Buy IPCA Labs – On Strong Growth

BOFA Merrill has initiated coverage on IPCA Labs with a BUY Rating.

Expect 19% sales CAGR over FY10-12E, driven by both, domestic (18% CAGR, 39% of sales) and export (26% CAGR, 35% of sales) formulations. Domestic formulations should sustain high growth on 30% addition to fieldforce in FY10 with thrust on high-growth chronic segments. Export formulation growth to be led by US (8% of sales by FY12E vs 3% now). API business should grow a modest 10-12% as a large part of capacity caters to captive usage.

We expect USFDA approval for Indore SEZ in the near term (in 2HFY11) to address capacity constraint which has restricted growth in the lucrative US generics market. With 14 ANDAs (inc. 10 approvals) awaiting full scale-up and 8- 10 new ANDAs to be filed p.a, US generics are forecast to grow at a 60% CAGR over FY10-12E to Rs1.5bn. Higher than expected tender supplies to WHO for
Artimether-Lumefantrine (anti-malarial, ~US$250mn, 4 players) combination drug would pose upside risk.

IPCA is trading at 12.5x FY11E & 10x FY12E, a steep 30% discount to peers which is unjustified noting strong earnings CAGR expected over FY10-12E. IPCA is expected to report an EPS of Rs 19.5 and Rs 24 for FY 11 and FY 12. Merrill has set a Target of Rs 333.