How Ipca Labs Is Scripting A Turnaround

Ipca Laboratories Ltd. is showing signs of a recovery as its revenue in the first nine months of the fiscal grew at the fastest pace in five years even as it battles a slowdown in Africa and looks to resolve the U.S. regulatory issues.

Since 2015, the Mumbai-based drugmaker, with nearly half its sales coming from overseas, has been trying to diversify and increase focus on the domestic formulations over pharma ingredients, and is also looking at alternative markets.

Shares of the drugmaker have returned more than 10 percent gains so far this year and is trading at a record, having more than doubled from the August 2017 low. The rebound in the last two years came after the stock tumbled 55 percent since its all-time peak.

Ipca Labs was clocking a revenue growth of about 20 percent till the year ended March 2013, Bloomberg data and exchange filings show. The top line growth slowed and a contraction followed because of an import alert for three of its plants, barring exports to the U.S. Then Switzerland-based Global Fund terminated its contract to supply anti-malarial drug in the African market.

But over the last few quarters, the company’s financials have shown signs of a recovery. And the management is optimistic that it will improve.

Management Outlook

• In a conference call after the third-quarter earnings, AK Jain, joint managing director at Ipca, said the company expects a 14-15 percent top line growth for the India business in the fourth quarter of 2018-19.
• It expects the revenue to grow 12-13 percent in the next three financial years.
• Without specifying the exact timeline, the management said it targets the operating margin to return to the levels of 24-25 percent—seen before the U.S. Food and Drug Administration alert—in the near to medium term.
• Multiple brokerages citing discussions with the management said the company sees its domestic formulations business to grow 13-15 percent in the next two fiscals, driving the growth.

The company has yet to respond to BloombergQuint’s emailed queries on its strategy and plans.

According to management commentary and discussions with brokerages, here’s what it’s doing to achieve its targets:

Remedial Measures For Plants

Ipca Labs has completed most of the remedial measures for its Pithampur, Madhya Pradesh and Silvassa plants, the management said in its third-quarter earnings call. For the Ratlam, Madhya Pradesh plant, it will be completed by March. It’s looking to invite the U.S. FDA inspectors for clearance in the next financial year. If the facilities are cleared, the company expects it could receive approval for 15-16 products within a short span.

• Pithampur, Madhya Pradesh: March 24, 2015
• Silvasa: March 24, 2015
• Ratlam, Madhya Pradesh: Jan. 22, 2015

India Business

The company is betting on the pain-management vertical—which contributes 42 percent to its domestic sales.

It’s focusing on clinical research and scientific detailing to build large brands in India, Abhishek Sharma, analyst at IIFL, said in a note. Higher sales in India will help it boost overall margins by 150-200 basis points a year in the next two fiscals, the brokerage said.

Param Desai of Elara Capital sees the company posting a 13 percent annualised growth in revenue over FY19-21, led by key cardiovascular, central nervous system, derma and anti-bacterial treatments.

Export Business

Ipca expects international formulation business to grow 10- 15 percent on a constant-currency basis. The company exports generics to Russia and CIS (Commonwealth of Independent States), besides South East Asia as and Latin America.

Institutional Tender Business

The management, in the earnings call, reiterated its Rs 180-crore guidance for the vertical and expects close to Rs 300 crore in the next financial year. It’s optimism stems from increased growth on the back of new injectables and dispersible tablets. Any procurement by the Global Fund in Africa can further lift the business in the next financial year, IIFL said.

Active Pharma Ingredients

Ipca expects the vertical to grow 20 percent in next fiscal. The growth will come mainly from a group of sartans (to control high blood pressure), specifically losartan, from exports to the markets outside the U.S. and European Union, said Surajit Pal of Prabhudas Lilladhar.

Brokerage View

IIFL

• It forecasts 24 percent annualised earnings growth over FY19-21.
• That will be driven by 14 percent growth in the India business, likely pick-up in the institutional business in the next financial year and a 10-15 percent growth in the exports outside U.S.

Elara Capital

• The domestic business will post a 13 percent annualised growth over FY19-21.
• Institutional business revenue should clock sales of Rs 270-300-crore in FY21, led by resumption of global fund orders, scaling up of dispersible tablet and injection launch.
• Resumption of broad-based revenue growth of 13 percent over FY18-21 (except the U.S.) after a flat FY14-18 period should result in higher operating leverage.

Prabhudas Lilladher

• It expects a 15 percent annualised growth in revenue in FY18-21E with a turnaround in European Union generics and partial success in U.S. generics.

Nomura

• Expect Ipca to deliver a 43 percent annualised earnings growth over FY18-21 driven by a steady growth in India, higher exports and reduction in remediation expenses.