IPCA Laboratories - Continue to hold

Ipca Laboratories, a mid-cap pharmaceutical company, was recommended by us in our Choice Scrip column in the issue dated July 4, 2010 at a price of Rs 277. We had favoured the scrip because of the growth in its formulation business both on the domestic as well as the global front. That apart, the expected approval for its Indore SEZ from the US FDA, WHO, MHRA (UK), etc. would help it to increase its revenues.

At its current market price of Rs 284, the scrip is up by almost 3 per cent from our recommended level even as the broader market is up by one per cent and the BSE Healthcare Index is up by 5 per cent. The stock has come down from its high of Rs 350 on December 31, 2010 primarily due to the adverse market conditions and its results for Q3FY11 which were below expectations.

IPCA reported an adjusted net profit of Rs 52.7 crore, down 12 per cent on a YoY basis largely due to lower-than-expected revenues from its domestic formulations during the quarter. The total income of the company grew by 17.9 per cent to Rs 466.4 crore, essentially due to a growth of 32.9 per cent YoY in the exports of formulations. The operating profit margin contracted by 330 basis points to 19.5 per cent on account of higher marketing costs of an expanded field force and freight costs (up 260 basis points).

We believe that the company will improve its earning curve from Q2FY12 onwards on account of the incremental contribution expected from the expanded field force. IPCA has received MHRA (UK) approval for its Indore SEZ facility and expects to get WHO accreditation in Q4FY11. The commencement of operations for supplies to UK and WHO will lead to improved operating leverage. Therefore our advice is that you should remain invested in the scrip with a price target of Rs 350 in the next one year