Buy Ipca Laboratories, target Rs 915: Nomura

Nomura has a buy call on Ipca Laboratories with a target price of Rs 915.

The current market price of Ipca Laboratories is Rs 787.45.

Time period given by the financial services firm is one year when Ipca Laboratories price can reach the defined target.


Investment rationale by Nomura:
We remain constructive on IPCA despite its relative outperformance over the past one year.

Over the past one year, the stock has rallied 44 per cent, outperforming the Nifty (+4 per cent) and Nifty Pharma Index (+1.5 per cent). The company delivered on earnings despite significant lower capacity utilisation and revenue cost mismatch.

We expect IPCA to deliver 15.2 per cent revenue growth over FY19-21F. In domestic formulation (45 per cent of revenues), we think the regulatory headwinds (primarily FDC ban) have played out and expect IPCA to sustain 11-13 per cent growth. In exports and API, we expect 18 per cent revenue CAGR over FY19-21F even without considering USFDA warning letter resolution.

Contribution from Global Fund tenders, new anti-malaria products (injection and dispersible tabs), strong API pricing/demand, Bayshore acquisition and likely pick-up in UK revenues are the key drivers. We factor in 36 per cent earnings CAGR over FY19-21F as operating leverage plays out. We revise our EPS estimates up by 3 per cent/8 per cent for FY19F/20F to factor in strong 2QFY19 results and management commentary.

We arrive at a new 12-month price target of Rs 915 (Rs 723 previously) based on 20x one-year forward (November 2020F) EPS of Rs 45.7, in line with the average trading multiple over the past four years. Our previous TP was based on EV/sales but, with earnings stabilising, we now choose P/E as our valuation methodology.

Catalyst: Increase in export revenues; sustained above-market growth in India.

Valuations: We think the target valuation multiple of 20x is justified despite inherent risks in the domestic and institutional businesses. This is so as the earnings are suppressed and EBITDA margins can expand further. We expect earnings growth to remain robust beyond FY21F, particularly if by then the FDA issues are resolved. The stock is trading at 10-15 per cent discount to mid-cap peers on FY19F/20F EPS estimates. We expect strong free cash flows to support valuations (FCF yield 5.1 per cent on FY21F estimates).