4QFY2013 Result Update | Pharmaceutical

June 3, 2013

Ipca Labs
Performance Highlights
Y/E March (` cr) Net sales Other income Operating profit Tax Adj. net profit 4QFY2013 659 16 129 50 72 3QFY2013 692 13 168 27 92 % chg qoq (4.9) 24.2 (23.2) 0.0 (14.2) 4QFY2012 553 7 104 19 76 % chg yoy 19.1 137.4 24.7 169.7 (4.5)

ACCUMULATE
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Pharmaceutical 7,649 478 0.3 634/331 38,878 2 19,610 5,939 IPCA.BO IPCA@IN

`606 `665
12 months

Source: Company, Angel Research

For 4QFY2013, Ipca Laboratories (Ipca) reported a lower-than-expected set of numbers. The top-line grew by 19.1% yoy to `659cr, lower than our expectation of `770cr. The OPM however came in higher than our expectations at 19.6% vs 18.7% in 4QFY2012. But the same was not reflected in the net profit growth on account of a high rise in deprecation and tax expenses. The adj. net profit declined by 4.5% yoy to `72cr vs our expectation of `121cr. For FY2014, the company has guided for a 16-17% sales growth and an OPM of 22-23% (incl. other operating income). We revise our target to `665 and recommend an Accumulate rating on the stock. Results below expectation: Ipca reported net sales of `659cr, up 19.1% yoy, but lower than our expectation of `770cr. The OPM came in higher than our expectations at 19.6% (we had estimated it to come in at 19.0%). The recurring profit came in at `72cr, lower than our estimate of `121cr, due to a rise in deprecation and tax expenses. Segment wise, for 4QFY2013, the overall formulations business grew by 27.0% to `492cr, contributing 74.6% to the companys total revenue. The API business was flat, reporting a growth of 0.6% to `167cr, contributing 25.4% to the total revenue. Outlook and valuation: We expect net sales to post a 17.9% CAGR to `3,826cr and EPS to register a 28.3% CAGR to `44.4 over FY201315E, driven by the US and domestic markets and the API segment. At current levels, the stock is trading at 16.8x and 13.7x FY2014E and FY2015E earnings, respectively. We revise our target price to `665 and recommend Accumulate on the stock. Key financials (Consolidated)
Y/E March (` cr) Net sales % chg Adj. Net profit % chg EPS EBITDA margin (%) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 45.9 21.8 21.2 11.1

Abs. (%) Sensex Ipca

3m 3.7 22.3

1yr 22.8 77.3

3yr 15.2 119.9

FY2012 2,359 22.9 287 9.3 22.8 21.9 26.6 24.9 25.8 6.1 3.4 15.8

FY2013 2,754 16.7 340 18.4 26.9 20.5 22.5 24.2 23.2 4.9 2.9 14.3

FY2014E 3,243 17.8 455 33.7 36.0 20.5 16.8 26.0 23.5 3.9 2.5 12.1

FY2015E 3,826 18.0 560 23.1 44.4 21.5 13.7 25.4 24.8 3.1 2.1 9.7

Sarabjit Kour Nangra

+91 22 39357800 Ext: 6806 sarabjit@angelbroking.com

Please refer to important disclosures at the end of this report

Ipca Laboratories | 4QFY2013 Result Update

Exhibit 1: 4QFY2013 Standalone performance Y/E March (` cr) Net sales Other income Total income Gross profit Gross margins (%) Operating profit Operating margin (%) Interest Depreciation PBT Provision for taxation Less: Exceptional Items (gains)/ loss Reported Net profit Adj. Net profit EPS (`) Source: Company, Angel Research 4QFY2013 659 16 674 401 60.8 129 19.6 6 22 118 50 (8) 75 72 5.7 3QFY2013 692 13 705 416 60.1 168 21.6 26 22 133 27 19 88 92 7.3 (14.2) (21.3) 0.2 (11.7) 86.2 (23.2) % chg (qoq) (4.9) 24.2 (4.4) (3.8) 4QFY2012 553 7 560 334 60.4 104 18.7 6 14 90 19 (5) 77 76 6.0 (1.5) (4.5) (7.9) 52.3 30.8 169.7 24.7 % chg (yoy) 19.1 137.4 20.5 20.0 FY2013 2,739 58 2,797 1648 60.2 582 21.2 31 84 525 130 63 331 347 27.5 FY2012 2,300 43 2,43 1393 60.6 484 21.0 39 65 422 89 53 280 291 23.1 (20.5) 28.6 24.4 46.4 19.9 18.3 19.2 20.3 % chg (yoy) 19.1 35.3 19.4 18.3

Exhibit 2: 4QFY2013 Actual vs. Angel estimates

(` cr) Net sales Other income Operating profit Interest Tax Adjusted Net profit
Source: Company, Angel Research

Actual 659 16 129 6 50 72

Estimates 770 14 146 7 17 121

Variation (%) (14.4) 9.9 (11.6) (18.0) 195.9 (40.5)

Revenue up 15.1%; lower than our estimate: Ipca reported net sales of `659cr, up 19.1% yoy, but lower than our expectation of `770cr. Segment wise, for 4QFY2013, the overall formulations business grew by 27.0% to `492cr, contributing 74.6% to the companys total revenue. The API business was flat, reporting a growth of 0.6% to `167cr, contributing 25.4% to the total revenue. On the domestic front, the company posted sales of `216cr, registering a growth of 18.7% yoy, while exports grew by 19.3% yoy to `443cr.

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Ipca Laboratories | 4QFY2013 Result Update

Exhibit 3: Domestic sales trend

280
240 200 224

263
213

178 148

(` cr)

160

120 80
40 0 4QFY2012 1QFY2013 2QFY2013 Formulation 3QFY2013 API 4QFY2013

34

39

30.4

37

38

Source: Company, Angel Research

Exhibit 4: Export sales trend

360 320 280 240
(` cr)
339

317

313

239

225

200
160 120 80 40 0 4QFY2012 1QFY2013 2QFY2013 Formulation 3QFY2013 API 4QFY2013

132

142

125

125

130

Source: Company, Angel Research

OPM comes mostly in line with expectations: Ipcas gross margin came in at 60.8%, down 45bp yoy for the quarter. The OPM expanded to 19.6% from 18.7% in the corresponding quarter of last year. Forex gains for the quarter stood at `7.8cr vs a loss of `18.6cr in 4QFY2012.

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Ipca Laboratories | 4QFY2013 Result Update

Exhibit 5: OPM trend

23 22 21.8

21.8 21.6

21
(%)

20 19.6
19 18 4QFY2012 1QFY2013 2QFY2013 3QFY2013 4QFY2013
Source: Company, Angel Research

18.7

Reported net profit lower than expected: The expansion in the OPM however did not translate into net profit growth as deprecation and tax expenses witnessed a rise. The adj. net profit declined 4.5% yoy to `72cr (`76cr in 4QFY2012) while we had expected it to come in at `121cr.

Exhibit 6: Net profit trend

140
120 100 115

125

88
77

(` cr)

80
60

75

40
20 0 4QFY2012 1QFY2013 2QFY2013 3QFY2013 4QFY2013
Source: Company, Angel Research

Concall takeaways

The Management expects sales to grow at 16-17% for FY2014 (not including incremental sales from the Indore SEZ). The growth would be driven by the branded business (domestic and international). The institutional business is expected to be ~`475cr for FY2014 vs `391cr in FY2013. The international API business is expected to grow at 20% in FY2014. The Management believes the impact of the new DPCO would not be significant as the company will be able to hike prices of non-DPCO products by upto 3%. Products currently under DPCO and on their way out of price control would contribute `6-7cr of savings. The OPM is expected to be at 22.4% - 22.8% for FY2014; material costs are expected to reduce by 50bps due to lower raw material costs.

June 3, 2013

Ipca Laboratories | 4QFY2013 Result Update

R & D expenses guided to increase to ~4% for FY2014. The field force currently stands at 4,000 employees in India and 500 in the global markets; no field force expansion has been guided for FY2014. The Indore SEZ was inspected in April 2013; the Management expects the clearance to come in in the next 3 months. The plant is expected to contribute a revenue of US$100mn over the coming 2-3 years. 2 approvals have been received from the facility with 33 products having been filed (14 already approved and 8 commercialized). Tax rate is expected to be 24-25% of PBT (incl deferred tax) for FY2014. A capex of around `350cr is estimated in FY2014.

Investment arguments
Domestic formulations business the cash cow: Ipca has been successful in changing its business focus to the high-margin chronic and lifestyle segments from the low-margin anti-malarial segment. The chronic and lifestyle segments, comprising CVS, anti-diabetics, pain-management, CNS and dermatology products, constitute more than 50% of the companys domestic formulation sales. The Management has ramped up its field force significantly with addition of divisions in the domestic formulations segment, taking the current total strength to nearly 4,000 MRs. We expect the domestic formulation business to grow at a CAGR of 17% during FY2013-15E. Exports to be the next growth avenue: On the formulations front, Ipca has been increasing its penetration in regulated markets, viz Europe and US, by expanding the list of generic drugs backed by its own API. In the emerging and semi-regulated markets, Ipca plans to focus on building brands in the CVS, CNS, pain-management and anti-malarial segments along with tapping new geographies. On the API front, where the company is among the low-cost producers, it is aggressively pursuing supply tie-ups with pharmaceutical MNCs. We expect exports to grow at a CAGR of 17% over FY2013-15E. Indore SEZ approval and tender business to enhance momentum: Ipca is awaiting USFDA approval for its Indore SEZ. Once the approval is received, the facility would cater to the US generic market and potentially post sales of US$100mn in the next 2-3 years. The Indore SEZ was inspected in April 2013; the Management estimates the clearance to come in in the next 3 months time frame. Valuation: We expect net sales to post a 17.9% CAGR to `3,826cr and EPS to register a 28.3% CAGR to `44.4 over FY201315E, driven by the US and the domestic markets and the API segment. At the current levels, the stock is trading at 16.8x and 13.7x FY2014E and FY2015E earnings, respectively. We revise our target price to `665 and recommend Accumulate on the stock.

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Ipca Laboratories | 4QFY2013 Result Update

Exhibit 7: Key Assumptions

FY2014E Sales growth (%) Operating margins (%) R&D Exp ( % of sales) Capex (` cr)
Source: Company, Angel Research

FY2015E 18.0 21.5 4.0 350

17.8 20.5 4.0 350

Exhibit 8: One-year forward PE band

600 500 400 300 200 100

Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Jan-08 Jan-09 Apr-09 Jan-10 Apr-10 Jan-12 Jan-13 Apr-13
Jan-11 Apr-11

Apr-07

Apr-08

Apr-12

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

4x

8x

12x

16x

Source: Company, Angel Research

Exhibit 9: Recommendation summary

Company Alembic Pharma. Aurobindo Pharma Cadila Healthcare Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Ranbaxy* Sanofi India* Sun Pharma Reco Neutral Buy Buy Buy Buy Buy Neutral Buy Accumulate Buy Neutral Neutral Neutral CMP (`) 137 178 772 369 2,113 69 2,661 65 606 753 362 2,608 1018 Tgt. price (`) 264 909 444 2,535 206 78 665 877 Upside % PE (x) 48.3 17.7 20.3 19.9 198.5 20.0 9.8 16.5 9.8 9.3 16.1 16.6 16.7 3.3 31.9 8.3 13.7 18.0 16.1 26.3 25.6 FY2015E EV/Sales (x) 1.3 1.1 2.0 2.5 2.4 0.8 6.3 0.8 2.1 2.4 1.2 2.6 6.0 EV/EBITDA (x) 6.9 7.1 11.1 11.3 11.9 3.8 22.0 5.5 9.7 11.2 9.3 15.7 14.5 FY12-15E CAGR in EPS (%) 26.1 58.2 12.7 15.9 12.8 38.8 6.1 15.8 24.9 29.1 (6.8) 13.4 18.8 FY2015E RoCE (%) 34.0 12.0 15.4 15.7 18.3 12.0 36.1 15.3 24.8 28.5 13.1 15.9 29.4 RoE (%) 34.7 18.0 23.1 15.9 21.8 13.7 31.0 14.7 25.4 24.8 19.1 16.7 22.0

Source: Company, Angel Research; Note: * December year ending

June 3, 2013

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Ipca Laboratories | 4QFY2013 Result Update

Company Background
Formed in 1949, Ipca is a market leader in the Anti-Malarials and Rheumatoid Arthritis segment. The company is a notable name in the domestic formulation segment with 150 formulations across major therapeutic segments like cardiovascular (CVS), anti-diabetes, anti-malaria, pain-management (NSAID), anti-bacterial, central nervous system (CNS) and gastro-intestinal. The company has 7 production units which have been approved by most of the discerning regulatory authorities including USFDA, UKMHRA, Australia-TGA, South AfricaMCC and Brazil-ANVISA. Its new US-dedicated facility at the Indore SEZ is awaiting USFDA approval.

June 3, 2013

Ipca Laboratories | 4QFY2013 Result Update

Profit & loss statement (Consolidated)

Y/E March (` cr) Gross sales Less: Excise duty Net Sales Other operating income Total operating income % chg Total expenditure Net raw materials Other mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation & amortisation EBIT % chg (% of Net Sales) Interest & other charges Other Income (% of PBT) Recurring PBT % chg Extraordinary expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of asso. PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E 1,602.8 43 1,560 7 1,567 21.2 1,233 646 158 221 208 326 27.4 20.9 47 280 29.2 17.9 26 3 1.0 263 35.3 (3.3) 266 62.7 23.6 204 2 205 202 14.3 13.2 16.1 16.1 14.1 1,954 13 1,941 37 1,978 26.3 1,559 776 194 266 322 382 17.1 19.7 56 327 16.7 16.8 31 8 2.4 341 29.5 (0.8) 341 78.3 22.9 263 (0) 263 263 30.0 13.5 20.9 20.9 29.5 2,378 19 2,359 12 2,371 19.8 1,842 913 208 335 385 517 35.1 21.9 67 450 37.7 19.1 44 417 22.5 52.8 364 88.1 24.2 276 (1) 276 287 9.3 11.7 22.8 22.8 8.9 2,776 22 2,754 59 2,813 18.7 2,190 1,097 243 392 458 564 9.1 20.5 87 477 6.1 17.3 33 14 2.8 517 24.0 63.3 454 129.9 28.6 324 324 340 18.4 11.8 26.9 26.9 18.4 608 151.9 25.0 456 455 455 33.7 14.0 36.0 36.0 33.7 3,275 33 3,243 59 3,302 17.4 2,579 1,291 286 461 540 664 17.8 20.5 97 567 18.9 17.5 33 14 2.4 608 17.4 3,865 39 3,826 59 3,886 17.7 3,003 1,524 298 544 637 823 23.9 21.5 114 709 24.9 18.5 33 14 1.9 749 23.3 749 187.2 25.0 562 560 560 23.1 14.6 44.4 44.4 23.1

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Ipca Laboratories | 4QFY2013 Result Update

Balance sheet (Consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity share capital Reserves & surplus Shareholders Funds Minority interest Total loans Other Long Term Liabilities Long Term Provisions Deferred tax liability Total Liabilities APPLICATION OF FUNDS Gross block Less: Acc. depreciation Net Block Goodwill Capital work-in-progress Investments Long Term Loans and Adv. Current assets Cash Loans & advances Other Current liabilities Net Current Assets Total Assets 899 11 120 768 210 689 1,398 38 33 881 243 638 988 289 699 95 41 38 1,040 11 63 966 315 725 1,597 1,315 394 920 24 95 34 38 1,217 12 35 1,170 439 778 1,889 1,587 472 1,115 24 95 9 48 1,407 58 42 1,307 477 930 2,221 1,937 569 1,368 24 95 9 52 1,734 77 48 1,609 603 1,130 2,603 2,287 683 1,604 24 95 9 61 2,106 151 57 1,898 712 1,394 3,104 79 1,398 25 840 865 (1) 455 25 1,026 1,052 (1) 458 2 5 81 1,597 25 1,229 1,254 532 1 9 93 1,889 25 1,529 1,554 523 1 12 130 2,221 25 1,924 1,949 523 1 12 130 2,603 25 2,425 2,450 523 1 12 130 3,104 FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E

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Ipca Laboratories | 4QFY2013 Result Update

Cash flow statement (Consolidated)

Y/E March (` cr) Profit before tax Depreciation (Inc)/Dec in working capital Direct taxes paid Cash Flow from Operations (Inc.)/Dec.in fixed assets (Inc.)/Dec. in Investments Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2010 266 47 (98) (46) 169 (134) (134) 0 (7) (38) 10 (35) (1) 12 11 FY2011 341 56 (35) (78) 284 (164) (8) (172) 0 3 (61) (54) (112) (0) 11 11 FY2012 364 67 (52) (88) 291 (326) (326) 0 76 (55) 14 36 1 11 12 FY2013 FY2014E FY2015E 454 87 (116) (130) 295 (272) (272) 0 (5) (59) 88 24 46 12 58 608 97 (185) (152) 367 (350) (350) 0 (59) 60 1 19 58 77 749 114 (199) (187) 477 (350) (350) (59) 6 (53) 74 77 151

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Ipca Laboratories | 4QFY2013 Result Update

Key Ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) RoCE (Pre-tax) Angel RoIC (Pre-tax) RoE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Int.) 0.5 1.4 10.6 0.4 1.2 10.4 0.4 1.0 10.1 0.3 0.8 14.3 0.2 0.7 17.0 0.2 0.5 21.2 1.9 80 85 26 139 2.1 78 70 25 128 2.1 87 55 41 114 1.9 92 49 42 106 1.9 96 52 36 106 1.8 99 53 39 108 21.9 22.6 27.0 21.8 23.0 27.4 25.8 27.5 24.9 23.2 24.8 24.2 23.5 25.2 26.0 24.8 26.8 25.4 17.9 76.4 1.2 17.0 4.4 0.6 24.6 16.8 77.1 1.3 17.2 5.3 0.5 22.9 19.1 75.8 1.4 19.8 6.8 0.4 25.2 17.3 71.4 1.4 17.2 4.5 0.4 21.8 17.5 75.0 1.4 18.5 4.8 0.3 22.1 18.5 75.0 1.4 19.7 4.8 0.2 22.5 16.1 16.1 20.1 2.8 69.1 20.9 20.9 25.3 4.2 83.7 22.8 22.8 27.2 3.2 99.4 26.9 26.9 32.6 4.0 123.1 36.0 36.0 43.7 4.0 154.5 44.4 44.4 53.4 4.0 194.1 37.6 30.1 8.8 0.5 5.2 24.6 5.7 29.0 23.9 7.2 0.7 4.1 21.0 5.0 26.6 22.3 6.1 0.5 3.4 15.8 4.3 22.5 18.6 4.9 0.7 2.9 14.3 3.6 16.8 13.9 3.9 0.7 2.5 12.1 3.1 13.7 11.3 3.1 0.7 2.1 9.7 2.6 FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E

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Ipca Laboratories | 4QFY2013 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Pvt. Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Pvt. Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report . Angel Broking Pvt. Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Pvt. Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Pvt. Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Pvt. Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Pvt. Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Ipca Laboratories No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors.

Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

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