4QFY2016 Result Update | Pharmaceutical

June 10, 2016

IPCA Laboratories

BUY

CMP

`431

Performance Highlights

Target Price

`613

Y/E March (` cr)

4QFY2016 3QFY2016 % chg (QoQ) 4QFY2015

% chg (yoy)

Investment Period

12 Months

Net sales

612

674

(9.2)

623

(1.7)

Other income

22.9

(7.0)

Stock Info

Operating profit

(35.6)

80.1

Sector

Pharmaceutical

Tax

(16)

(199.2)

(3)

349.6

Adj. net profit/(loss)

58.9

(10)

Market Cap (` cr)

5,846

Source: Company, Angel Research

Net Debt (` cr)

337

Beta

0.6

IPCA Laboratories (Ipca)’s results for 4QFY2016 have come in much lower than

52 Week High / Low

888/402

our expectations on the sales and the operating front, while a tax write-back led

Avg. Daily Volume

49,999

the net profit to outperform our estimates. Sales for the quarter de-grew 1.7%

Face Value (`)

yoy to `612cr (V/s `680cr expected). On the operating front, the gross margin

BSE Sensex

26,636

came in at 64.4% V/s 58.8% in 4QFY2015, while the EBDITA margin came in at

Nifty

8,170

8.4% V/s 4.6% in 4QFY2015. The reported net profit for the quarter thus came

Reuters Code

IPCA.BO

in at `38cr V/s `8cr in 4QFY2015 while the Adj. net profit stood at `38cr V/s a

Bloomberg Code

IPCA@IN

loss of `10cr in 4QFY2015. While the current performance of the company is

being impacted due to its key plants being under the USFDA scanner, we believe

once out of it, the company can bounce back to its normalized ROE of 25%. Thus,

Shareholding Pattern (%)

we maintain our Buy on the stock.

Promoters

45.9

MF / Banks / Indian Fls

19.8

Results lower than expectations: For the quarter, the company’s sales declined by

FII / NRIs / OCBs

22.1

1.7% yoy to `612cr (V/s `680cr expected). The dip in the sales was owing to a

Indian Public / Others

12.2

26% yoy decline in API sales (`114cr), while Formulations (`498cr) posted a yoy

growth of 6.0%. Within formulations, domestic formulations posted a yoy growth

of 9%. On the operating front, the gross margin came in at 64.4% V/s 58.8% in

Abs. (%)

3m 1yr

3yr

4QFY2015, while the EBDITA margin came in at 8.4% V/s 4.6% in 4QFY2015. The

Sensex

8.2

(0.8)

37.0

reported net profit for the quarter thus came in at `38cr V/s `8cr in 4QFY2015 while

Ipca

(15.0)

(27.8)

(23.3)

the, Adj. net profit stood at `38cr V/s a loss of `10cr in 4QFY2015.

Outlook and Valuation: We expect net sales to post a 15.6% CAGR to `3,799cr,

3-Year Daily Price Chart

and EPS to register a 36.5% CAGR to `19.7 over FY2016-18E. The company’s

1,000

financials will be impacted by the USFDA import alert on the Ratlam, Indore and

Silvassa facilities. While the problems are likely to persist for a while, we expect the

800

company’s performance to witness a gradual pick-up going forward. Given the

600

valuations, we maintain our Buy rating on the stock with a price target of `613.

400

Key financials (Consolidated)

Y/E March (` cr)

FY2015

FY2016

FY2017E

FY2018E

200

Net sales

3,117

2,844

3,303

3,799

% chg

(2.6)

(8.7)

16.1

15.0

Adj. Net profit

254

133

219

248

% chg

(48.6)

(47.6)

64.2

13.5

Source: Company, Angel Research

EPS

20.1

10.6

17.3

19.7

EBITDA margin (%)

16.2

10.6

15.3

P/E (x)

21.2

40.4

24.6

21.7

RoE (%)

12.2

5.9

9.1

9.4

RoCE (%)

10.9

4.1

8.4

8.8

P/BV (x)

2.4

2.3

2.1

2.0

Sarabjit Kour Nangra

EV/Sales (x)

1.9

2.0

1.7

1.5

+91 22 39357800 Ext: 6806

EV/EBITDA (x)

11.9

19.0

11.4

10.1

[email protected]

Source: Company, Angel Research; Note: CMP as of June 7, 2016

Please refer to important disclosures at the end of this report

Ipca Laboratories | 4QFY2016 Result Update

Exhibit 1: 4QFY2016 - Standalone performance

Y/E March (` cr)

4QFY2016 3QFY2016

% chg (qoq)

4QFY2015

% chg (yoy) FY2016 FY2015

% chg (yoy)

Net sales

612

674

(9.2)

623

(1.7)

2844

3060

(7.0)

Other income

22.9

(7.0)

(11.6)

Total income

630

689

(8.5)

642

(1.8)

2902

3125

(7.1)

Gross profit

395

423

(6.8)

366

7.8

1787

1917

(6.8)

Gross margins (%)

64.4

62.8

58.8

62.8

62.6

Operating profit

(35.6)

80.1

262

495

(47.1)

Operating margin (%)

8.4

11.8

4.6

9.2

16.2

Interest

(11.4)

(2.2)

21.6

Depreciation

(12.5)

(32.0)

172

177

(2.7)

PBT

(45.2)

(18)

112

352

(68.2)

Provision for taxation

(16)

(199.2)

(3)

349.6

102

(81.8)

Less: Exceptional Items

(23)

(gains)/ loss

Reported Net profit

62.6

254

(63.3)

Adj. Net profit/(loss)

58.9

(10)

254

(63.3)

EPS (`)

2.9

1.8

(0.8)

7.3

19.8

(63.3)

Source: Company, Angel Research, FY numbers are consolidated

Exhibit 2: 4QFY2016 - Actual vs Angel estimates

(` cr)

Actual

Estimates

Variation (%)

Net sales

612

680

(10.0)

Other income

(0.1)

Operating profit

(38.5)

Interest

(0.1)

Tax

(16)

Adjusted Net profit/(loss)

33.5

Source: Company, Angel Research

Revenue below our estimate; dips 1.7% yoy: For the quarter, the company’s sales

declined by 1.7% yoy to `612cr (V/s `680cr expected). The dip in the sales was

owing to a 26% yoy decline in API sales (`114cr), while Formulations (`498cr)

posted a yoy growth of 6.0%. Within formulations, domestic formulations posted a

yoy growth of 9%.

Domestic markets (`273cr) posted a growth of 4.4% yoy. API sales at `24cr

de-grew by 27.6% yoy, while Formulation sales at `250cr grew by 9.0% yoy.

Exports (`339cr) dipped by 6.1% yoy; API exports dipped by 25.1% yoy (`91cr),

while Formulation exports (`249cr) posted a yoy growth of 3.5%.

Overall, for 4QFY2016, exports contributed 55.4% to the top-line while the

domestic business contributed by around 44.6%. The overall contribution of

formulation sales is at 81.3% of total sales, for the quarter.

June 13, 2016

Ipca Laboratories | 4QFY2016 Result Update

Exhibit 3: Domestic sales trend

360

331

318

308

320

280

250

229

240

200

160

120

4QFY2015

1QFY2016

2QFY2016

3QFY2016

4QFY2016

Formulation

API

Source: Company, Angel Research

Exhibit 4: Exports sales trend

280

249

240

225

227

240

221

200

152

147

160

121

117

120

4QFY2015

1QFY2016

2QFY2016

3QFY2016

4QFY2016

Formulation

API

Source: Company, Angel Research

OPM falls sharply: On the operating front, the gross margin came in at 64.4% V/s

58.8% in 4QFY2015 on back of an improved sales mix, while the EBDITA margin

came in at 8.4% V/s 4.6% in 4QFY2015. The margins growth during the quarter

was restricted by the dip in sales. The company had posted an OPM of 11.8% in

3QFY2016. The decline was also owing to a large amount of fixed costs in the US

and the Institutional business remaining unabsorbed, and remediation cost on US

facilities also continued to be incurred during the quarter. Overall, the base

business’ margin remained muted at ~14-15% in 4QFY2016. The margins are

likely to improve once the US business picks up, which would be hopefully by

FY2018.

June 13, 2016

Ipca Laboratories | 4QFY2016 Result Update

Exhibit 5: OPM trend

12.0

11.4

11.0

10.6

10.0

9.0

8.4

8.0

7.0

6.0

4.6

5.0

4.0

4QFY2015

1QFY2016

2QFY2016

3QFY2016

4QFY2016

Source: Company, Angel Research

Reported net profit outperforms our estimates: The reported net profit thus came in

at `38cr V/s `8cr in 4QFY2015 while the Adj. net profit stood at `38cr V/s a loss

of `10cr in 4QFY2015.

Exhibit 6: Adj. Net profit trend

4QFY2015

1QFY2016

2QFY2016

3QFY2016

4QFY2016

(10)

(20)

Source: Company, Angel Research

Investment arguments

 Domestic formulations business - the cash cow: Ipca has been successful in

changing its business focus to the high-margin chronic and lifestyle segments

from the low-margin anti-malarial segment. The chronic and lifestyle

segments, comprising CVS, anti-diabetics, pain-management, CNS and

dermatology products, constitute more than 50% of the company’s domestic

formulation sales. The Management has ramped up its field force significantly

with addition of divisions in the domestic formulations segment, taking the

current total strength to nearly 4,000MRs. With an expected pick-up in sales in

FY2017, we expect the domestic formulation business to grow at a CAGR of

16.2% over FY2016-18E.

 Exports currently under pressure; should pickup only by FY2018: On the

formulations front, Ipca has been increasing its penetration in regulated

June 13, 2016

Ipca Laboratories | 4QFY2016 Result Update

markets, viz Europe and the US, by expanding the list of generic drugs backed

by its own API. In the emerging and semi-regulated markets, the company

plans to focus on building brands in the CVS, CNS, pain-management and

anti-malarial segments along with tapping new geographies. On the API front,

where the company is among the low-cost producers, it is aggressively

pursuing supply tie-ups with pharmaceutical MNCs.

After the USFDA inspection at the company’s APl manufacturing facility at

Ratlam (Madhya Pradesh), the company has received certain inspection

observations in Form 483, consequent to which the company had voluntarily

decided to temporarily suspend API shipments from this manufacturing facility

to the US markets until the issue getting resolved. However, the 483 was

converted into an import alert, except for 4 APIs which constituted around 45%

of US sales in FY2014.

The company’s Silvassa and Indore facilities (formulation facilities) are also

under import alert. These developments impacted FY2015 sales, while

FY2017/FY2018 should see some revival. We expect exports to grow at a

CAGR of 15.0% over FY2016-18E.

Outlook & Valuation:

We expect net sales to post a 15.6% CAGR to `3,799cr, and EPS to register a

36.5% CAGR to `19.7 over FY2016-18E. The company’s financials will be

impacted by the USFDA import alert on the Ratlam, Indore and Silvassa facilities.

While the problems are likely to persist for a while, we expect a gradual pick-up in

performance only by FY2018. Still, given the valuations, we maintain our Buy

rating on the stock with a price target of `613.

Exhibit 7: Key Assumptions

FY2017E

FY2018E

Sales growth (%)

16.1

15.0

Domestic growth (%)

17.4

15.0

Exports growth (%)

15.0

Operating margins (%)

15.3

R&D Exp ( % of sales)

4.0

Capex (` cr)

500

Source: Company, Angel Research

June 13, 2016

Ipca Laboratories | 4QFY2016 Result Update

Exhibit 8: One-year forward PE band

1,200

1,000

800

600

400

200

10x

15x

20x

25x

Source: Company, Angel Research

Exhibit 9: Recommendation summary

Company

Reco.

CMP

Tgt Price

Upside

FY2017E

FY15-17E

FY2017E

EV/Sales

EV/EBITDA

CAGR in EPS

RoCE

RoE

(`)

(%)

(x)

(%)

Alembic Pharma

Neutral

557

29.8

3.0

18.2

11.4

22.0

20.1

Aurobindo Pharma Accumulate

773

768

10.8

20.1

3.1

14.5

11.4

21.4

27.7

Cadila Healthcare

Buy

320

400

25.0

18.7

2.9

13.2

22.9

24.2

28.8

Cipla

Neutral

469

21.6

2.7

15.3

4.9

11.1

13.7

Dr Reddy's

Accumulate

3,158

3,476

10.1

20.7

3.0

12.3

6.8

19.2

18.7

Dishman Pharma

Neutral

152

15.2

1.6

7.7

15.9

9.4

11.0

GSK Pharma

Neutral

3,515

58.4

8.1

43.0

0.0

33.0

29.9

Indoco Remedies

Neutral

282

20.7

2.2

12.4

23.0

19.7

Ipca labs

Buy

431

613

42.2

24.9

1.8

11.5

7.8

8.4

9.1

Lupin

Buy

1,435

1,809

26.1

24.7

4.1

15.6

13.1

29.6

24.7

Sanofi India*

Accumulate

4,300

4,738

10.2

28.0

3.9

22.3

34.2

21.0

25.6

Sun Pharma

Buy

739

950

28.6

26.4

5.4

17.9

10.5

17.7

18.7

Source: Company, Angel Research; Note: *December year ending

June 13, 2016

Ipca Laboratories | 4QFY2016 Result Update

Profit & loss statement (Consolidated)

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E

FY2018E

Gross sales

2,778

3,232

3,157

2,891

3,356

3,859

Less: Excise duty

Net Sales

2,754

3,199

3,117

2,844

3,303

3,799

Other operating income

Total operating income

2,813

3,282

3,157

2,885

3,344

3,839

% chg

19.3

16.7

(3.8)

(8.6)

15.9

14.8

Total expenditure

2,190

2,471

2,613

2,543

2,799

3,219

Net raw materials

1,097

1,137

1,155

1,058

1,173

1,349

Other mfg costs

245

250

277

253

294

338

Personnel

392

498

565

627

728

837

Other

456

587

616

606

604

695

EBITDA

564

728

504

301

504

580

% chg

19.5

29.1

(30.8)

(40.2)

67.4

15.0

(% of Net Sales)

20.5

22.8

16.2

10.6

15.3

Depreciation & amortisation

103

180

172

233

268

EBIT

477

625

324

129

271

312

% chg

17.8

31.1

(48.1)

(60.2)

110.3

15.0

(% of Net Sales)

17.3

19.5

10.4

4.5

8.2

Interest & other charges

Other Income

(% of PBT)

2.8

3.2

7.8

10.9

5.7

5.0

Recurring PBT

517

703

364

155

297

338

% chg

24.0

35.9

(48.2)

(57.5)

91.8

13.7

Extraordinary expense/(Inc.)

63.3

72.2

39.5

PBT (reported)

454

631

364

115

297

338

Tax

129.9

152.4

101.9

18.6

74.2

84.4

(% of PBT)

28.6

24.2

28.0

16.1

25.0

PAT (reported)

324

478

262

223

253

Add: Share of earnings of asso.

(5)

(3)

PAT after MI (reported)

324

478

254

219

248

ADJ. PAT

340

495

254

133

219

248

% chg

18.4

45.6

(48.6)

(47.6)

64.2

13.5

(% of Net Sales)

11.8

14.9

8.2

3.3

6.6

6.5

Basic EPS (`)

26.9

39.2

20.1

10.6

17.3

19.7

Fully Diluted EPS (`)

26.9

39.2

20.1

10.6

17.3

19.7

% chg

18.4

45.6

(48.6)

(47.6)

64.2

13.5

June 13, 2016

Ipca Laboratories | 4QFY2016 Result Update

Balance sheet (Consolidated)

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E

FY2018E

SOURCES OF FUNDS

Equity share capital

Reserves & surplus

1,529

1,934

2,183

2,281

2,485

2,718

Shareholders Funds

1,554

1,960

2,208

2,306

2,510

2,743

Minority interest

Total loans

523

603

829

595

671

809

Other Long Term Liabilities

Long Term Provisions

Deferred tax liability

130

147

174

169

Total Liabilities

2,220

2,726

3,233

3,094

3,350

3,722

APPLICATION OF FUNDS

Gross block

1,537

1,882

2,626

2,828

3,328

3,828

Less: Acc. depreciation

475

578

758

930

1,163

1,431

Net Block

1,063

1,303

1,868

1,898

2,165

2,397

Goodwill

Capital work-in-progress

129

165

Investments

Long Term Loans and Adv.

115

108

125

144

Current assets

1,397

1,602

1,614

1,522

1,767

2,032

Cash

125

162

189

223

Loans & advances

Other

1,297

1,459

1,442

1,317

1,529

1,759

Current liabilities

477

485

579

729

847

974

Net Current Assets

921

1,117

1,035

793

920

1,058

Other Non current Assets

Total Assets

2,220

2,726

3,233

3,094

3,350

3,722

June 13, 2016

Ipca Laboratories | 4QFY2016 Result Update

Cash flow statement (Consolidated)

Y/E March (` cr)

FY2013 FY2014 FY2015 FY2016 FY2017E FY2018E

Profit before tax

454

631

364

115

297

338

Depreciation

103

180

172

233

268

(Inc)/Dec in working capital

(116)

(193)

286

(411)

1,088

Direct taxes paid

(130)

(152)

(102)

(19)

(74)

(84)

Cash Flow from Operations

295

389

530

555

137

1,722

(Inc.)/Dec.in fixed assets

(257)

(380)

(745)

(202)

(500)

(Inc.)/Dec. in Investments

Cash Flow from Investing

(257)

(380)

(745)

(202)

(500)

Issue of Equity

Inc./(Dec.) in loans

(5)

232

(232)

138

Dividend Paid (Incl. Tax)

(59)

(74)

(15)

Others

(69)

419

(72)

Cash Flow from Financing

264

(316)

480

Inc./(Dec.) in Cash

Opening Cash balances

125

162

189

Closing Cash balances

125

162

189

223

June 13, 2016

Ipca Laboratories | 4QFY2016 Result Update

Key Ratios

Y/E March

FY2013

FY2014

FY2015

FY2016

FY2017E

FY2018E

Valuation Ratio (x)

P/E (on FDEPS)

16.0

11.0

21.4

40.8

24.9

21.9

P/CEPS

12.7

9.1

12.5

17.8

12.0

10.5

P/BV

3.5

2.8

2.5

2.4

2.2

2.0

Dividend yield (%)

0.9

EV/Sales

2.1

1.8

1.9

2.0

1.8

1.6

EV/EBITDA

10.4

8.1

12.0

19.2

11.5

10.2

EV / Total Assets

2.6

2.2

1.9

1.7

1.6

Per Share Data (`)

EPS (Basic)

26.9

39.2

20.1

10.6

17.3

19.7

EPS (fully diluted)

26.9

39.2

20.1

10.6

17.3

19.7

Cash EPS

33.8

47.4

34.4

24.2

35.8

40.9

DPS

4.0

5.0

1.0

Book Value

123.1

155.3

175.0

182.7

198.9

217.4

DuPont Analysis

EBIT margin

17.3

19.5

10.4

4.5

8.2

Tax retention ratio

71.4

75.8

72.0

83.9

75.0

Asset turnover (x)

1.4

1.1

1.0

1.1

1.2

ROIC (Post-tax)

17.2

20.2

8.2

3.6

6.8

7.1

Cost of Debt (Post Tax)

4.5

3.6

2.9

3.7

3.2

Leverage (x)

0.4

0.3

0.2

Operating ROE

21.8

24.9

9.8

3.6

7.3

7.9

Returns (%)

RoCE (Pre-tax)

23.2

25.3

10.9

4.1

8.4

8.8

Angel RoIC (Pre-tax)

25.0

27.7

12.0

4.5

9.4

9.9

RoE

24.2

28.2

12.2

5.9

9.1

9.4

Turnover ratios (x)

Asset Turnover (Gross Block)

2.0

1.9

1.4

1.1

Inventory / Sales (days)

103

111

Receivables (days)

Payables (days)

WC cycle (ex-cash) (days)

106

113

Solvency ratios (x)

Net debt to equity

0.3

0.2

Net debt to EBITDA

0.8

0.7

1.4

1.0

Interest Coverage (EBIT / Int.)

14.3

23.3

11.4

4.1

8.6

9.9

June 13, 2016

Ipca Laboratories | 4QFY2016 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

DISCLAIMER

Angel Broking Private Limited (hereinafter referred to as “Angel”) is a registered Member of National Stock Exchange of India Limited,

Bombay Stock Exchange Limited and Metropolitan Stock Exchange of India Limited. It is also registered as a Depository Participant with

CDSL and Portfolio Manager with SEBI. It also has registration with AMFI as a Mutual Fund Distributor. Angel Broking Private Limited is

a registered entity with SEBI for Research Analyst in terms of SEBI (Research Analyst) Regulations, 2014 vide registration number

INH000000164. Angel or its associates has not been debarred/ suspended by SEBI or any other regulatory authority for accessing

/dealing in securities Market. Angel or its associates including its relatives/analyst do not hold any financial interest/beneficial

ownership of more than 1% in the company covered by Analyst. Angel or its associates/analyst has not received any compensation /

managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. Angel/analyst

has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market making activity

of the company covered by Analyst.

This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment

decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should

make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the

companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine

the merits and risks of such an investment.

Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and

trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's

fundamentals.

The information in this document has been printed on the basis of publicly available information, internal data and other reliable

sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this

document is for general guidance only. Angel Broking Pvt. Limited or any of its affiliates/ group companies shall not be in any way

responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report.

Angel Broking Pvt. Limited has not independently verified all the information contained within this document. Accordingly, we cannot

testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document.

While Angel Broking Pvt. Limited endeavors to update on a reasonable basis the information discussed in this material, there may be

regulatory, compliance, or other reasons that prevent us from doing so.

This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced,

redistributed or passed on, directly or indirectly.

Neither Angel Broking Pvt. Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from

or in connection with the use of this information.

Note: Please refer to the important ‘Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the

latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Pvt. Limited and its affiliates may

have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement

Ipca Laboratories

1. Analyst ownership of the stock

2. Angel and its Group companies ownership of the stock

3. Angel and its Group companies' Directors ownership of the stock

4. Broking relationship with company covered

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Based on expected returns

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

over 12 months investment period):

Reduce (-5% to -15%)

Sell (< -15)

June 13, 2016