Initiating Coverage

Institutional Equities

Ipca Laboratories
31 December 2012
Reuters: IPCA.BO; Bloomberg: IPCA IN

Entering The Big League

BUY

With over two-thirds of its business vertically integrated, Ipca Laboratories (ILL)
has created a profitable and sustainable franchise in some of the most competitive
markets where peers are scaling down their exposure. We believe the company
has considerable leverage in its operating model and also as some of its recent
investments start paying off we believe expansion in margins will continue,
thereby driving further improvement in return ratios and triggering a re-rating of
the stock. We have assigned a Buy rating to the stock with a target price of Rs641.
Multiple margin levers: Contrary to consensus expectations of flat margins over FY13FY15E, we believe multiple margin levers can play out for the company and have
factored in a 90bps improvement over FY13E-FY15E. Key drivers are likely to be rising
share of high-margin businesses (domestic formulations, US, institutional and branded
business) in the overall revenue pie from 63% in FY12 to 68% in FY15E, benefit of lowcost artemesinin inventory a key raw material for anti-malarial drugs - and higher
operating leverage as the recently added field force starts contributing meaningfully to
domestic revenue. Further, ILL is a major beneficiary of a weak rupee; as per our
estimate, a 10% depreciation in the rupee against the US dollar leads ILLs revenue to
rise by ~1.8% and operating margin to increase by ~130bps. Early clearance of Indore
SEZ by the US Food and Drug Administration (by around 1HFY14E) would further aid
expansion in margins, although prudently we have assumed a one-year delay.
Strong base business drivers: Corrective action after a backfired sales restructuring
strategy helped the companys domestic business to stage a sharp recovery in 1HFY13
(up 17%) after a tepid FY12 and we believe this is largely sustainable. Further, with the
extension of AMFm (Affordable Medicines Facility for Malaria) programme until
December 2013, investor concerns regarding continuation of donor funding have been
put to rest and we expect its institutional anti-malaria business to continue its growth
momentum with market share ramp-up in arthemeter+lumefantrine (AL) and launch of
amodiaquine+artesunate (AS-AQ) fixed- dose combination. Thus, even after assuming
a delay in US business ramp-up, we expect ILL to post earnings CAGR of 29% over
FY12-FY15E, which combined with margin expansion, is likely to drive RoE/RoCE
up by 359bps/380bps, respectively, over FY12-FY15E.
Valuation: We believe ILLs steep discount (trading 70%-80% below peers and 20%
below its two-year average) is unwarranted and under-estimates the following: a) The
companys strong growth prospects (29% earnings CAGR likely over FY12-FY15E
versus 16% over FY10-FY12), b) Positive free cash flow (FCF) generation (a swing from
negative FCF in FY12), and c) Expansion in RoE/RoCE on increased capacity utilisation.
We believe the discount gap will narrow and so we have valued ILL at 13.5xFY15E EPS
of Rs48 to arrive at a target price of Rs641. Our target multiple is pegged at a 5%
premium to its two-year historical average owing to significant improvement in the
operating profile.

Sector: Pharmaceuticals

Y/E March (Rsmn)

Revenue
YoY (%)
EBITDA
EBITDA (%)
Adj PAT
YoY (%)
Fully DEPS
RoE (%)
RoCE (%)
P/E (x)
EV/EBITDA (x)

FY11
18,998
21.3
3,742
19.7
2,629
28.0
20.9
27.4
20.8
28.8
18.7

FY12
23,587
24.2
5,133
21.8
2,769
5.3
21.9
24.0
24.7
20.6
13.8

FY13E
27,672
17.3
6,309
22.8
3,274
18.2
26.0
23.6
26.0
16.6
11.4

FY14E
31,948
15.5
7,444
23.3
4,732
44.5
37.5
27.5
26.9
13.9
9.7

FY15E
37,810
18.3
8,961
23.7
5,987
26.5
47.5
27.6
28.5
11.0
7.9

CMP: Rs522
Target Price: Rs641
Upside: 23%
Praful Bohra
praful.bohra@nirmalbang.com
+91-22-3926 8175
Key Data
Current Shares O/S (mn)

126.1

Mkt Cap (Rsbn/US$bn)

65.6/1.2

52 Wk H / L (Rs)

537/268

Daily Vol. (3M NSE Avg.)

313,046

Share holding (%)

Q4FY12 Q1FY13 Q2FY13

Promoter

46.0

45.9

45.9

FII

9.8

10.9

12.7

DII

22.2

21.4

21.5

Corporate

10.2

10.0

8.1

General Public

11.9

11.9

11.8

One Year Indexed Stock Performance

200
180
160
140
120
100
80

60
40
Dec-11

Feb-12

Apr-12

Jun-12

IPCA LABS LTD

Aug-12

Oct-12

Dec-12

NSE S&P CNX NIFTY INDEX

Price Performance (%)

Ipca Labs.
Nifty Index
Source: Bloomberg

Source: Company, Nirmal Bang Institutional Equities Research

Please refer to the disclaimer towards the end of the document.

1M

6M

1 Yr

15.1

47.5

87.9

3.2

14.7

25.6

Institutional Equities
Our FY14E/FY15E earnings are 3%/12%, respectively, above consensus
Our FY13E earnings estimates are 13% below consensus projections as we have assumed forex loss
of Rs854mn in our numbers. ILL reported Rs525mn forex loss in 1HFY13 and has outstanding hedge of
around US$105mn, of which around US$53mn (taken at an average of Rs48.5/US$), expire by March 2013.
As per our house call on rupee-US dollar rate of Rs54.5/US$, we believe this will result in an additional
Rs330mn forex loss in 2HFY13E. The remaining US$53mn hedges expire by September 2013 and are taken
at a higher rate of Rs55/US$ and are therefore unlikely to result in significant losses (our assumption for
FY14E is Rs55.5/US$).
Contrary to consensus estimate of flat margins over FY13-FY15E, we believe multiple margin levers can play
out for ILL and so we have factored in a 90bps improvement. Key drivers are rising share of high-margin
businesses (domestic formulations, US,institutional and branded business) in overall revenue pie from 63% in
FY12 to 68% likely in FY15E, the benefit of low-cost artemesinin inventory - a key raw material for antimalarial drug accounting for ~20% of overall raw material costs - to be realised post 3QFY13E and higher
operating leverage with the recently added field force starting contributing meaningfully to domestic revenue.
Further, ILL is a major beneficiary of a weak rupee; as per our estimate, every 10% depreciation in the rupee
against the US dollar leads the companys operating margin to rise by ~130bps. Any early clearance of Indore
SEZ by the USFDA (by around 1HFY14E) would further aid expansion in margins,although out of prudency we
have assumed a one-year delay and factored in the regulators clearance in FY15. Taking into consideration
the impact of the New Pharmaceutical Pricing Policy (NPPP), our FY14E/FY15E earnings are 3%/12%,
respectively, above consensus estimates. We believe consensus estiamtes are yet to reflect the
impact of NPPP and are thus subject to a downward revision.
Exhibit 1: Our estimates versus consensus expectations
NBIE
estimates

(Rsmn)
Revenue
EBITDA
EBITDA margin (%)
PAT

27,672
6,309
22.8
3,274

FY13E
Bloomberg
consensus
estimates
27,853
6,319
22.7
3,749

FY14E
Variation
(%)

NBIE
estimates

(0.6)
(0.2)
11bps
(12.7)

31,948
7,444
23.3
4,732

Bloomberg
consensus
estimates
32,360
7,386
22.8
4,605

Variation
(%)

NBIE
estimates

(1.3)
0.8
48bps
2.7

37,810
8,961
23.7
5,987

FY15E
Bloomberg
consensus
estimates
36,611
8,384
22.9
5,371

Variation
(%)
3.3
6.9
80bps
11.5

Source: Bloomberg, Nirmal Bang Institutional Equities Research

Exhibit 2: Revenue estimates

(Rsmn)
Formulations
Domestic
Exports
Institutional business
Branded business
Russia/CIS
Others
Generic business
Europe
US
Others
API and intermediates
Domestic
Exports
Total

FY12

FY13E

YoY (%)

FY14E

YoY (%)

FY15E

YoY (%)

17,496
7,534
9,961
2,996
2,200
1,052
1,148
4,766
2,929
1,780
57
5,497
1,439
4,058
22,992

20,792
9,018
11,774
3,750
2,860
1,367
1,492
5,164
3,105
1,988
71
6,744
1,316
5,428
27,536

18.8
19.7
18.2
25.2
30.0
30.0
30.0
8.4
6.0
11.7
25.0
22.7
(8.5)
33.8
19.8

24,233
10,201
14,032
4,812
3,688
1,778
1,910
5,532
3,415
2,025
92
7,473
1,382
6,091
31,706

16.6
13.1
19.2
28.3
29.0
30.0
28.0
7.1
10.0
1.8
30.0
10.8
5.0
12.2
15.1

29,381
11,833
17,548
5,293
4,610
2,222
2,388
7,645
3,664
3,866
115
8,133
1,313
6,821
37,514

21.2
16.0
25.1
10.0
25.0
25.0
25.0
38.2
7.3
90.9
25.0
8.8
(5.0)
12.0
18.3

Source:Company, Nirmal Bang Institutional Equities Research

Ipca Laboratories

Institutional Equities
ILL maintains considerable leverage in its operating model as over two-thirds of its business is
vertically integrated - and we believe margins approaching FY14E could witness significant expansion.
Most important of these drivers are: a) A tilt in the business mix - from API (Active Pharmaceutical
Ingredient) to formulations and from low-margin businesses (European generic business, API) to highmargin businesses (domestic formulations, branded products, institutional business), b) Reduction in
artemesinin costs a key raw material used in the manufacture of anti-malarial drugs - once the
existing high-cost inventory depletes (expected by end 3QFY13E), and c) Improvement in productivity
of recently added sales force in domestic market would result in significant operating leverage
(domestic business margin down by around 200bps-250bps post sales force expansion). Any early
clearance of Indore SEZ (annual fixed cost of ~Rs250mn) by the USFDA (by around 1HFY14E) would
further aid margin expansion, but owing to lack of clarity on the timeline we have factored in clearance
only in FY15.

Changing business mix to be major margin driver

Exhibit 3: Margin profile in various geographies/segments
(%)
35

30
25
20
15

10
5
0
Branded Biz

US

Domestic Institutional
formulation
biz

Europe

API - Export

API Domestic

Source: Nirmal Bang Institutional Equities Research Estimates

Over the past two years, ILLs revenue share from relatively low-margin European generic business declined
from 16% to 13%, while the cumulative share of other high-margin businesses (domestic formulations,
institutional, branded product and US business) rose from 53% to 63%. In terms of product mix, the share of
high-margin formulations business moved up from 70% to 76%, with the same being taken away from lowmargin API business. Consequently, the companys gross margin rose by around 250bps during the same
period. We believe this will continue going forward. Excluding Europe, most of the companys business is
backed by own API, owing to which it is able to maintain healthy margins even in highly competitive markets
like the US or in African tender business where others are scaling down or expanding cautiously. To put things
in a proper perspective, its US business margins are close to ~30%; despite a highly competitive portfolio
(more than seven players in almost all products it currently sells in the market) and lack of a front-end set-up.
As per our estimate, cumulative share of domestic formulation, US, institutional and branded business would
rise from 63% in FY12 to 68% in FY15E.

Ipca Laboratories

Institutional Equities
Exhibit 4: Rising share of high-margin businesses in overall revenue pie
(%)

(%)

100

100

90
80

26

31

28

30

26

24

22

24

24

90
80

70

70

60

60

30

37

36

34

58

63

64

65

68

53

FY11

FY12

FY13E

FY14E

FY15E

50

50
40

41

31

46

74

69

72

70

74

76

78

76

76

40
30

20

20

10

10
-

0
FY07

FY08

FY09

FY10
FY11
Formulations

FY12 FY13E
API

FY14E

FY10

FY15E

High margin businesses

Low margin businesses

*High margin businesses refers to cumulative share of domestic formulations, US business, institutional business and branded generics, while low-margin businesses
refer to Europe generics and API business
Source: Company, Nirmal Bang Institutional Equities Research

With domestic growth problems largely behind, recovery is imminent

In FY11/FY12, ILL embarked on a major revamp in its domestic strategy by aggressively expanding its field
force (doubled over the past two years) and further sub-divided its existing divisions (from 8 to 13); in order to
further enhance product focus. However, the strategy backfired due to the following reasons: 1) Performancelinked pay of sales force started declining due to lower number of products (limited to 10-12) in each division,
thereby leading to large-scale attrition, and 2) Existing doctor-medical representative (MR) relationship was
impacted due to reshuffling of sales force. Further, large-scale attrition also clipped new product launch.
Consequently, revenue grew by a moderate 8% in FY12. However, since then the company has taken
corrective steps, rolled back some of its new divisions (from 13 to 12), arrested attrition level by increasing
entry-level pay and increased the launch of new products. As a result, its domestic business staged a
sharp recovery, registering 17% growth in 1HFY13 and the management expects it to grow by ~16%18% in FY13E, assuming moderate growth of 10%-12% in anti-malarial drug sales (seasonal in nature
being linked to the monsoon season).
Exhibit 5: Break-up of domestic formulations

(Nos)
30

Cough
Nutraceuticals, 2
Others, 2
preparations, 4 Dermatology, 3
Neuro psychiatry,
3

Exhibit 6: New products launched

Cardiovascular/
anti-diabetecs, 26

Gastro-intestinal
(GI), 6

25

25
20

15

Anti-bacterials, 7
10

Anti-malarials, 17

NSAID, 30

0
FY08

Source: Company, Nirmal Bang Institutional Equities Research

8
5

FY09

FY10

FY11

FY12

Source: Company, Nirmal Bang Institutional Equities Research

We believe the company can sustain 16% growth on long-term basis

ILLs field force attrition rate at 20%-22% is now at manageable level and sharply below FY12 level of 35%40%. Most of the marketing divisions (excluding anti-bacterial and neuro-psychiatry - together contributing
10% to domestic revenue) have also stabilised and two of its largest therapies - cardiovascular and pain
management, together contributing 56% to domestic sales are growing by over 20%. Assuming a 10% growth
in anti-malarial drug sales largely monsoon-linked we feel ILL can sustain 16% growth on long-term
basis led by: 1) Increase in field force productivity - around 50% of its field force is less than one-year
old and yet to achieve peak productivity, 2) Strong growth in core therapies like pain management and
cardiovascular (growing by over 20%), and 3) Aggressive launch of new products (targeting 10-15
launches per year). We have factored in the impact of NPPP, assuming its implementation from FY14
and expect domestic revenues to show a 16% CAGR over FY12-FY15E.

Ipca Laboratories

Institutional Equities
NPPP to negatively impact overall earnings by ~1%-2%
The NPPP, as it stands today (simple average derived price-ceiling for drugs having over 1% market share),
will impact ILLs domestic revenue negatively by around Rs350mn-Rs400mn or by ~4% and FY14E earnings
by ~1%-2%, as per our assessment (factoring in a 10% price erosion). We believe the new list of essential
medicines (NLEM) would incrementally bring around 40% of the companys drug portfolio under price control.
Among its top 10 brands, we believe Larinate, Perinorm and Azibact (together contributing around 9% to
domestic revenue) will come under the price net. Our estimates have not taken into account any lossmitigating strategy (changes to product portfolio, incentive structure etc) that softens the impact.
Exhibit 7: Domestic growth to sustain in the long run
(Rsmn)

(%)

14,000

30

12,000

25

10,000

20

8,000
15
6,000
10

4,000

2,000
-

0
FY07

FY08

FY09

FY10

FY11

FY12

FY13E

FY14E

FY15E

Source: Company, Nirmal Bang Institutional Equities Research

Well positioned in institutional anti-malaria drug business

ILLs institutional business has been one of its key growth drivers over the past two years (230% CAGR over
FY10-FY12), and we believe it is likely to stay so. The company is one of the only four WHO (World Health
Organisation) pre-qualified suppliers for arthemeter+lumefantrine (AL) combination drug (an artemisinin
combination therapy or ACT-based anti-malarial drug in Africa; market size of ~US$300mn) and one among
the six pre-qualified suppliers for global fund managed AMFm programme. As the market is largely tenderbased/funding-driven, profitability is generally low, but ILL has an inherent advantage over peers, being the
only vertically integrated player in the segment and is highly profitable with margins of around 22%-23%. The
companys market share in AL soared to ~20%, despite entering the market almost around the same time as
Cipla and Ajanta Pharma (two of the other pre-qualified suppliers who cumulatively hold ~20% market share)
within two years of launch by aggressively bidding in tenders and supplying to AMFm as well as other donor
programmes.
ILL is now in the process of launching amodiaquine+artesunate (AS-AQ) fixed-dose combination
(artemesinin-based anti-malarial drug; market size ~US$50mn), its second product in this segment and
has started applying for tenders in select African markets. Currently, Sanofi is the only other player in
the market, and thus it would be a limited-competition product. We expect the product to start
contributing from 4QFY13E/1QFY14E (assuming a three-month or four-month lag for scaling up
validation batches, data generation, and tender approvals) and expect it to contribute ~Rs500mn in
FY14E (assuming a 25% market share).

Ipca Laboratories

Institutional Equities
Exhibit 8: Institutional business: Contribution from various segments

Exhibit 9: Revenue scale-up

(Rsmn)
6,000

Other donor
programmes,
33%

5,000

AMFm, 33%

4,000
3,000
2,000

1,000

Tender-based,
33%

FY10

Source: Company, Nirmal Bang Institutional Equities Research

FY11

FY12

FY13E

FY14E

FY15E

Source: Company, Nirmal Bang Institutional Equities Research

Huge potential for ACTs, but funding problem may restrain long-term growth
As per a recent study funded by UNITAID, sales of pre-qualified ACT are expected to touch over 300mn
treatments in 2012, the highest since the start of the ACT scale-up in 2004. However, the study also forecasts
a sharp decline in public-sector procurement of ACT in 2013, based on current international donor
commitments. While ACT is most effective anti-malarial treatment available, it is also more expensive than
artemesinin-based mono-therapies, and thus a drop in donor funding does not bode well for the industry. ILL
receives around 33% of its revenue from donor programmes other than AMFm and may witness moderation in
revenue from this segment. However, we believe the company will be able to make up for the losses by further
ramping up its market share in AL (the management targets 50% market share over the next three-four years).
Concerns over funding of the AMFm programme have been put to rest with its recent extension until 31
December 2013 by Global Fund, and we thus expect this segment to be stable at least till the end of FY14.
Overall, we expect institutional business (excluding AS-AQ) to grow 15% and AS-AQ launch to add
another Rs500mn to FY14E revenue. Additional funding across sectors - including new funding
commitment for public sector procurement and AMFm is expected to positively influence market
dynamics and lead to an upside.
Exhibit 10: ACT treatment projections
(mn)

2010

2011

2012

2013E

Public sector
Private-subsidised sector
Private-premium sector

182
12
20-25

176
88
23

210
83
10

162
85
10

214-219

287

303

257

Source: UNITAID, Nirmal Bang Institutional Equities Research

Branded business, excluding India, on a strong footing

ILL has a strong focus on expanding its presence in branded generic markets, and with a 550-strong sales
force spread over 40 countries we believe its branded franchise is well set to deliver sustainable long-term
growth. This business (excluding India) has shown a 30% CAGR over FY10-FY12 and is one of the highmargin segments for the company (around 32%-33%, as per our estimate, significantly higher than the
company-level margins). Major markets are Russia/CIS (contributing 47% to revenue) and West Africa
(contributing 20% to revenue). The management expects this segment to grow by over 25% in the long
run and we are also confident about it. We expect this segment to maintain its past momentum and
show a 28% CAGR over FY12-FY15E (1HFY13 growth has been around 39%).

Ipca Laboratories

Institutional Equities
Exhibit 11: Revenue growth in branded generic business
(Rsmn)
5,000
4,500
4,000

3,500
3,000
2,500
2,000
1,500

1,000
500
-

FY10

FY11

FY12

FY13E

FY14E

FY15E

Source: Company, Nirmal Bang Institutional Equities Research

Low-margin businesses likely to grow moderately

We expect the growth in ILLs European business, which contributes around 13% to overall revenue, to remain
muted over the next few years as existing capacities are diverted towards high-margin geographies. UK
accounts for almost 90% of European sales; however, due to higher contribution from matured products
(around 35%-40%), pricing pressure and a saturated market (45-46 products already; 1-2 additional filings
every year), we expect growth in this business to remain muted and post 8% CAGR over FY12-FY15E.
Similarly, the companys API business, contributing 24% to overall revenue, is also likely to post 14%
CAGR, lower than its overall growth, as most of the domestic APIs are used for captive consumption.
Toniras API business, acquired last year, is also facing capacity constraints and is likely to remain flat as ILL
is unable to expand the Ankleshwar plant due to non-allocation of additional power. As per our estimates, both
these businesses have EBITDA margins of around 15%-16%, significantly lower than the companys average.
Exhibit 12: Expect moderate growth in European generic Exhibit 13: as well as API business
business
(Rsmn)
4,000

(Rsmn)
9,000

3,500

8,000
7,000

3,000

6,000

2,500

5,000

2,000

4,000

1,500

3,000

1,000

2,000

500

1,000

FY10

FY11

FY12

FY13E

FY14E

Source: Company, Nirmal Bang Institutional Equities Research

FY15E

FY10

FY11

FY12

FY13E

FY14E

FY15E

Source: Company, Nirmal Bang Institutional Equities Research

Ipca Laboratories

Institutional Equities
Early clearance to Indore SEZ by USFDA would lead to uptick in margins
During the internal quality assurance review in November 2012, ILL noticed a few non-conformances at its
Indore facility- which was recently approved by the USFDA and the company voluntarily reported the same
to the regulator. The company also suspended commercialisation of products (one approval so far) till the
issue gets resolved. The USFDA inspection is now scheduled in February 2013 and the management
expects the problems to get resolved in 1QFY14/2QFY14. As per the management, the problems are
mainly document-related and have been corrected. We believe any delay in clearance to the facility will delay
US business ramp-up, which is already facing capacity constraints. Excluding Indore, its only other USFDAapproved plant at Silvassa is operating at full capacity owing to which the company is unable to scale up
volume and thus US sales have largely remained flat in 1HFY13 in constant currency terms. ILL has filed for
around 29 products (with 13 approvals and 8 launches) and is expected to ramp up filings to 12-15 per year
going forward. Further, it has also applied for site transfers of five products from Silvassa to Indore (approval
put on hold till the problems are resolved). We have factored in clearance for the plant in FY15 and flattish
growth in FY14. However, an early clearance (by around 1HFY14E) would positively impact EBITDA
margin by around 15bps-20bps (ILL is currently incurring ~Rs250mn fixed costs at its Indore facility)
and positively impact our FY14E revenue/earnings estimates by ~2%/4%, respectively.
Exhibit 14: Expect significant ramp-up in US sales post FY14
(Rsmn)
4,500

4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
FY10

FY11

FY12

FY13E

FY14E

FY15E

Source: Company, Nirmal Bang Institutional Equities Research

Benefit of low-cost inventory yet to reflect in financials

ILL is yet to realise the benefit of reduced artemesinin pricesa key raw material used to produce anti-malaria
drugs as it was carrying past high-cost inventory. As per the management, this inventory is likely to deplete
by the end of 3QFY13 and low-cost inventory would start reflecting in the financials from 4QFY13
Artemesinin accounts for ~20% of overall raw material costs and a 10% reduction in its prices will lead
to a 75bps improvement in gross margin, as per our calculations. Artemesinin prices have been very
volatile of late, ranging from US$300/kg in 2009 to US$900/kg in 2011. In FY12, the average cost for ILL was
US$650/kg, which declined to US$450/kg currently.

Outlook on artemesinin prices

As per the study funded by UNITAID, public-sector procurement of ACTs is expected to decline sharply in
2013 based on current international donor commitments. This combined with the transition of AMFm
programme into the next phase raises the spectre of product shortage after FY14. Given the long lead time
associated with ACT production, it may be too late to change capacity decision for 2013 for
artemesinin cultivators, and hence the raw material price may remain at current levels even for a major
part of FY14. However, greater clarity on funding for 2014 ACT procurement is crucial for influencing the next
planting season.
ILL sources around 90% of its annual artemesinin (and its derivatives) requirement from China and Vietnam
and is thus subject to price volatility. However, the company plans to increase its own captive source (currently
meets 10% of its requirement) by cultivating the crop locally. The company is setting up its own artemesinin
extraction plant at Vadodara, Gujarat, which will take another three-four months to get ready. However, it may

Ipca Laboratories

Institutional Equities
still take a long time to cultivate the crop (requires huge farm land, supervision from agriculture scientist teams
etc), and thus in the near term, most of the requirement is likely to be met from China and Vietnam. Over a
three-four year period, the management expects to source 30%-40% of its requirement locally, through own
cultivation. We believe low-cost artemesinin inventory will reflect in FY14 numbers and aid gross margin
improvement. However, we believe artemesinin prices may inch up in FY15E (we have factored in 5%
increase), though additional funding commitments by donors in future may keep the prices low.
Exhibit 15: Average import price for artemesinin in India
Unit price/kg (US$)
800
700
600
500
400
300
200
100
Oct-12

Nov-12

Sep-12

Aug-12

Jul-12

Jun-12

Apr-12

May-12

Mar-12

Jan-12

Feb-12

Dec-11

Oct-11

Nov-11

Sep-11

Aug-11

Jul-11

Jun-11

Apr-11

May-11

Mar-11

Jan-11

Feb-11

Source: UNITAID

Favourable currency movement, operating leverage to boost margins

Over the past two years, ILL nearly doubled its field force from ~2,000 to ~3,800 owing to which its EBITDA
margin expansion was limited to 100bps, despite gross margin improvement of around 250bps. Around 50%
of the current field force is less than one-year old and yet to contribute meaningfully to revenue. With
stabilisation of its marketing division and likely rise in productivity, we expect the companys domestic margins
of 27%-28% to gradually move back to the earlier level of ~30%. Further, the company is also a major
beneficiary of a weak rupee, as nearly 60% of its revenue comes from exports. The company hedges
outstanding receivables for the next one year and had outstanding hedges of US$106mn as of end September
2012. As per our estimate, for every 10% depreciation in the rupee against the US dollar, ILLs revenue
rises ~1.8% and operating margin increases by ~130bps.

Exhibit 16: Forex exchange impact

Forex exposure (US$)
Exports (% of overall sales)
Operating expenses (% of overall sales)
Outstanding hedges (% of overall sales)
Net exposure (% of overall sales)
10% change in US dollarversus Indian rupee
Net impact on overall revenue (%)
Impact on operating margin (bps)

61.0
24.4
18.3
18.3
1.8
~130

Source: Nirmal Bang Institutional Equities Research

Free cash flow (FCF) generation to swing back to positive zone; Return ratios to expand
ILLs FCF generation declined in FY12 owing to higher capex (Rs3.4bn, nearly two times FY11 capex) and
lower profitability (due to forex loss of Rs524mn). However, with improving operating performance, we
expect free cash flow generation to swing back into the positive zone (expect Rs2.1bn FCF generation
over FY13E-FY15E), even as the company continues with its capex drive (21% CAGR in EBIT over
FY12-FY14E as against 16% capex CAGR). With improving profitability and stable leverage, we also
expect significant expansion in RoE - from 24.0% in FY12 to 27.6% in FY15E. We also expect RoCE to
improve from 24.7% to 28.5% in FY15E, as the company benefits from operating leverage through
recently added capacities.

Ipca Laboratories

Institutional Equities
Exhibit 17: Improvement in return ratios

Exhibit 18: FCF to swing back to profitability

(Rsmn)

(%)
30

2,000

28

1,500

26
24

1,000

22
500

20
18

16

FY10

FY11

FY12

FY13E

FY14E

FY15E

(500)

14
12

(1,000)

10
FY10

FY11

FY12

RoE (%)

FY13E

FY14E

FY15E

(1,500)

RoCE (%)

Source: Company, Nirmal Bang Institutional Equities Research

Source: Company, Nirmal Bang Institutional Equities Research

Valuation risk

10

ILL is one of the major beneficiaries of rupee depreciation and any change in the trend will hurt its
profitability. As per our estimate, for every 10% rupee appreciation, the companys operating margin will
decline by ~130bps.

Artemesinin accounts for around 20% of overall raw material costs for ILL, the prices of which have been
very volatile of late. We have assumed stable prices in FY14 (explained earlier in the report) and a 5%
increase thereafter. Any sharp swing in prices could impact earnings. As per our estimate, a 10%
increase in prices will lead to a 75bps decline in gross margin.

Institutional anti-malaria business, which accounts for 13% of overall sales, is largely dependent on donor
funding from agencies like World Health Organisation (WHO), Global Fund, UNITAID etc. Given the
decline in donor commitment, we expect the growth rate to moderate for this segment going forward.
However, we believe ILL, owing to its vertically integrated portfolio, is better positioned than peers in case
of a slowdown.

Ipca Laboratories

Institutional Equities
Enters the big league; valuation discount to narrow
ILLs share price has been very volatile it declined by around 30% between July-October 2011 and then
nearly doubled by September 2012, regaining lost ground. We believe the earlier fall was the result of its
domestic strategy backfiring, which resulted in a muted 8% growth in FY12. However, with corrective action in
place (explained above), domestic business rebounded with a 17% growth in 1HFY13, which coupled with
strong ramp-up in its institutional anti-malaria business led to a sharp re-rating in the stocks multiple from 10x
to 15x. Currently, the stock trades at 11xFY15E EPS, at a steep discount of ~70%-80% to peers and
20% below its two-year average of 13x.
We believe the stock deserves to trade at a premium to its historical valuation owing to the following
reasons: a) Strong growth prospects (29% earnings CAGR likely over FY12-FY15E versus 16% over
FY10-FY12) b) Free cash flow turning positive, and c) Expansion in RoE/RoCE by 359bps/380bps,
respectively, likely over FY12-FY15E. Historically, the stock always traded at a discount to peers owing
to its lower scale of operations. However, with strong operating growth over the next few years, we
believe the stock is fast graduating to the Rs5bn profit club, which will trigger a re-rating of its PE
multiple, as seen in the case of other companies like Lupin and Cadila Healthcare.
We have valued ILL at 13.5xFY15E EPS of Rs48 to arrive at a target price of Rs641. Our target price is
pegged at a 5% premium to its two-year average multiple and at a 30% discount to the sectors average
multiple (due to relatively smaller size of operations).
Exhibit 19: PE Graph

Exhibit 20: P/BV Graph

(x)
4.0

(x)
18.0
16.0

3.5

2 year median

14.0

2 year median

3.0

12.0

2.5

5 year median

10.0

5 year median

2.0

8.0

Source: Company, Nirmal Bang Institutional Equities Research

Dec-12

Jun-12

Sep-12

Mar-12

Dec-11

Jun-11

Sep-11

Mar-11

Dec-10

Jun-10

Sep-10

Mar-10

Dec-09

Jun-09

Sep-09

Mar-09

Dec-08

Jun-08

Sep-08

Dec-07

Dec-12

Jun-12

Sep-12

Mar-12

Dec-11

Jun-11

Sep-11

Mar-11

Dec-10

Jun-10

Sep-10

Mar-10

Dec-09

Jun-09

Sep-09

Mar-09

Dec-08

Jun-08

0.0
Sep-08

0.5

0.0

Mar-08

1.0

2.0

Dec-07

4.0

Mar-08

1.5

6.0

Source: Bloomberg, Nirmal Bang Institutional Equities Research

Exhibit 21: Peer comparison

Peer valuation
(Bloomberg estimates)
Ipca Labs*
Torrent Pharmaceuticals
Cadila Healthcare
Unichem
Glenmark Pharmaceuticals

Mkt. Cap
(Rsbn)
65.7
60.1
185.5
21.8
144.8

Earnings CAGR
(FY12-15E) (%)
29.3
24.5
20.5
30.5
28.1

RoE (%)
FY15E
27.6
26.4
26.6
18.4
21.4

P/E (x)
FY15E
11.0
10.9
16.3
10.4
16.6

P/BV (x)
FY15E
2.7
2.6
4.0
1.8
3.3

*Our estimates
Source: Bloomberg, Nirmal Bang Institutional Equities Research

11

Ipca Laboratories

Institutional Equities
Exhibit 22: Cadila Healthcares PE

Exhibit 23: Lupins PE

(x)
30

(x)
25

Reached Rs5bn in
earnings

20

25

Reached Rs5bn in
profits

20

15
15

10

Dec-12

Jun-12

Dec-11

Jun-11

Dec-10

Jun-10

Dec-09

Jun-09

Dec-08

Dec-07

Dec-12

Jun-12

Dec-11

Jun-11

Dec-10

Jun-10

Dec-09

Jun-09

Dec-08

Jun-08

Dec-07

Jun-08

10

Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 24: Quarterly performance

Quarterly performance (Rsmn)
Revenue
Other operating income
Total income
Gross profit
Gross margin (%)
EBITDA
EBITDA margin (%)
Other income
Translation gains/(loss)
Interest costs
Depreciation
PBT
Tax
Tax rate (%)
Reported PAT

1QFY12
5,263
36
5,299
3,195
60.3
943
17.8
27
91
74
154
832
215
25.9
617

2QFY12
6,180
55
6,235
3,800
61.0
1,580
25.3
26
(272)
118
176
1,042
262
25.2
780

3QFY12
6,018
131
6,148
3,807
61.9
1,513
24.6
39
(399)
108
181
864
225
26.0
639

4QFY12
5,531
80
5,611
3,419
60.9
1,117
19.9
37
51
111
142
952
186
19.5
766

1QFY13
6,303
42
6,344
3,887
61.3
1,418
22.3
30
(589)
95
199
565
135
23.9
430

2QFY13
7,575
138
7,713
4,603
59.7
1,788
23.2
92
64
89
209
1,646
395
24.0
1,251

Source: Company, Nirmal Bang Institutional Equities Research

12

Ipca Laboratories

Institutional Equities
Financials
Exhibit 25: Income statement
Y/E March (Rsmn)
Net sales
% growth
Raw material costs
Staff costs
Other expenses
Total expenses
EBITDA
% growth
EBITDA margin (%)
Other income
Forex gains/(losses)
Interest costs
Gross profit
% growth
Depreciation
Profit before tax
% growth
Tax
Effective tax rate (%)
Add: Profit from associates
Net profit
% growth
Adj. profit excl. forex impact
% growth
Reported EPS (Rs)
% growth
Adjusted EPS (Rs)
% growth
DPS (Rs)
Payout (%)

Exhibit 26:Cash flow

FY11

FY12

FY13E

FY14E

FY15E

18,998
21.3
(7,764)
(2,663)
(4,829)
(15,256)
3,742
15.1
19.7
84
434
(294)
3,966
26.7
(558)
3,408
28.0
(784)
23.0
4
2,629
28.0
2,281
13.9
20.9
27.5
18.1
13.4
3.2
18

23,587
24.2
(9,131)
(3,355)
(5,968)
(18,454)
5,133
37.2
21.8
117
(524)
(413)
4,313
8.7
(671)
3,642
6.8
(881)
24.2
9
2,769
5.3
3,188
39.8
21.9
5.0
25.4
39.8
3.2
17

27,672
17.3
(10,875)
(3,846)
(6,641)
(21,363)
6,309
22.9
22.8
122
(854)
(452)
5,126
18.9
(828)
4,299
18.0
(1,032)
24.0
7
3,274
18.2
3,957
24.1
26.0
18.2
31.4
23.7
3.8
17

31,948
15.5
(12,396)
(4,441)
(7,668)
(24,504)
7,444
18.0
23.3
84
(352)
7,176
40.0
(960)
6,216
44.6
(1,492)
24.0
7
4,732
44.5
4,732
19.6
37.5
44.5
37.5
19.6
5.4
17

37,810
18.3
(14,897)
(5,256)
(8,696)
(28,849)
8,961
20.4
23.7
175
(277)
8,859
23.4
(1,093)
7,766
24.9
(1,786)
23.0
7
5,987
26.5
5,987
26.5
47.5
26.5
47.5
26.5
6.9
17

Y/E March (Rsmn)

FY11

FY12

FY13E

FY14E

EBIT

3,184

4,462

5,482

6,484

7,868

(70)

(396)

(1,661)

(1,416)

(1,936)
5,932

(Inc.)/dec in working capital

Cash flow from operations

FY15E

3,114

4,066

3,821

5,068

Other income

518

(408)

(731)

84

175

Depreciation

558

671

828

960

1,093

Interest paid (-)

(294)

(413)

(452)

(352)

(277)

Tax paid (-)

(784)

(881)

(1,032)

(1,492)

(1,786)

Dividends paid (-)

(439)

(468)

(518)

(704)

(929)

2,673

2,568

1,916

3,564

4,208

Minority Interest (-)

Net cash from operations
Capital expenditure (-)

(1,821)

(3,486)

(2,500)

(2,500)

(2,500)

Net cash after capex

Inc./(dec.) in short-term
borrowing
Inc./(dec.) in long-term
borrowing
Inc./(dec.) in preference capital

852

(918)

(584)

1,064

1,708

297

(620)

459

1,329

445

(1,048)

(790)

Inc./(dec.) in borrowings

757

709

445

(1,048)

(790)

(Inc.)/dec. in investments

(83)

68

89

(500)

675

777

534

(1,048)

(1,290)

(1,531)

159

(18)

(4)

(4)

Opening cash

108

104

122

53

65

Closing cash

104

122

53

65

479

(4)

18

(69)

12

414

Equity issue/(buyback)
Cash from financial activities
Others

Change in cash

Source: Company, Nirmal Bang Institutional Equities Research

Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 27: Balance Sheet

Y/E March (Rsmn)
Equity
Reserves
Net worth
Short-term loans
Long-term loans
Total loans
Deferred tax liability
Minority interest
Liabilities
Gross block
Depreciation
Net block
Capital work-in-progress
Long-term investments
Inventories
Debtors
Cash
Other current assets
Total current assets
Creditors
Other current liabilities
Total current liabilities
Net current assets
Total assets

Exhibit 28:Key Ratios

FY11

FY12

FY13E

FY14E

FY15E

Y/E March

251
10,265
10,516
2,634
2,668
5,302
807
(7)
16,617
9,868
2,810
7,058
882
408
4,664
3,672
104
2,330
10,770
1,786
714
2,500
8,270
16,617

252
12,288
12,540
2,014
3,997
6,011
932
19,482
13,351
3,849
9,501
885
341
6,699
3,491
122
2,235
12,547
2,369
1,422
3,791
8,755
19,482

252
15,010
15,263
2,014
4,442
6,456
906
22,624
15,851
4,677
11,174
885
252
8,025
4,203
53
2,235
14,517
3,219
983
4,202
10,314
22,624

252
18,945
19,197
2,014
3,394
5,408
895
25,500
18,351
5,637
12,714
885
252
9,265
4,853
65
2,235
16,418
3,692
1,076
4,769
11,650
25,500

252
23,923
24,176
2,014
2,604
4,618
883
29,677
20,851
6,729
14,121
885
752
10,964
5,743
479
2,236
19,423
4,347
1,157
5,504
13,919
29,677

Per share (Rs)

FY11

FY12

FY13E

FY14E

FY15E

Reported EPS

20.9

21.9

26.0

37.5

47.5

Adjusted EPS

18.1

25.4

31.4

37.5

47.5

3.2

3.2

3.8

5.4

6.9

BV/share

83.7

99.4

121.0

152.2

191.6

Dividend payout (%)

17.8

16.9

16.8

16.8

16.8

RoE (%)

27.4

24.0

23.6

27.5

27.6

RoCE (%)

20.8

24.7

26.0

26.9

28.5

P/E (x)

28.8

20.6

16.6

13.9

11.0

P/BV (x)

6.2

5.3

4.3

3.4

2.7

EV/Net Sales (x)

3.7

3.0

2.6

2.2

1.9

EV/EBITDA (x)

18.7

13.8

11.4

9.7

7.9

DPS

Performance ratios

Valuation ratios

Efficiency ratios
Fixed asset turnover (x)

1.8

1.7

1.7

1.7

1.7

Working capital/sales (x)

0.4

0.4

0.4

0.4

0.4

Receivable days

89

54

55

55

55

Inventory days

90

104

106

106

106

Payable days

32

47

55

55

55

Source: Company, Nirmal Bang Institutional Equities Research

Source: Company, Nirmal Bang Institutional Equities Research

13

Ipca Laboratories

Institutional Equities
Disclaimer
Stock Ratings Absolute Returns
BUY > 15%
HOLD 0-15%
SELL < 0%
This report is published by Nirmal Bangs Institutional Equities Research desk. Nirmal Bang has other business units with independent research teams separated by
Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. This report is for the personal information of the authorised
recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information
for the clients of Nirmal Bang Equities Pvt. Ltd., a division of Nirmal Bang, and should not be construed as an offer or solicitation of an offer to buy/sell any securities.
We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical
information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be
subject to change from time to time without notice.
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14

Ipca Laboratories