Ipca on recovery path over FDA clearance, growth in Africa tender business

Ipca Laboratories' stock is an outperformer in the pharmaceutical sector, gaining over 60 per cent in the last six months. The street's confidence in the stock has increased because its plant remediation process, which began in the 2015, is coming to an end. The company has also been reinstated as a supplier for the Africa tender business. 

The firm, whose annual revenue has stagnated at Rs 30 billion over the last three years, after the US Food and Drug Administration (US FDA) ban in 2015, is expected to witness a revival of its top line. Signs of improvement were visible in the December quarter, which saw 15 per cent year-on-year growth in the company's India formulations. 

The company expects to achieve 14-16 per cent growth in its domestic business, led by a declining contribution from its low-growth anti-malarial portfolio (8 per cent currently from 12 per cent in 2017). It also expected a 3 per cent price hike in its drugs facing price control. This would help the domestic business (half of consolidated revenues) post strong growth, said analysts at Equirus Securities.

The biggest trigger for the stock is the clearance of the plants by the US FDA, which might re-inspect its facilities. Unlike its peers, Ipca completed exhaustive remediation work, including re-modelling of facilities, and deployed three consultants, said Surajit Pal of Prabhudas Lilladher. With a co-operative approach of the new commissioner and the FDA's track-record of imposing easier norms for oral and active pharmaceutical ingredient plants, Pal expects approval of the facilities in 2018-19.

While higher sales in the US market, after resolution of regulatory issues, will improve revenue, it will also help utilisation levels of Ipca's plants. With higher US revenues and tender business orders, operating leverage will come into play, improving margins, operating profit and net profit. While margins are expected to improve by 500 basis points to over 18 per cent in 2020 from an estimated 13 per cent in 2018, net profit is expected to grow by 40-60 per cent in 2019 and 2020.  The stock was trading at 17 times its 2020 earnings estimates. 

Due to uncertainty over various issues, investors were waiting for a clear signal before buying the stock, as adverse FDA action on its plants could delay the recovery process.

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