IPCA Laboratories Ltd 26 th August, 2013 BUY

Company Report BROKING DEPOSITORY DISTRIBUTION FINANCIAL ADVISORY IPCA Laboratories Ltd 26 th August, 2013 BUY CMP(As on 24/8/13) Rs.623.30 Target Price Rs.780.00 BSE Code 524494 NSE Code IPCALAB Market Cap (Rs Cr.) 7866.05 52 Week High/Low 708.00/389.00 Industry Pharmaceuticals Face Value Rs.2.00 Shares O/S 12.62 Cr. EPS 25.64 Book Value 123.12 P/E 24.31 P/B 5.06 Shareholding Pattern Ipca Laboratories is vertically integrated and produces finished dosage forms and Active Pharmaceutical Ingredients. Exports to over 120 countries, now account for nearly 61% of its income. The company has posted highest strong quarterly performance for the quarter ending June 2013. The Revenues from operations on consolidated basis increased by around 26% at Rs.805.56 crores vs Rs.637.61 crores y-o-y. Operating profit jumped about 21% at about Rs.171.02 crores as against Rs.141.78 crores in the previous quarter. Overall R&D cost in this quarter was around Rs.35.16 crores which includes about Rs.3.14 crores of capital expenditure and Rs.32 crores of revenue expenditure. As a result of it operating profit margins declined about 101bps at 21.23%. The net profit skyrocketed by 67% at Rs.71.77 crore for the quarter as compared to Rs.42.98 crore. EPS for the quarter stood at Rs.5.69. The company incurred a capital expenditure of around Rs.47 crores in the quarter. Total revenue from formulations business grew by 29% at Rs.580.31 crores as against Rs.448.69 crores in Q1FY13. Revenue from domestic branded formulations grew by 12% at Rs.250.36 crores from Rs.224.18 crores y-o-y and export formulations revenues surged sharply by 47% at Rs.329.95 crores vis-à-vis Rs.224.51 crores. Revenues from API moved up by 17% at Rs.212.22 cr. as compared to Rs.181.56 cr. in Q1FY13. Domestic API revenues grew 16% at Rs.45.63 cr vs Rs.39.34 cr. y-o-y. Export API revenues jumped by 17% at Rs.166.59 cr. from Rs.142.22 cr. in Q1FY13. Valuation Research Analyst: Vineeta Mahnot research@hemonline.com With robust product pipeline, increasing market share in key products; revival of ani-malaria segment revenues; Ipca Labs Ltd. revenue stream looks visible. Approval of Indore SEZ would be a growth driver in near term. We believe the company is trading at an attractive valuation at 17.21x and 13.95x of FY14EPS of Rs.36.21 and FY15EPS of Rs.44.68. We initiate a BUY on the stock with a target price of Rs.780 (appreciation of about 25%) with the medium to long term investment horizon. For Private Circulation Only 1 Hem Research

Business Details Ipca is a fully-integrated Indian pharmaceutical company manufacturing over 350 formulations and 80 APIs for various therapeutic segments. For more than 60 years, Ipca has been partnering healthcare globally in over 110 countries and in markets as diverse as Africa, Asia, Australia, Europe and the US. It is one of the world's largest manufacturers and suppliers of over a dozen APIs. These are produced right from the basic stage at manufacturing facilities endorsed by the world's most discerning drug regulatory authorities like US-FDA, UK-MHRA, EDQM- Europe, WHO-Geneva and many more. Ipca is a therapy leader in India for anti-malarials with a market-share of over 34% with a fast expanding presence in the international market as well. It also lead in DMARDs (Disease Modifying Anti-Rheumatic Drugs) treatment for rheumatoid arthritis. APIs Ipca has emerged as one of India's top exporters of APIs with nearly 25% of the turnover coming from APIs. Regulated markets like the USA, Canada, Europe and Australia account for 75% of its API exports. It is one of the world's largest manufacturers of APIs - Atenolol (anti-hypertensive), Chloroquine Phosphate (antimalarial), Furosemide (diuretic), Hydroxychloroquine Sulphate (NSAID), Metoprolol Succinate (anti-hypertensive), Metoprolol Tartrate (anti-hypertensive) and Pyrantel Salts (anthelmintic) - besides being one of the largest suppliers of these APIs worldwide. For over 20 years, Ipca has been playing a lead role in the Indian APIs market, both in the anti-malarial and anti-hypertensive therapeutic segments. Formulations - Branded-India Ipca manufactures over 350 formulations in virtually every dosage form: oral solids and liquids, dry powders for suspension, and injectables (liquid and dry). Its finished formulations are available in over 500,000 retail shops that are catered to by a network of over 1500 wholesalers. 4000 sales and marketing personnel service over 200,000 doctors across the country. It has leading brands in 5 therapeutic areas, with 4 of branded formulations being ranked among the Top-300 Indian brands by ORG-IMS. Its top 10 brands are Zerodol (Aceclofenac+combinations), Lariago (Chloroquine), HCQS (Hydroxychloroquine), Perinorm(Metoclopramide), Rapither (Artemotil), Tenoric (Atenolol + Chlorthalidone), Lumerax (Artemether + Lumefantrine), Etova(Etodolac), Malirid (Primaquine) and Folitrax (Methotrexate). International Ipca's formulations basket includes generics for the developed markets and branded formulations for emerging markets. Formulations account for 67% of export turnover, making Ipca one of India's largest formulation exporters. Ipca has over 1500 products registered in 70 countries, and another 600 are in the process of registration in 50 countries. More than half of its formulations business is backed by our own APIs. Ipca promote more than 60 brands of formulations in over 36 countries of Asia, Africa, CIS and South America. For Private Circulation Only 2 Hem Research

Upward Guidance Ipca s management has given strong guidance for financial year ending March 2014. Revenue growth for FY14 is expected to be in the range of 18-20% with more emphasis on the upper end. Looking at the first quarter performance, they expect to revise revenue guidance upwards post Q2 or so. Promotional business is expected to grow by around 25% to 30% and institutional business is estimated to achieve business of around Rs.460 crores. The company is market leader in the anti-malaria segment with about 50% market share in FY13. Anti-malarial segment after witnessing a subdued first half performance is expected to perform well in later half and can become around Rs.800 crores kind of business in about 2-3 years time with very good pipeline. The company has leadership in rheumatoid arthiritis with substantial market share. R&D expenditure for the whole year would be around 4%. EBITDA margin is expected to be around 22 percent. Tax rate would be staying in the range of 25% to 27% during the quarters but would not exceed 26% for the year. So, overall growth for the current year should be good with very good profitability. Strong capex ahead Capex for the current year is expected to be around Rs.300 crore plus. The company is putting up a Greenfield project at Baroda as API Facility; Rs.100 crores are expected to be spend on this facility. Around Rs.80 crores are to be utilized for purchase of new machines like high-speed blister machines, high-speed tabulating machine and some like high-speed card retainer [ph] machines. And remaining Rs.120 crores will be spend on maintenance and lot of other things. The company has current field force strength at 3,800 and expects to focus more on increasing productivity rather than increasing field force. For Private Circulation Only 3 Hem Research

Commissioning of Indore SEZ plant Ipca exports its generic formulations to US, Europe, South Africa and few more countries. US formulations business was limited due to capacity constraint. The USFDA has inspected the Indore facility of the company in April. The approval is on the cards and the management expects it to be either in end of August or September. Upon approval the company would start commercial production of formulations for the US market through marketing and distribution partners probably in Q3 or Q4 of the current year. With the commencement of production at this facility and with launch of new products; US market will grow and gain significant market share. The company has cumulative filings of 35 ANDAs out of which 15 have been approved and 8 products are already commericalised. The company has about 50 products at various stages of development including 505(b)2 projects/ sustained release formulations and also plans to file 8 to 10 ANDAs every year going ahead. For Private Circulation Only 4 Hem Research

Consolidated Profit & Loss Account Rs. Crore Particulars FY11 FY12 FY13 FY14E FY15E Net sales 1899.80 2359.42 2813.12 3356.05 4020.55 Growth 24.19% 19.23% 19.30% 19.80% Expenditure 1525.74 1845.92 2189.93 2617.72 3119.95 EBITDA 374.06 513.50 623.19 738.33 900.60 Growth 37.28% 21.36% 18.48% 21.98% EBITDA margin 19.69% 21.76% 22.15% 22.00% 22.40% Other income 8.38 11.95 14.31 16.78 20.10 Depreciation & Amortisation 55.79 67.13 86.73 105.69 122.55 EBIT 326.65 458.32 550.77 649.42 798.16 EBIT margin 17.19% 19.43% 19.58% 19.35% 19.85% Interest 29.40 41.28 33.36 38.86 45.13 Gain/Loss on foreign ex. Translation 43.44 (52.73) -63.14 0.00 0.00 PBT 340.69 364.31 454.27 610.56 753.03 Tax 78.38 88.11 129.94 152.64 188.26 PAT 262.31 276.20 324.33 457.92 564.77 Minority interest (0.08) 0.00 0.00 0.00 0.00 Share of profits in Associates (0.43) (0.86) 0.78 0.89 0.96 Adjusted PAT 262.82 277.06 323.55 457.03 563.81 Growth 5.42 16.78 41.26 23.36 Net Profit margins 13.83 11.74 11.50 13.62 14.02 Exceptional item 0.00 0.00 0.00 0.00 0.00 Reported PAT 262.82 277.06 323.55 457.03 563.81 Equity Shares 12.57 12.58 12.62 12.62 12.62 Adjusted EPS 20.91 22.02 25.64 36.21 44.68 Ratios Particulars FY11 FY12 FY13 FY14E FY15E Return on Equity 24.99 22.09 20.82 23.46 23.27 Return on Capital employed 20.65 24.71 25.37 24.47 24.61 Debt/Equity 0.50 0.48 0.40 0.36 0.34 Asset turnover 0.99 1.01 1.04 1.02 1.01 Current Ratio 4.31 3.31 3.68 3.65 3.73 Book value per share 83.66 99.68 123.12 154.34 192.02 For Private Circulation Only 5 Hem Research

Balance Sheet Rs. Crore Particulars FY11 FY12 FY13 FY14E FY15E Share Capital 25.14 25.23 25.24 25.24 25.24 Reserves & Surplus 1026.45 1228.78 1,528.54 1,922.50 2,398.01 Shareholders funds 1051.59 1254.01 1553.78 1947.74 2423.25 Pref. Sh. Issues by subsidiaries 0.00 0.00 0.00 0.00 0.00 Borrowings 530.17 601.05 617.03 706.54 820.52 Deferred tax liability 80.73 93.15 130.39 130.39 130.39 Minority Interest -0.66 0.00 0.00 0.00 0.00 Sources of funds 1661.83 1948.21 2301.20 2784.67 3374.16 Gross block 988.42 1,314.96 1555.48 1854.17 2150.03 Accumulated Depreciation 289.20 394.47 474.84 580.53 703.08 Net block 699.22 920.49 1080.64 1273.64 1446.95 Capital work in progress 94.75 94.51 129.17 148.33 203.34 Investments 40.83 34.08 9.02 19.84 32.25 Deffered tax assets 0.00 0.00 0.00 0.00 0.00 Goodwill on consolidation 0.00 23.59 23.59 23.59 23.59 Inventories 466.40 669.89 741.03 926.72 1,150.91 Sundry debtors 367.21 344.88 417.82 545.13 706.50 Cash and bank balance 10.36 12.16 58.24 72.68 91.16 Other current assets 132.76 155.16 148.10 163.54 193.72 Loans and advances 100.28 72.57 89.34 109.03 136.74 Total current assets 1,077.01 1,254.66 1,454.53 1,817.09 2,279.03 Current liabilities and provisions 249.98 379.12 395.75 497.83 611.00 Net current assets 827.03 875.54 1,058.78 1,319.26 1,668.03 Misc exp 0.00 0.00 0.00 0.00 0.00 Uses of funds 1,661.83 1,948.21 2,301.20 2,784.66 3,374.16 For Private Circulation Only 6 Hem Research

Quarterly Financial Highlights Rs. Crore Particulars Q1FY14 Q1FY13 Q4FY13 YoY% QoQ% Revenues 805.56 637.61 671.71 26.34 19.93 Expenditures 634.54 495.83 529.39 27.98 19.86 Operating Profit 171.02 141.78 142.32 20.62 20.17 Adjusted Net Profit 71.77 42.98 75.43 66.98 (4.85) OPM% 21.23 22.24 21.19 (101bps) 4bps NPM % 8.91 6.74 11.23 217bps (232bps) Adjusted EPS 5.69 3.41 5.98 66.86 (4.85) Past Price movement of the stock For Private Circulation Only 7 Hem Research

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