Ipca Laboratories’ focus on branded formulations and expansion into the US market will help it post strong growth rates over the next two years.
While the healthcare index has been quite resilient in the face of the equity meltdown dropping 28 per cent to Sensex’s 55 per cent over the last one year, some healthcare stocks have fallen quite sharply offering an attractive opportunity for investors. Once such scrip is Mumbai-based Ipca Laboratories, which despite registering robust rates and having strong cash flows lost about half its value since its peak in January this year and is trading at Rs 360 levels.
The company which gets about three quarters of its revenues from formulation sales (APIs make the rest), exports its products, largely in the high margin lifestyle segment (cardiovascular, anti-diabetics etc) to over 100 countries across the world and is preparing to expand its presence in the US market.
Exports
While Europe constitutes nearly half of the company’s exports, the company is now eyeing the US market especially in the formulations segment in a big way. The company has two tie-ups---one each with Ranbaxy and US-based generic pharma company, Heritage Pharma to distribute its formulations. While Ranbaxy has recently launched Metoclopramide tablets with annual sales of $27 million, Heritage introduced Propranolol tablets (annual sales $25 million). Ipca Labs’ executive director A K Jain says that the strategy of seeking out more partners will continue and the company will not establish a distribution network due to high costs and the need for a large generic portfolio (at least 100 ANDAs) to make it a viable proposition.
The arrangements are on profit sharing basis which includes the cost of manufacturing and marketing of the product. The company’s formulations exports to the US started in September and the company expects sales of about Rs 15 crore for FY09. Currently, formulation exports are being carried out from a smaller FDA-approved unit at Silvassa (the company has two units there) which is capable of manufacturing 9 products and the maximum exports turnover from this would be about Rs 40 crore.
Once its bigger units in Silvassa and at the SEZ unit in Indore get FDA-approved, the company expects to scale up to 40 products and earn a sizeable chunk of revenue over the next two-three years. While 28 products are under development, the company has applied for ANDA approval for 11 products. Overall, the company currently manufactures 65 APIs and two years down the line expects this number to move to about 100.
Domestic market
The company’s top brands in the country include the anti-malarial drug Lariago with sales of Rs 45 crore, Zerodol range (Rs 42 crore) (pain management) and Perinom, a drug to treat nausea (Rs 25 crore). While the company is planning to launch only one new drug per marketing division (it has eight divisions), its focus will be on brand building and consolidation rather than launching a larger basket of products. Driven by sales in lifestyle drugs which account for 30 per cent of the company’s business, IPCA expects to grow its domestic formulation business by about 17-18 per cent over the next two to three years.
| ATTRACTIVE VALUATIONS | |||
| Rs crore | FY08 | FY09E | FY10E |
| Net Sales | 1,082 | 1,299 | 1,559 |
| EBIDTA | 229 | 292 | 359 |
| Net Profit | 141 | 169 | 203 |
| P/E (x) | 6.4 | 5 | 5 |
| E: Estimates | |||
Expansions
The company plans to invest about Rs 75 crore in the current fiscal. Major investments include upgradations of API facilities in Ratlam at a cost of Rs 20-Rs 25 crore and an equal amount at the formulation plant at Athal, Silvassa (used for exports to Europe). Imported packing lines will be installed at the Athal facility and will help the company triple capacities at the plant. The company has lined up a further Rs 100 crore investment for FY10 which includes the setting up of its Sikkim plant and the expansion at its SEZ unit in Indore. The expansions will be funded by small loans and internal accruals, which include annual cash profits in excess of about Rs 170 crore.
Investment rationale
In addition to utilising its internal accruals for expansions, the company plans to buy back shares up to Rs 60 crore at a price not exceeding Rs 600. The buyback plan allows the company to take advantage of the low prices and is expected to boost investor sentiment.
On the operational front, the company has had to grapple with high raw material (RM) costs due to supply issues in China in the last two quarters. However, better product mix and higher sales in APIs as well as branded formulations has helped bring down the RM to sales ratio to 35 per cent (40 per cent) and improve EBIDTA margins by 400 bps y-o-y to about 24 per cent in the September quarter.
Of its products, branded formulations fetch the highest EBIDTA margins of about 27-28 per cent while generics bring the lowest at 15 per cent with APIs contributing in line with the company’s overall margins of 22-23 per cent. Going ahead, higher branded formulation sales in the lifestyle segment is expected to help the company grow its sales by 20 per cent in the current fiscal. Its growth plans will get a boost once its facilities are approved by the US FDA and the company introduces a larger basket of formulations in the world’s largest healthcare market.
At Rs 360, the stock trades at just under 4.5 times its FY10 earnings and would fetch around 30 per cent returns over the next 15 months.
