November 06, 2015 / 17:01 IST
Ipca Laboratories’ Q2FY16 operational performance was weak (revenue, EBITDA, PAT down 4%, 34%, 81%) due to: (i) business disruption owing to regulatory issues; and (ii) flat India revenue on account of weak anti-malarial and anti-bacterial therapies season. Structural recovery of US business looks uncertain in the near to medium term as it entirely hinges on further action by USFDA, nature and timeline of which is unpredictable. Additionally, split of management’s bandwidth between various business/regulatory challenges could slowdown recovery. Maintain ‘REDUCE’ with target price of INR 565.
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Earnings weak, yet againWhile India sales (45% of total) were flat YoY, export formulations (31% of total) fell 31% YoY. Currency headwinds took a heavy toll on international branded generics business (18% of total) in CIS, West Africa and EU. Ipca has taken back 20 ANDAs from a partner, in lieu of which it has taken a INR100mn charge. The company has maintained its FY16 revenue growth guidance of 7-8% (excluding any upside from Global Fund business) and tweaked down EBITDA margin guidance to 16% (earlier 17-18%). It expects shipments of exempted products to US to begin in November 2015 and is eyeing ~30% market share (HCQS, Furosemide, among others) in a year’s time.
Tail spin mode continuesManagement guidance implies revenue growth in excess of 30% and EBITDA margin of ~20% for H2FY16. While remediation efforts are on and Ipca continues to send updates to FDA, it has not yet heard back from the FDA. Additionally, Global Fund (~70% of institutional malaria) has not yet signed off on compliance issues despite WHO clearance.
Outlook and valuations: Multiple challenges; maintain ‘REDUCE’We believe US business recovery is uncertain and challenging given its multiple plants under import alert. Investments towards upgrading facilities and higher remediation/operational costs will keep the profitability and return ratios suppressed (FY14/15 RoCE: 28%/14%). We maintain ‘REDUCE/Sector Underperformer’ with a target price of INR 565 (14XFY17 EPS of INR 39).For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. 
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