Buy IPCA Laboratories for a price target of Rs 1470 -ShareKhan

ShareKhan in its January 23, 2010 research report has recommended a buy rating on the stock IPCA Laboratories with a price target of Rs. 1470.

Recommendation: Buy
Price target: Rs1,470
Current market price: Rs1,204

ShareKhan in its research report cites the following reasons for the recommendation:

•Ipca Laboratories (Ipca) has reported a strong performance for Q3FY2010 with a 26.3% increase in its net sales, driven largely by a robust growth in the domestic formulation markets (up by 37.5%) and sustained traction in the active pharmaceutical ingredient (API) exports (up by 32.8%). The revenues from the export formulations languished at 11.4% due to a decline in the branded formulation segment (down 16%) on account of lower institutional tender business and continuous challenge in the Russian/Commonwealth of Independent States (CIS) market.
•Ipca?s reported operating profit margin (OPM) stood at 22.8%, up ten basis points year on year (yoy) and marginally ahead of our estimate of 22%. The OPM remained firm largely on account of a change in the product and market mixes (a higher share of high-volume, low-margin APIs). We expect the OPM to stay steady at ~21% over FY2010-12. While there will be a consistent increase in the proportion of higher-margin businesses like branded formulations and regulated market APIs, the likely appreciation in the rupee as well as the growing regulatory expenditure on filings and research and development (R&D) would offset the benefits.
•Driven by a strong operating performance, Ipca?s reported net profit in Q3FY2010 grew by 151.3% to Rs58.3 crore, aided by a lower interest cost. The company incurred a foreign exchange (forex) loss of Rs1.65 crore vis-?-vis a loss of Rs19.2 crore in Q3FY2009. On adjusting for the forex impact, the adjusted profit after tax (PAT) stood at Rs59.9 crore, ahead of our estimate of Rs45 crore. Aided by the low base of FY2009, the net profit is expected to double in FY2010 and grow at a compounded annual growth rate (CAGR) of 18% over FY2010-12.
•We are upgrading our estimates to factor in the strong growth posted by the company in M9FY2010 across its API and formulation businesses. We estimate the revenues to post a CAGR of 20% over FY2010-12. Our revised earnings per share (EPS) estimates stand at Rs84.7 (vs Rs78.5) and Rs97.9 (vs Rs90.1) for FY2010 and FY2011 respectively. We are also introducing our FY2012 numbers and forecast EPS of Rs117.6 for the year. Ipca?s board has also approved a stock split of five equity shares of Rs2 each for every one equity share of Rs10 each and an interim dividend of Rs4, and is awaiting the shareholders? approval.
•At the current market price of Rs1,204, Ipca is attractively valued at 14.2x FY2010E earnings and 12.3x FY2011E earnings. Although the stock has outperformed the market over the last few months, the valuations at these levels seem absolutely compelling when viewed in the context of the strong growth potential of the company. Based on the strong earnings visibility from the export segment and the scale-up in the US business, we maintain our Buy recommendation on the stock with a revised price target of Rs1,470 (15x its FY2011E earnings).