Here is HDFC Securities’ research report after FY15Q2 results:-
IPCA Labs (IPCA) reported below estimatedrevenues as well as PAT for 2Q. Revenues at Rs7.7bn were down ~7% YoY. EBIDTA margins dipped1004/740bps YoY/QoQ led by a sharp decline inoperating leverage due to lower revenues. Grossmargins, however, remained strong (down only100bps YoY and up 200bps QoQ) due to lower APIrevenues in the quarter.
IPCA missed the estimates on revenues due to anunexpected ~65% decline in tender revenues (led bydelay in shipments due to batch by batch inspectionby WHO). IPCA has also indicated a ~20% priceerosion in the malaria tender supplies which wouldimpact the 2HFY15 revenues from the segment.
Moreover, IPCA also faced a blip in export APIrevenues (down 40% YoY) due to implementation ofautomation at the plants. The miss on revenues andlower operating leverage led to the lowest EBIDTAmargins in the last 15 quarters at 17.3% in 2QFY15.
IPCA has been facing issues on the regulatory frontstarting with the API plant at Ratlam, which hasnow extended to the Indore plant. Moreover, theinspection of the Silvassa plant is a cause of concernin the near term.
ï Concerns beyond US
Though IPCA has been facingconcerns over the US plants on the regulatory front(which may lead to nil US revenues in FY16E as well),we believe the concerns are much beyond that. Themalaria tender business, which has started seeingpricing pressure (down 15-20% in 2QFY15), may feelthe stress going ahead with funding bodies gettingcautious on pricing. Moreover, apart from theregulatory issues, IPCA also faces concerns on USrevenues led by the Ranbaxy-Sun deal, as Ranbaxy isthe front end partner for IPCA. Hence, we turncautious on the company and await clarity on theregulatory and business outlook.
ï Outlook and Valuation
Factoring the revisedguidance and lower revenues from high marginsegments like US and tender supplies, we revise ourEBIDTA margin estimates lower by 82/308bps forFY15E/16E. Our revised EPS stands at Rs 33.7/38.7from Rs 36.75/50.1. We downgrade IPCA toNEUTRAL (earlier BUY) with a TP of Rs 620 (earlier Rs****850) at 16x (earlier 17x) FY16E EPS."
My personal view is that the stock has reacted quite well to the below par results in Q2. However, there is the lingering threat of imminent weakness due to such poor results. It might react sharply & negatively to any sort of market correction, regulatory concerns, etc.
Still trying to figure out the way forward in this. The obvious question is how long will the expected turnaround take?
Disclosure : Invested at avg price 670 with a long term view