Will be buying on every 10% decline from here …
i too have holding in IPCA. Right now i wont be selling till i see the results on Feb 7. If the sales figure are above 800 crores with profits of 100 crores. Then the company P/E will be 20. Now this is without exports to US.
So as the company can grow the domentic business in the range of 15-20%, we can continue to see the growth in the overall business for the next 2 years.
So once USFDA started such alerts … usually the copy cat nations CANADA UK FRANCE & GERMANY ( I am not sure in health standards are they copy cats but surely in Foreign policies) are not gonna give similar alerts ?
comparing the market cap (8000cr) and the value that one would give to the business, its a buy imo.
short term triggers are negative though. european n african currencies would be down wrt NR . Q3 Results will also show whether or not they are properly hedged.
prasanna,
The key element in evaluating ipca is about finding out how much downside there is. If that is gauged properly., upsides will take care of themselves in next 2-3 years. But key here is the investment horizon of 2-3 years and not next one to two quarters.
It involves two kinds of risks
first is downside in stock price (how much negative is priced in currently)
second is the opportunity risk. (could you have bought something better which could provide better returns in next 2-3 years.
Hitesh,
How much more can the stock fall, is unknowable. After-all it’s a factor of how much growth can be obtained over the next 3 years. The same is needed even to evaluate opportunity cost risk. I guess both of them go hand in hand.
How would you value the stock 3 years down the line? What do you think is the most probable scenario? Lets say the USFDA problems get resolved, and growth is just starting to kick in.
Thanks,
-Prasanna
What makes you say it will take 2-3 quarters to get resolved ? Import alerts have taken up to 2 years or more to get resolved example aurobindo import alert issued in Jan 2011 and resolution in March 2013. In wockhardt’s case waluj facility was given import alert in May 2013 and 18 months later FDA is yet to do a reinspection so this will also take over 2 years if re-inspection doesn’t throw any further issues. Even 483 or warning letter with minor infractions ( example: strides) are taking over a year or more to go away.
I broadly agree with the thesis that IPCA at this price offers a decent investment opportunity.However investors especially new ones need to be prepared for the fact that things may get worse( uk mhra /European regulatory action etc) before they get better and be invested with 2 years horizon ignoring noise.
I largely agree with Hiteshbhai here that, one should invest in Ipca with a longer term horizon (at least 2 years) and with willingness to sustain volatility without being perturbed.
I think, while we analyze the merits of Ipca for investment option in light of recent import ban and subsequent fall in price, we may keep following points in mind
- In 2013-14, US Sales contributed less than 15% of the total sales of Ipca. Ipca has well diversified portfolio across geographies/therapy areas/ value chain (API vs. formulation). Hence dependence of Ipca on US Sales is limited
- Import alert is not a new development but an outcome of of July 2014 inspection by USFDA. After the July inspection and Form 483, company has engaged an internationally renowned consultant for corrective action and has already started the implementation. According to last concall, CA were likely to be completed by December 2014 and a report of the same was to be submitted to USFDA. The point that is not yet clear is, whether, the US FDA import alert is result of delay in submitting the CA report by the company or is the result of inadequacy of the corrective actions submitted in the report (slated to be submitted in December 2014)? We most likely will know about the same in next concall.Thus, first of all, it is not prudent to assume 2 years time frame for resolution of the issues, from Jan 2015 if Ipca has implemented the corrective actions but not yet submitted the report to USFDA. If they have not completed the implementation of CA, we should wait for management commentary on the likely time frame for completing corrective action hence forth and addreasonabletime for audit inspection.
- Ipca had already stopped shipment to US voluntarily and hence the “loss of revenue” from US market was factored in by the market. However,post the clarification issued by the company, it is clear that Ipca can export Hydroxychloroquine and Propanol as USFDA has excluded it from import alert. According to Nomura research report, Chloroquine has market size of USD 46 million with Ipca commanding 85% market share while propanol has USD 18 million market size with Ipca commanding 30% market share. Thus, both product put together, USD 45 million of sales can still happen (if Company decides to resume shipment). Thus, in my opinion, the scenario may be much better in case of import alert with exclusions than the voluntary suspension of all the products. Following is the link for Nomura report
- (Dropbox - IPCA Laboratories (IPCA IN, Buy) - US FDA scare.pdf - Simplify your life)
- It is important to keep in mind that Ipca gained significant market share in US market for mature products having number of competitors due to it being the lowest cost producer. This is an advantage, which will keep it in good stead, even if it re-enters after a year or so for the products it has already launched.
- Last but not the least, we shall see, how much discounting is reflected in the market price. I have put up a few scenarios to arrive at broad range of values for each scenario to give us the context. Scenarios are
- US Sales not happening from 2014-15 and thereafter, rest of the markets grow at 18% CAGR (Africa, Asia, CIS, Europe, Australia/Newzeland) and NPM shrinking by 200 basis point (13% from current level of 15%)
- US Sales not happening from 2014-15 and thereafter, Europe sales not happening from FY 16 and rest of the markets grow at 18% CAGR (Africa, Asia, CIS, Europe, Australia/Newzeland) and NPM shrinking by 200 basis point (13% from current level of 15%)
- US sales not happening for 2 years from 2014-15 and thereafter in FY 17, 50% of FY 14 sales happening and thereafter sales growing @ 18% CAGR
- Here is the link
Obviously, this is a very rudimentary calculations with few assumptions that reflects my views based on my understanding of the business. One can take a very different view on the growth rate/margin after understanding the business. Based on these scenarios, one can get a reasonably sound view on the extent of discounting market has done for the business.
Just a note to add: From whatever I have interacted with various stakeholders, the unanimous view from various stakeholders about Ipca is that management is both highly competent and ethical.
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Thanks Dhwanil for the insightful post!
Dhwanil
Very nice detailed post. Couple of points :
Import alert is a NEW development .Management was hoping their proactive actions like voluntary stoppage ,corrective actions would placate FDA and was guiding for a speedy resolution based on this assumption with avoidance of import alert which has not happened. Big positive here is the company’s four products exempted from alert contribute to 80% of their US sales .
Every company under fda scanner engages consultant ( usually same consultant Lachman consultant I think ) and takes corrective actions so nothing new here. Wockhardt has also done the same soon after they got into trouble and khorakhiwalas have been touting their "corrective " actions and process improvements on every available broadcast medium for almost a year now and have been in “constant touch” with FDA but FDA moves at at its own pace and is yet to do a re-inspection . If IPCA is able to resolve this sooner they will be an exception not the norm and they will set a trend for other companies getting into similar predicament to follow their footsteps i.e on serious 483 violations ->voluntary stoppage and engage consultant->Take corrective actions ->voila! Import alert goes away in months not years .if this were to happen i suppose it will be very good for industry as a whole. I also eagerly await the concall commentary.
Disclosure :
Invested
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Hi...Had a look at the latest Qtr (14 Dec) results and here is what I understood :
| Narration | 13-Dec | 14-Dec |
QoQ basis
(14 Dec Vs 13 Dec) |
| Sales | 833 | 741 | -11 % |
| Operating Profit | 217 | 121 | -44 % |
| Net Profit | 139 | 42 | -70% |
As per"ANALYTICAL/Scientific/1st Level thinking MINDSET" of mine, above numbers in question and answer form are :
Question 1 : "Why Operating Profit is down by 44 % although sales fell by only 11%?
Answer 1 : Mainly, all the expenses (Cost of material consumed, Purchase of stock in trade, inventory changes, Employee benefits expenses, Other expenses) which reduces the Operating Profits has either stayed as is or gone up as compared to last year's quarter."
Question 2 :"Why Net Profit is down by 70 % although Operating Profit fell by 44 %?
Answer 2 :Due to additional forex loss of around 10Cr. & additional depreciation expense of around 17Cr."
Now the above analysis is of no use as it does not help me any decision making. As of now, contemplating on the below points ("ARTISTIC/2nd Level thinking/ (Hitesh, Dhawnil, Donald) MINDSET"). Please do pitch in and help me to answer these.
As "Buy right" part is majorly influenced by "Did I Pay tight?", please do help on the valuation front.
--> How to see the bigger picture beyond/behind these numbers?
--> Would these kind of results be a norm going forward?
--> Is it Risk or Uncertainty?
--> How much is too much to pay for this business although Opportunity Size for the business is huge, Quality of business and Management is also good.
**Disc. I do own a small position and interested to add more as and when understand it better than before.
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The profits for this year will be around 300 crores.
Tomorrow there is conference call at 2 pm.
Thanks Sandeep.
How to know the call in details for the conference call? In case you know, please do share.
Does anyone know a free source which could be used to read/know about the conference call details for all companies?
IDFC Securities invites you to theQ3FY15 Earnings call ofIPCA Laboratories LtdMonday, 9th February 2015 at 14:00 hrs IST
IPCA Labsâ management will be represented by:Mr. A K Jain â Joint MDMr. Harish Kamath â Corporate Counsel & Company SecretaryDial-in numbers Primary Number: +91 22 6746 8394 Secondary Number: +91 22 3960 0894 The numbers listed above are universally accessible from all networks and all countries. Toll Free Number: USA: 1 866 746 2133 UK: 0 808 101 1573 Singapore: 800 101 2045 Hong Kong: 800 964 448 Please dial-in at least 5-10 minutes prior to the conference schedule to ensure that you are connected to the call in time. |
|
For further information please contact |
|
Nitin Agarwal / Param Desai |
|
IDFC Securities Ltd. |
i got this information by mailing the harish kamath, the company secretory.
IPCA concall updates were very encouraging -
IPCA management had invited EU medical agency, WHO, TGA Australia for site inspection @Ratlam. As per management, inspection concluded without any adverse observations and with this management expects ramp up in EU and Institutional sales (management also got assurance that lost institutional sales can be adjusted next year to make up 30% IPCAâs quota). Right now all institutional sales require 100% verification by WHO and backlog at their site hurt institutional sales.
Also, US sales for exempted API can be resumed as soon as company meets the procedure required by USFDA (3rd party audit or documentation ânot very clear). Among 4 products exempted from import alert, compliance for 1 product has already been completed and 2nd product is under progress (these 2 are key products for IPCA’s API business in US). IPCA will resume API sales as soon as it receives order, they also have 3 months of inventory at formulations site at Indore.
Management expects CIS business to stabilize with stabilizing currency in Russia. Per the management, Q1FY16 onwards business should get normalized for all business other than business impacted with import alert. Management also expects to complete corrective action at Ratlam facility to meet FDA GMP standard by Feb/ March and request FDA for site re-inspection.
Looks like Hiteshâs observation and assumptions are working perfectly here tooJ.
Thanks, Augustine for the updates on few important points from Ipca’s concall. Points highlighted in the italics are my comment’s
Here are few more points from the call
)- Out of the 4 products excluded from the import alert, only 2 had been launched in US market while the other two have not been launched.
)- In FY 14, two products that has been excluded from import alert (HCQS and Propanol) constituted 45% of US sales. However, it may take some time before returning to earlier level of market share for this product.
)- Company enjoyed more than 90% share in US HCQS market and prices have shot up by more than 20 times since company stopped supply (this points should give a lot of clues as to the probability of company gaining back the market share)
)- Company is at the fag end of negotiation with a US FDA approved facility for commercial production for some of its US products (A risk mitigation strategy company and may help in ramping up the US sales too, in next 2-3 quarters in case if US FDA re-inspection takes time)
)- Company’s acquisition of Alpa Labs facility: Company is planning a vertically integrated play in hormonal space (They have hormonal API in Nandesari and Alpa labs will give them forward integration (formulations) possibility. Though, this may not be the focus area for many, I see this as a one more material development as we understand from interaction with Shilpa’s management that there are not many players in this area and for sure not many which are vertically integrate. A new vista opening up for Ipca)
)- Additional expense of USD 3-4 million will be incurred till the end of current FY for compliance/mitigation measures
)- EU/UK formulation business is doing extremely well and has grown @ 40% in Q3. Similarly, Aus/NZ business is also doing very well (more than 120%), South Africa formulation business grew @20% in Q3. Hence barring CIS market,non US branded generics business is doing well every where else
)- Since USFDA inspections, company has given 3 updates to USFDA, one of which was post import alert (2-3 days after import alert). According to management, US FDA critical observations are not related to the production systems but the laboratory unit.
)- All corrective measures suggested by the consultant have been implemented. (My personal inference from this and the above point was that USFDA alert was not in response to the inadequacy of the CA or the slippage in time line. Hence, the timeline for resolving import alert will be much shorter and the uncertainty involved here would be more with respect to the time taken by USFDA to do the re-inspection and ofcourse IPCA’s ability to demonstrate the adequacy of its CA during the re-inspection)
)- Decline in operating leverage is largely attributable to the “negative” effects of operating leverage (i.e. lower capacity utilization while the fixed cost remain the same). Once the capacity utilization improves, the margin will return to earlier level of 25-26% level.
Disclaimer: The views expressed here are not a buy/sell advise nor should it be interpreted that way. These are the personal views and investor shall do their own due diligence or shall consult their investment advisor before making an investment decision
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IPCA is picking up stake in Krebs Bio and according to krebs website they ‘Undertakes both contract manufacturing for large pharmaceutical and multinational companies as well as product development by KBIL for sale in global markets’.
Krebs Bio has 0 revenue in FY14 & past 3 qtr in FY15. However,interestingthing is Kerb has two multipurpose manufacturing facilities, Unit â I in Nellore (USFDA, ISO 9001 & Indian GMP Approved) and Unit â II in Vizag (EDQM & EUGMP Approved, ISO 9001 & Indian GMP Approved).
In a note along with the results for current qtr, its mentioned Unit I of the krebs was reopened on October 3 and Unit II was reopened on December 15, 2014 and in both the units, repair and maintenance works were being carried out. Unit II was expected to be operational by the first week of March.
And as per annual report both the manufacturing units were not in operation during the current Financial period on account of layoff of employees at Unit â II (seems stopped production due to power shortage in AP) and lock outof the Unit â I due to illegal strike of the employees.
Looks like this is risk mitigation strategy to have USFDA and EU approved site as backup when its own plants facing non compliance issue.
Does anyone have any idea on whats procedure if IPCA need to use these plants to manufacture API to US/ EU? does this require re-filing and re-approval from FDA?
I don’t see a separate thread for Lupin but since this thread has a lot of related topic - usfda discussion, I am putting this topic here. Lupin’ s Pithampur plant seems to be under the FDA scanner
Disc - I have major portion of pharma holding in Lupin and I am seeking views/ suggestions. I am almost tempted to book my STCG and move on since I don’t have the mindset like patient IPCA investors. Thx a ton