Strong domestic and export growth to drive Ipca Laboratories' earnings

Shares of Ipca Laboratories, which scaled to an all-time high last fortnight, continue to trade firm despite the company receiving OIA (official action initiated) status for its Silvassa plant recently. An OIA status issued by US FDA post inspection of a manufacturing facility indicates that the plant is considered to be in an unacceptable state of compliance with regards to current good manufacturing practice. The OIA status for the plant, which already remains under import alert by the FDA, now means that clearance may be further delayed.

Interestingly, even as Ipca’s ordeal with the FDA has continued for long and supplies have remained impacted, the stock continues to gain led by revenue traction in the domestic arena and ramp up of exports (API and international tenders) business. Analysts at Emkay Global, post FDA observations, say that though clearance of Silvassa plant is unlikely by FY21, their growth thesis remains unchanged and FY21 earnings did not factor in any upsides from the US business.

Ipca’s first half performance holds testimony to its robust growth with India business growing in mid-teens. Exports continue to be driven by the Institutional and Active Pharmaceutical Ingredients (API) supplies. Domestic formulations (45 per cent of overall) have grown by 14.5 per cent during first half of FY20, driven by price increase of four per cent and healthy volume growth of 11 per cent. The pain segment, about half of domestic revenues, is growing at over 20 per cent.

The API exports business (a fifth of overall) grew at a faster pace of 42 per cent in constant currency terms during first half led by incremental sales for hypertension control drug Sartan API. The road ahead also looks good with the management expecting 20 per cent growth in second half, which would imply export API growth to be more than 30 per cent, say analysts. 

Prospects for formulation exports (28 per cent of revenue) also remain strong on the back of firm order flows. Institutional business grew 40.3 per cent year-on-year in September quarter to Rs 615 million and the management has guided for up to Rs 220 crore revenue in FY20 and Rs 300 crore revenue in FY21, having received orders from Global Fund along with other tenders. 

Analysts at Anand Rathi estimate domestic revenues to grow 13 per cent annually over FY19-21 and expect institutional revenues to grow 33 per cent annually during this period. Even IIFL analysts have recently upgraded their FY20/21 estimates by up to 7 per cent.

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