,625 18,798 22,333 26,972 Gross Block 8,812 9,884 13,115 15,700 17,953 Depreciation 2,433 2,892 3,849 4,714 5,723 Net Block 6,379 6,992 9,266 10,987 12,230 Capital work in progress 383 1, ,099 1,346 Goodwill on Consolidation Long term Investments Inventories 3,802 4,664 6,699 7,558 8,694 Debtors 3,880 4,637 3,491 4,216 5,058 Cash ,131 Other Current assets 1,201 1,182 2,235 2,637 3,162 Total Current assets 8,992 10,586 12,547 14,285 18,044 Creditors ,369 2,887 3,453 Other current liabilities 1,395 1,551 2,106 1,728 1,772 Total current liabilities 2,097 2,493 4,475 4,615 5,225 Net current assets 6,895 8,093 8,071 9,670 12,819 Total Assets 13,981 16,625 18,798 22,333 26,972 Source: Company, Karvy Institutional Research 5

6 Exhibit 5: Cash Flow Statement Y/E Mar (Rs mn) FY10 FY11 FY12 FY13E FY14E EBIT 2,868 3,203 4,464 5,497 6,625 Change in working capital 1,664 1, ,847 1,891 Cash flow from operations 1,204 2,000 4,503 3,649 4,734 Other income Depreciation ,010 Deferred tax liabilities Interest paid ( ) Dividends paid( ) Tax paid ( ) ,102 1,519 Forex gain/loss Extraordinaries Net cash from operations 589 1,530 3,056 2,004 3,279 Capital Expenditure 1,317 1,920 2,698 2,800 2,500 Goodwill on consolidation Free Cash Flow Change in short term borrowing Change in long term borrowing Change in borrowings Change in Investments Equity issue/buyback Cash from Financial Activities Others Opening cash Closing cash Change in Cash Source: Company, Karvy Institutional Research Exhibit 6: Key Ratios FY10 FY11 FY12 FY13E FY14E EV/EBDITA(x) ROE (%) ROCE (%) P/BV(x) P/S(x) Source: Company, Karvy Institutional Research 6

7 Rangachari Muralikrishnan Institutional Equities Team Head Institutional Equities / Research / Strategy muralikrishnan@karvy.com K. Anant Rao Head Sales Trading & Derivatives k.anantrao@karvy.com Uday Raval Karvy Inc. USA udayr@karvy.com INSTITUTIONAL RESEARCH Analysts Industry / Sector Desk Phone ID Amey Chalke Pharmaceuticals amey.chalke@karvy.com Dwaipayan Poddar Chief Technical Strategist dwaipayan.poddar@karvy.com Hatim Broachwala, CFA Banking hatim.broachwala@karvy.com Kruti Shah Economist kruti.shah@karvy.com Manoj Kumar Manish Derivatives and Quant Analyst manojkumar.m@karvy.com Maruti Kadam Automobiles / Metals & Mining maruti.kadam@karvy.com Mitul Shah Automobiles mitul.shah@karvy.com Naveen Trivedi FMCG naveen.trivedi@karvy.com Paresh Jain BFSI paresh.jain@karvy.com Parikshit Kandpal Infra / Real Estate / Strategy parikshit.kandpal@karvy.com Rahul Sharma Pharmaceuticals rahul.sharma@karvy.com Rahul Singh MidCap rahulsingh@karvy.com Rajesh Kumar Ravi Cement & Logistics rajesh.ravi@karvy.com Rupesh Sankhe Power/Capital Goods rupesh.sankhe@karvy.com Vinay Nair Oil & Gas vinaynair@karvy.com INSTITUTIONAL SALES Dinesh Bajaj Sales dinesh.bajaj@karvy.com R. Sriram Sales sriram.rangarajan@karvy.com Shabbir Dahodwala Sales (USA) shabbir@karvy.com Tejash Gandhi Sales tejash.gandhi@karvy.com INSTITUTIONAL SALES TRADING & DEALING Bhavesh Gandhi Institutional Dealer /69 bhavesh.gandhi@karvy.com Prashant Oza Institutional Dealer /71 prashant.oza@karvy.com Parag Shah Sales Trader /65 parag.shah@karvy.com Sriram Jagdish Sales Trader /67 sriram.jagdish@karvy.com Gurdarshan Singh Kharbanda Sales Trader / 69 gurdarshansingh.k@karvy.com PRODUCTION Asim Kumar Mohapatra Editor asim.mohapatra@karvy.com Vijayalaxmi L. Moolya Production vijayalaxmi.m@karvy.com

8 Stock Ratings Absolute Returns Buy : > 15% Hold : 5 15% Sell : < 5% For further enquiries please contact: research@karvy.com Tel: Disclosures Appendix Analyst certification The following analyst(s), who is (are) primarily responsible for this report, certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. Disclaimer The information and views presented in this report are prepared by Karvy Stock Broking Limited. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither Karvy nor Karvy Stock Broking nor any person connected with any associate companies of Karvy accepts any liability arising from the use of this information and views mentioned in this document. The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above mentioned companies from time to time. Every employee of Karvy and its associate companies are required to disclose their individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only through Karvy Stock Broking Ltd. This report is intended for a restricted audience and we are not soliciting any action based on it. Neither the information nor any opinion expressed herein constitutes an offer or an invitation to make an offer, to buy or sell any securities, or any options, futures nor other derivatives related to such securities. Karvy Stock Broking Limited Institutional Equities Office No. 702, 7 th Floor, Hallmark Business Plaza, Opp. Gurunanak Hospital, Mumbai Regd Off : 46, Road No 4, Street No 1, Banjara Hills, Hyderabad Karvy Stock Broking Research is also available on: Bloomberg KRVY <GO>, Thomson Publisher & Reuters.