Good results, promise of better performance and a stronghold in domestic as well as export markets make IPCA Laboratories a good long-term buy.

At current market price of Rs 339, the stock trades at about 13 times its likely FY12 per share earnings. This is at a discount to its peers and leaves ample scope for appreciation.

Regulatory approval for its new manufacturing facility at Indore, improving productivity of its field force and stabilising margins add to the stock's attractiveness. Besides, unlike most peers, it has a manageable debt and doesn't have any ongoing issues with the US FDA over its manufacturing facilities. This is a positive especially because of the export potential opening up in developed markets.

Investors, nonetheless, should consider accumulating the stock in lots, given its midcap categorisation and the volatility in the broad markets.

Burgeoning exports

Export opportunities for Indian generic players have improved considerably over the last couple of years, especially in the US. What's more, the opportunities are expected to get better as more countries open the doors to these low-cost drugs.

IPCA, with an established presence in most export markets — it exports to more than 110 countries and is among the top 10 pharma exporters from India —is well-placed to benefit from this growing demand trend.

For one, its regulatory-compliant manufacturing facilities, without any US FDA overhang, puts it in a position to make the best of the growth potential ahead of it. Second, its new facility at Indore SEZ that is awaiting US FDA approval (expected soon), will help it tap more opportunities.

The management expects the Indore SEZ plant to clock in revenue in the range of Rs 100 crore in FY12 and growing up to Rs 300-Rs 400 crore by FY13 once its fully operational.

Three, the company's in-house strength in API gives it an edge and can help it make deeper inroads in the exports market. Till date, the company has 22 filings in the US, with 11 pending approvals. It further plans to file 10-12 ANDAs every year for the next three years in the US, even as it explores contract development and manufacturing opportunities.

Exports, which make up more than half its total revenues (54 per cent), have grown at an impressive rate, clocking a three-year CAGR of 24 per cent. We expect the momentum to continue in the coming years as well.

Stronghold in domestic arena

IPCA's domestic formulation business, which has grown at 17 per cent CAGR over the last three years, too holds significant potential. This growth momentum could be maintained in the coming years, what with a likely improvement in the productivity of its field agents, shift in focus to high-margin product segments and product launches.

The company added over 600 agents last year, taking the field force count to 5,200 now. While the attrition rate was a bit high during the year, the management expects it to come down from this year. It also expects field agents' productivity to improve hereon.

The company's improved focus on the high-margin pain and CVS segments too will help, as anti-malarials and anti-infectives segments typically see pricing pressures.

Their prices are largely capped as they come under the government's price control ambit. Besides, anti-malarials business is seasonal and dependant on raw material sourcing from China.

IPCA launched 25 products for the year ended March 2011.The company is looking to launch 12-18 products per year from now on.

Over the last three years, IPCA has grown its sales and profits at a compounded rate of about 21 per cent each. In the year-ended March 2011, IPCA delivered 21 per cent sales growth while profits grew by 22 per cent to Rs 1,890 crore and Rs 255 crore respectively.

In terms of segmental growth, the formulation business registered a 28 per cent growth, with a 16 per cent growth in domestic formulations and 41 per cent growth in export formulation. The business makes up about 74 per cent of the total revenues. Its API business, however registered a tepid growth of 4 per cent, due to a considerable increase in captive consumption.

OPM was lower at about 20 per cent, led by higher employee costs (on account of field force addition) and rise in raw material costs. It is expected to expand to 21 per cent, helped by improving sales force productivity and increased capacity utilisation of its new facility at Indore following the US FDA approval.

For the coming year, the management expects to grow its revenues by 18-20 per cent. This seems achievable given the strong growth prospects in the export as well as domestic markets.

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