Strong growth in the domestic formulations business, more than half of its turnover from exports and good cash flows, make IPCA a good buy
Moneylife Digital Team
Ipca Laboratories was originally promoted by a group of medical professionals and businessmen and was incorporated as ‘The Indian Pharmaceutical Combine Association’ in October 1949. The current management took over in November 1975 when the total turnover of the company was Rs54 lakh only. Ipca manufactures over 150 formulations representing various therapeutic segments. The company also manufactures formulations for many leading companies in the European Union under supply agreements.
Ipca was a pre-eminent player in the anti-malaria segment for a long time. Over the years, it has grown to be one of the largest manufacturers and is among the top 10 exporters of active pharmaceutical ingredients (APIs) since they are approved by leading drug regulatory authorities of the US, the UK, South Africa, Brazil and Australia. With operations in over 100 countries, formulation exports account for more than 57% of the company’s turnover.
The global pharmaceutical market is estimated at $773 billion and is growing at a rate of about 4.8%pa. The US, Japan and Europe constitute about 86% of the market and are growing at a slower annual rate of about 4% mainly due to loss of exclusivity, fewer product approvals and price erosion due to competition from (off-patent) generic drugs.
In contrast, the pharmaceutical markets of emerging economies like India, Brazil, Mexico, etc, are growing at a much faster rate of 12%-16%pa driven by improved per capita income, increased access and rising awareness about modern medicine and strengthening of healthcare infrastructure.
Though India has a share of less than 3% (by value) in the world pharmaceutical market, the country is today recognised as one of the leading global players with a large number of drug master files and dossier registrations for APIs and formulations with manufacturing facilities approved by regulatory authorities of various developed countries. Indian companies are focusing on global generic and API business, R&D activities and contract research and manufacturing alliances with multinational companies. India is also fast emerging as a preferred pharmaceuticals manufacturing location.
Several multi-billion dollar drugs going off patent over the next few years and increasing use of pharmaceutical generics in developed markets will provide attractive growth opportunities to generics manufacturers. Thus, the Indian pharmaceutical industry is poised for strong growth in the coming years. Ipca Laboratories ended FY09-10 with a net total income of Rs1,558.95 crore as against Rs1,275.57 crore in the previous fiscal, a growth of 22%. The company’s focus on the formulations business resulted in an increase in formulation sales to Rs1,086.99 crore, a growth of 19% over Rs913.76 crore in the corresponding previous period. The API business also increased by 30% to Rs458.56 crore. Net profit was Rs209.19 crore for the financial year ended 31 March 2010 compared to Rs91.22 crore in the previous fiscal, a leap of 129%.
Revenue growth for the December 2010 quarter was 18% at Rs466.36 crore compared to Rs395.70 crore in the corresponding previous period. Operating profit for the third quarter of the current fiscal was Rs90.99 crore, up 3% from Rs88.66 crore in the year-ago period. Operating profit margin in the third quarter was a decent 20%, but down from 22% in the corresponding previous period, displaying the impact of rising costs.
The company’s average revenue and operating profit growth for the past five quarters stood at 19% and 46%, respectively. Based on annualised results for the December quarter, its market-cap to revenue is 2.03 and market-cap to operating profit is 10.39 times. Return on net worth for the year ended March 2010 was 24%. Ipca declared a total dividend of 140% for the last fiscal, which includes two interim dividends and final dividend of 50%. The stock is worth buying at the current price of Rs300.