| Summary of Contents STOCK IDEA Ipca Laboratories
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs875
Current market price: Rs660 Vertical integration to change fortunes Key points - Domestic formulation business to outpace industry growth: Driven by steady new launches, a strong therapy-focused field force and good brand building abilities, Ipca Laboratories' (Ipca) domestic formulation business has been growing at above industry growth rates. With an enhanced focus towards chronic therapies and aggressive new launches, Ipca's domestic formulation business would continue to grow at 16-18% during FY2007-09.
- Strong thrust on exports: With steady performance on the domestic front, Ipca is increasingly focusing on its export business, which generates 30% of its total revenues. Driven by aggressive brand promotion in the emerging economies, a revival in the European business and a scale-up in the US business, the formulation exports are projected to grow at a CAGR of 14.5% over FY2007-09.
- API business to benefit from outsourcing contracts: A leader in several API products, Ipca's API business constitutes 33% of its total revenues. With its low-cost advantage, Ipca is set to capture a substantial chunk of the outsourcing business of global pharmaceutical companies. We believe Ipca's API business will grow at a 13.5% CAGR over FY2007-09, driven by a 9% CAGR in the domestic API business and a 15% CAGR in API exports.
- Earnings to gallop at a 23% CAGR: We estimate Ipca's earnings to grow at a CAGR of 23% over FY2007-09E on the back of a 20% CAGR in revenues. The revenues will be driven by a 15.3% CAGR in the domestic business and a 24.4% CAGR in exports. We estimate earnings of Rs59.9 per share in FY2008 and of Rs73.0 per share in FY2009.
- Compelling valuations: At the current market price of Rs660, Ipca is trading at attractive valuations of 11.0x FY2008E earnings and 9.0x FY2009E earnings. It has traditionally been getting PE multiple in low teens. But with the enhanced visibility of growth from the US and European markets, the sustained growth in the domestic business and the healthy return ratios, we believe that the stock should command higher valuations. We therefore recommend a Buy on Ipca with a one-year price target of Rs875, ie an upside of 33% from the current levels.
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