IPCA’s winning streak may continue on exports

IPCA Labs, a mid-sized Indian pharma company, has seen its stock price doubling in the past six months. The stock has outperformed the Sensex, which witnessed a rise of 17% during the same period. It has also outperformed ET Pharma Index, which rose by a modest 45% during the six-month period.

The company, which is the market leader in the anti-malarial therapeutic category in India, has been on a growth trajectory since past couple of quarters. Its steady growth in sales have been driven by increased exports of active pharmaceutical ingredients (API) and formulations. It is also ramping up its generic business in the US.

Its domestic formulations business is also gaining traction driven by good performance in its anti-malarial, anti-diabetes, cardio-vascular and anti-infective therapeutic segments. Its operating profit margin has also improved over the past two quarters. All this has caused a re-rating of its stock on the bourses.

The company has recently received approval from World Health Organisation (WHO) for its anti-malarial formulation. Ipca already has WHO approval for its APIs for anti-malarial formulation, which are supplied to many pharma companies in the world. With this approval, Ipca has become the only company in the world to have WHO approval for both API and formulation. This is likely to give good upside to the company as it will open an estimated market of $200-250 million across the world.

The positive action in the stock is likely to continue as the company’s financials continue to improve steadily. However, with this recent re-rating, which saw the stock price tripling in last one year, the price rise, going forward, is expected to be more measured. The company is valued at a market cap of Rs 2,500 crore - a little lower than twice its net sales of Rs 1,400 crore (on trailing four quarter basis). The stock is trading at a price to earnings multiple of nearly 18. This is a fair valuation for a mid-sized pharma company.