Domestic growth remains a highlight in IPCA Laboratories' Q4 show

14-17% top line growth estimate indicates 20% rise in earnings

The Ipca Laboratories stock, which has been an outperformer since early 2019, has become a favourite for investors, given the export opportunities for chloroquine and hydroxychloroquine (HCQ) — both used in Covid-19 treatment.

The stock, which had gained 28.5 per cent since its March lows and has risen 40 per cent in 2020 so far, has corrected by over 2 per cent in two sessions, after its results on Tuesday. 

While net profit in the March quarter was lower than expectations, the US FDA’s revocation of emergency use authorisation for chloroquine and HCQ has softened sentiment. However, the management’s guidance of 14-17 per cent revenue growth and a 150-basis point (bp) improvement in margin for FY21, are positives. Ipca’s FY20 revenues grew 23 per cent, because of which this guidance, on a high base, is impressive.

Ranvir Singh, analyst at Sunidhi Securities, says the same should translate to a 20 per cent-plus growth in earnings in FY21, adding that the stock — trading at about 24x its FY21 estimated earnings — still has an upside. 

Since the company had received clearance for supplying HCQ to the US from its plants only during the second fortnight of March, there were no significant sales to the US during FY20, and growth was led by other geographies. Therefore, such supplies to the US should reflect in FY21 and aid earnings.

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Further, while the US FDA may have revoked emergency use of HCQ, use of this drug in other countries is likely to remain high, thereby benefitting Ipca —is its largest supplier — say analysts. 

Meanwhile, its Q4 performance did not meet expectations, on account of lower-than-anticipated export of formulations, as well as a 43 per cent increase in depreciation charges coupled with impairment of intangible assets of Rs 27.64 crore of a US subsidiary. 

Consequently, profit before tax fell 12 per cent year-on-year (YoY). Revenue at Rs 1,073 crore was in line with consensus estimate of Rs 1,077 crore, and operating profit grew 30 per cent YoY, led by superior product mix. Analysts said there was nothing alarming regarding the Q4 results.

On the contrary, domestic formulations (40 per cent of revenue) grew 21 per cent, compensating for the 11 per cent slower growth in export formulations (26 per cent of revenue). Export formulations were impacted by logistical issues due to Covid-19, but should normalise soon. Outlook for domestic business remains robust, with acute segments — led by pain relief drugs — continuing to grow well.

In this backdrop, most analysts are positive on Ipca. Motilal Oswal Financial Services’ target price of Rs 1,885 (post results) indicates good upside for the stock, trading now at Rs 1,563.