IPCA Laboratories Limited is an Indian multinational pharmaceutical company which has their headquarters in Mumbai. The company is in the production of Active Pharmaceutical Ingredients (APIs). IPCA Labs sells their APIs and their intermediates globally. The company produces more than 150 formulations which includes oral liquids, tablets, dry powders, and capsules. The prime campaign of the company is to produce and market pharmaceuticals and drugs. The various products of the company include formulations, drug intermediates, and active pharmaceutical ingredients (API).
The silhouette of margins is bound to essentially advance by FY24, the withdrawal of high-cost inventory and the mastery over backward integration will have colossal growth impact in the upcoming quarters.
Additionally, the active pharmaceutical ingredient (API) exports will revamp steadily as the channel inventory is returning to normal levels and the company’s Sartan API business is gaining acceptance.
Margins intimidated due to inflated energy expenses
The company’s 2nd quarterly output was mainly driven by formulations and was partly nullified by the API business. The domestic formulations business, which consists of 45 percent of the overall business, has grown by 10 percent YoY (year on year). Apart from anti-malarial sales, domestic sales have grown 14 percent YoY. Considering therapies, pain management persisted to do good, but the cardiovascular segment diminished due to restructuring.
Formulation exports (25 percent of sales) had a decent growth. However, the API business (19 percent of sales) shrunk to 15 percent due to lower export sales for Sartans. This was partially compensated by the positive performance in the domestic market. Sequentially, API exports have fallen by 22 percent.
Long term Panorama
The management believes that the company will perform to a sales growth guidance of 9-10 percent in FY23, principally they will have the backing by the domestic business. The domestic business will probably benefit from the addition of 1,200 (25 percent expansion) medical representatives with a focus on ortho, derma, and cardiovascular therapies.
In the export market regarding the UK, the management is expecting a recovery in the current year. Next fiscal is expected to have normal growth for the UK business.
Considering APIs, the company would require some time to gain momentum in the market share from Chinese competitors in the Sartan API range. In addition, there has been a lesser demand in the LatAm and Asian markets.
The management has revaluated the API export sales guidance to a decline of 2 percent in FY23. It would be refined in following years, with channel inventory normalisation and as capacity problems in the API range are corrected with the Dewas and the Ratlam projects.
At the gross margin level, there is a sequential improvement, which tells us that high-cost inventory is being rectified. Furthermore, the company has benefit from backward integration. A few intermediates are now being manufactured in-house at a lower cost which were earlier being acquired from China. This advantage would begin to reflect from H2FY23.
Alas, operational costs pertaining to promotion and travel expenses are likely to stay inflated. Costs regarding to the addition of field force would be a haul until the time productivity gains traction. Additionally, the company has to face an initial operational cost in relation to the Dewas plant of the order of Rs 7.5 crore per quarter.
Therefore, the EBITDA margin would remain in line with the present levels before consistently improving from FY24.
Technical Analysis
The stock had a lifetime high of Rs 1383 in the year 2021 from which it has been sliding down till today’s date. The shocking part about the pharma industry is that the sector was pumped during covid times and lockdown period, and dumped, but now with the ease of normal life, the sector is still slumped? Apart from Sun Pharma which is the industry leader, most of the good pharma stocks have gained no traction despite putting out good earnings results.
The stock price is trading below the 100-day moving average which marks it to be oversold. MFI is at 29 points which gives us the confirmation that the stock is indeed oversold and cheap for accumulation. The price of Rs 850 appears to be a strong support level for this stock as it is near the 50% retracement level. Accumulating of IPCA Labs for portfolio for long-term investment with the current price is a wonderful timing to get maximized benefits a bright portfolio.
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