Buy Ipca Labs; target of Rs 930: Motilal Oswal

“IPCA has voluntarily stopped shipment from its API facility in Ratlam, India post the observations (form 483) listed by the US FDA in its recent inspection. IPCA received six observations, of which two relate to data integrity. This development will also have an impact on the formulations plants (Indore SEZ and Silvassa), which source majority of the APIs from the Ratlam site. The US market contributed ~10% to FY14 sales (INR3b).”

“IPCA expects no sales in the US from September 2014 till the time the US FDA issues are resolved. It expects to resolve these issues over the next 4-6 months. We estimate cumulative sales loss of USD41m/62m/49m for FY15/FY16/FY17, which includes loss of current sales and delay in new launches. In addition, we build in remediation costs that IPCA would have to incur until resolution of the issue. We estimate 18%/20%/15% cut in earnings for FY15/FY16/FY17.”

“IPCA’s stock price declined over 15% today, partly reflecting the potential cut in earnings due to this development. Despite the significant earnings cut, we maintain our Buy rating. We draw comfort from (a) swift resolution of US FDA issues at Indore SEZ within 10 months, and (b) high probability of IPCA regaining lost market share, as these are high volume/mature products, making it difficult for competition to match IPCA’s scale. We build in a gradual recovery in the US, starting 2HFY16 and expect FY17 to be a normalized year of operations. We move our valuations and target price to FY17. Our revised target price is INR930 (15x FY17E EPS). Key risk to our call is escalation of current observations to import alert or warning letter status,” says Motilal Oswal research report.

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