Profit Is The Best Medicine - IPCA Laboratories

Just when the world economy was trying to stand on its feet after the economic meltdown caused due to the sub-prime crisis, a new setback in the form of the sovereign default gripped it again and stock markets around the world went into a tail-spin. In this volatile situation when the broader market index Sensex has given negative returns year till date (YTD), it make sense to invest in those stocks which are not only from the defensive sector but also available at attractive valuation and have consistent dividend paying history. IPCA Laboratories is one of those companies which satisfies all such criteria and therefore has been chosen as our scrip for this issue. IPCA Lab which was earlier known as The Indian Pharmaceutical Combine Association is a Mumbai-based pharmaceutical company and is engaged in producing active pharmaceutical ingredients for a range of therapeutic segments, including cardiovascular, anti-diabetics etc. It also provides formulations in various dosage forms as well as offers drug intermediates. We feel that the company will outgrow the Indian pharmaceutical industry in its segment. The driver for the growth will be generic formulations with its international business contributing 74 per cent of FY10 export formulations revenues.

This is further going to increase with the increased number of filings in the US and the EU.  These filings will be mainly in CVS and pain management as it is estimated that 40 per cent of deaths in the EU occur due to the CVS problem. To prepare itself for growing demand from the regulated market, the company is setting up a manufacturing facility at Indore SEZ.  It is expected that it will be fully functional from the next fiscal and once this facility gets approval from the USFDA, it can scale up to USD 2 million per product and 7 to 8 products are expected to be launched within six months.

Apart from exports, the domestic formulation business is expected to do well. IPCA is traditionally a market leader in the anti-malarials and rheumatoid arthritis category, which come under price control by government, but now it is shifting its focus to the fast growing chronic segments. This has resulted in drug formulation from pain management increasing its share from 12 per cent in FY05 to 26 per cent in FY10 in the company’s overall formulation revenue.

When we look at IPCA Lab’s financials, its topline and bottomline have increased by 20 per cent and 34 per cent CAGR respectively for the five years ending FY10. The company maintained its growth momentum this quarter too and sales increased by 15.8 per cent YoY and clocked at Rs 367 crore. This was mainly aided by 30 per cent growth in domestic formulation and 25 per cent in the API (active pharmaceutical ingredients) segment.

The current share price of the company discounts its last 12 months earning by 16.5 times, which is lower than both the Sensex and BSE HC which are trading at 18x and 22.5x respectively. Add to that the company’s consistent dividend paying history since the last 20 years, which is what makes it ideal to form a part of your portfolio.