This drug maker, 40% owned by MF & FPIs, just had a weak Q2. Time to sell?

NEW DELHI: Shares of Ipca Laboratories have fallen after the drug maker's disappointing September quarter results.

Analysts said they expect a couple of “quiet quarters” ahead, and have even cut their FY22 estimates and price targets to factor in a negative earnings growth for the year. The target prices on the counter after the Q2 results were Rs 2,200-2,800, with the average targets of six domestic brokerages standing at Rs 2,485, suggesting up to 20 per cent upside for the stock.

YES Securities said it found the stock worthy at Rs 2,850. The other targets: Motilal Oswal Securities at Rs 2,600, Edelweiss at Rs 2,530, ICICIdirect at Rs 2,490, Emkay Global at Rs 2,240 and IIFL at Rs 2,200. The stock stood at Rs 2,069 a piece in Thursday's trade, falling for the fourth day.

The scrip has been a favourite of mutual funds and FPIs, who owned over 40 per cent stake in the drug maker, with promoters holding another 46.29 per cent stake, leaving non-institutional holding at 9.8 per cent. But the stock has hardly performed, falling 6 per cent year-to-date and delivering no return in the last one year.

Ipca is a fully integrated pharma company manufacturing over 350 formulations and 80 APIs with exports contributing 50 per cent of revenues in FY21. Formulation accounted for 66 per cent of FY21 revenues, API 28 per cent and the rest was contributed by subsidiaries. Therapeutic segments such as pain management, cardiovascular and anti-diabetics, anti-infectives and antimalarials account for 75 per cent of the company's revenues.

The Mumbai-based company reported a 6.3 per cent YoY drop in profit after tax at Rs 250.2 crore amid cost escalation. It logged a 13.5 per cent YoY rise in sales at Rs 1,544.4 crore. The pharmaceutical company withdrew its FY22 revenue and Ebitda guidance, as it expected the December quarter to be soft. It said the domestic formulations business would perform better than expected, but other businesses such as Europe generics and APIs were expected to face challenges.

Ipca would likely face near-term headwinds in the form of input cost escalation that is impacting API sales and gross margin, besides challenges in its EU markets, said Edelweiss Securities. "However, this does not obscure its market-beating growth in India, its vertically integrated business model, API potential beyond FY22 due to capacity addition and an enviable cost optimisation track record. We are cutting FY22 and FY23 EPS estimates by 10 per cent each to factor these in, but stay optimistic on long-term prospects," Edelweiss said, while suggesting a revised target of Rs 2,530 from Rs 2,580 earlier.

YES Securities said cost pressure-led weakness in margin can be resolved relatively faster through price hikes. “... FY23 estimates do not undergo any change while we cut current year EPS by 6 per cent," it said, retaining its buy on the stock by valuing it at 28 times FY23 EPS.

Adjusted for the one-time hydroxychloroquine sulfate business in FY21, Motilal Oswal Securities said IPCA would report 17 per cent earnings growth compounded annually FY21-23, largely led by strong sales growth in the domestic formulation segment.

ICICIdirect said with incremental growth in other therapies (excluding malaria), especially non-communicable diseases like pain management and cardio-diabetology, the overall portfolio was poised for steady growth. Other triggers for future stock performance were the commissioning of a plant in Dewas, additional capacities from Ratlam, a sustained traction in branded and generics exports sales and a revival in the EU to mitigate the US void. US traction will take longer due to USFDA import alerts for the Ratlam facility, which is the only API source for Silvassa and Pithampur formulations, ICICIdirect added.