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Ipca Laboratories Equity Research

HomeCompanyIpca Laboratories Equity Research

Date of Research – 11 January 2016 Price – Rs. 669.20

About the Company

Incorporated in 1949, Ipca Laboratories Limited (“IPCA” or the “Company”) is a fully-integrated Indian pharmaceutical company manufacturing over 350 formulations and 80 Active Pharmaceutical Ingredients (APIs) for various therapeutic segments. The Company offers branded and generic formulations in various dosage forms, including oral solids and liquids, dry powders for suspension, and liquid and dry injectables. For more than 60 years, IPCA has been partnering with healthcare companies in over 110 countries in Africa, Asia, Australia, Europe and the USA. IPCA’s international clients include global pharmaceutical giants like AstraZeneca, GlaxoSmithKline, Merck, Roche and Sanofi Aventis. The Company’s exports accounts for 61 % of its income. The Company is a leader in India for anti-malarials with a market-share of over 34% with a fast expanding presence in the international market as well. Some of the brands include: Zerodol, Lariago, Tenoric, Rapither, Perinorm and Folitrax.

Key Financial Figures

Consolidated (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations 2,813.12 3,281.77 3,141.83 2,885.04  3,210.64 
Expenses 2,189.93 2,471.21 2,612.74 2,543.34  2,765.86  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 623.19 810.56 529.09 341.70  444.78  
Depreciation 86.73 103.13 179.55 172.21  172.95  
Finance Costs 33.36 26.88 28.39 –  24.08  
Other income 14.31 22.26 35.76 16.91  22.57  
Exceptional items 63.14 72.22 (4.17) 39.49  – 
PBT 454.27 630.59 361.08 146.91  270.32  
Tax 129.94 152.39 101.93 18.57  67.52  
Extraordinary items (0.27) 31.61  – 
PAT (before Minority Interest and share of Associates) 324.60 478.20 259.15 96.73 202.80  
Profit/ (loss) attributable to Minority Interest – 
Share of profit / (loss) of Associates 1.05 (0.34) 4.92 3.46  8.26  
Consolidated Profit / (Loss) for the year 323.55 478.54 254.23 93.27  194.54  

Profitability Analysis

Consolidated (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Operating Profit Margin Ratio 22.15 24.70 16.84 11.84  13.85 
Net Profit Margin Ratio 11.54 14.57 8.25 3.35  6.32 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Share Capital 25.14 25.24 25.24 25.24 25.24
Share application money pending allotment
Reserves & Surplus 1,228.78 1,528.54 1,934.42 2,183.19 2,258.57
Net worth (shareholders funds) 1,253.92 1,553.78 1,959.66 2,208.43 2,283.81
Minority Interest
Long term borrowings 330.18 366.21 294.00 503.21 488.29
Current liabilities 640.17 633.65 793.29 904.36 859.92
Other long term liabilities and provisions 9.82 12.92 16.23 22.05 23.79
Deferred Tax Liabilities 93.15 130.39 147.11 174.31 170.12
Total Liabilities 2,327.24 2,696.95 3,210.29 3,812.36 3,825.93

 

Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Fixed Assets 1,015.00 1,209.81 1,484.05 2,033.21 2,113.37
Noncurrent Investments 33.93 8.87 9.00 16.19 21.86
Current assets 1,210.05 1,397.28 1,601.42 1,613.98 1,557.68
Long term advances and other noncurrent assets 44.76 57.40 80.47 114.54 98.58
Goodwill on consolidation (net) 23.59 23.59 34.44 34.44 34.44
Total assets 2,327.33 2,696.95 3,210.56 3,812.36 3,825.93

Efficiency Analysis

  (%)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
ROCE 32.42 32.46 35.97 19.51 12.33
ROE / RONW 22.10 20.82 24.42 11.51 4.24

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations (Rs. Cr.) 2,813.12 3,281.77 3,141.83 2,885.04  3,210.64 
Growth (%) 19.26 % 16.66 % (4.26 %) (8.17 %)  11.29 % 
PAT (Rs. Cr.) 323.55 478.20 259.15 96.73   202.80  
Growth (%) 16.78 % 47.90 % (45.81 %) (62.67 %)  109.66 % 
Earnings Per Share – Basic (Rs. ) 25.65 37.92 20.15 7.39  15.42 
Earning Per Share – Diluted (Rs. ) 25.65 37.92 20.15 7.39  15.42 
Price to Earnings 20.53 20.79 32.59 78.45  31.84 

Dividend History

The Company has maintained an average dividend yield of 1.27 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. IPCA’s average current ratio over the last 5 financial years has been 1.94 times which indicates that the Company has been maintaining sufficient cash to meet its short term obligations.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

IPCA’s average long term debt to equity ratio over the last 5 financial years has been 0.22 times which indicates that the Company operates with low level of debt and is placed well to withstand economic slowdowns.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

IPCA’s average interest coverage ratio over the last 5 financial years has been 14.59 times which indicates that the Company has been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, IPCA reported a promoter holding of 46.13 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 30.57 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

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