Motilal Oswal Recommends Buying IPCA Labs, Targets ₹1950

Motilal Oswal is optimistic about IPCA Laboratories, giving the stock a “Buy” rating with a target price of ₹1950, according to their report on October 14, 2024.

Earnings Growth on the Horizon

After three years of lower earnings, IPCA is expected to see strong profit growth between FY24 and FY27. The company has performed well in the domestic market, showing a 15% year-on-year growth as of August 2024 and maintaining a similar growth rate since 2021.

IPCA is expanding its export business by launching new products and gaining more market share in the generics sector. The company is also benefiting from its recent acquisition of Unichem, which is expected to help IPCA grow further.

Reviving the US Business

For the past 10 years, IPCA’s US generics business struggled due to compliance issues with the USFDA (United States Food and Drug Administration). However, IPCA is now improving its compliance standards, planning new product launches in the next 6 to 8 months, and integrating Unichem to boost its US operations.

With a projected 29% earnings growth rate and an improved return ratio of around 17% between FY24 and FY26, IPCA is valued at 38 times its 12-month forward earnings. Motilal Oswal has upgraded the stock to a “Buy,” taking into account better operational efficiency, the revival of the US business, benefits from the Unichem deal, and its strong domestic business.

Strong Performance in Domestic Formulations (DF)

IPCA has consistently outperformed the Indian pharmaceutical market (IPM) in the domestic formulations segment from 2021 to 2024. This is largely due to its strong reputation, efficient management during peak seasons, higher productivity of medical representatives, and gains in market share.

In key areas like cardiac, anti-infective, and dermatology treatments, IPCA outpaced the industry by 6%, 10.6%, and 13.1%, respectively, as of August 2024. Despite a general decline in pain treatments within the industry, IPCA saw significant growth in its well-known pain relief brand Zerodol and its combination products.

IPCA is focused on increasing productivity, launching new products, and expanding market share, which is expected to lead to a 14% growth in sales in the DF segment over FY25-27.

Export Business Set for Growth

IPCA’s export formulation business grew at a slower rate of 3.6% between FY21 and FY24, primarily due to a decline in institutional sales and slower growth in the generics business. However, looking ahead, exports are expected to grow at a 27% rate from FY24 to FY27, thanks to new product approvals, better compliance, and new launches.

Valuation and Conclusion

IPCA has several positive factors, including its strong domestic presence, improved compliance with USFDA regulations, growth in the US market, benefits from the Unichem acquisition, and better operational efficiency. The company is valued at 38 times its expected 12-month forward earnings, with a target price of ₹1950. As a result, Motilal Oswal has upgraded IPCA Laboratories to a “Buy” rating.