Mohan Pabrai’s recent advice is ringing clearly in my mind: “Understand the difference between risk and uncertainty. In a situation where the uncertainty is high but the risk is low, the stock will be mis-priced and you must buy the stock”.
There are a number of recent instances where we saw this theory come into play. MCX, Muthoot and Ranbaxy are a few examples where, if we had acted at the point of pessimism, we would have taken home a huge chunk of money. In MCX itself, the reward is to the tune of 172% for those brave hearts (like Prashant Jain of HDFC MF) who jumped in at the stage of melt-down. MCX gave another chance at the stage of Jignesh Shah’s arrest. Even from there, the take-home is 62%.
IPCA Labs is a highly regarded Mid-Cap Pharma stock. Its’ list of major shareholders reads like a who’s-who of the investing world.
David Nadela of Royce Funds is a vocal supporter of IPCA Labs. What he loves about IPCA is the fact that it has compounded revenue growth of 20%+ for the last five years – with 20%+ ROIC and that it sells anti-malarial medications and cardiovascular drugs, which are in great demand in Africa and Europe.
Another believer in IPCA is Gulpreet Kohli, MD, ChrysCapital. He made it clear that IPCA Labs was a great company because it has a very stable business and has been growing between 18 to 20 percent and will continue to do that. He added that IPCA’s return on capital employed is fantastic and that while one may not see massive growth, one can expect 18 to 20 percent growth over the next many years to come.
Saurabh Mukherjea of Ambit Capital echoed the same sentiment when he said “IPCA is actually one of the best performing pharma companies over a 20 year period and is an attractive pharma company to look at”.
When IPCA Labs made the grim announcement on 23rd July that it was voluntarily suspending supplies from its Ratlam plant owing to some adverse observations in Form 483 by the US FDA, there was panic all around and the stock price slumped 13% in one day. The stock has lost 18% in one month and is looking quite weak.
Now that IPCA Labs has released its Q1FY15 results and the dust is settling down, cooler heads are taking stock of the situation and realizing that maybe things are not as bad as they appeared at first sight.
Meeta Shetty of HDFC Securities has sounded a positive note. In a report titled “Confidence building up”, Meeta has explained that while IPCA has given the guidance that the Ratlam plant issues will be resolved in next six months, there is a strong possibility of IPCA resuming supplies sooner than six months given that the remedial measures (automations at plant) required for resolution were already underway before inspection. Meeta has also pointed out that IPCA is confident of (1) not losing substantial market share in its key products (Atelnolol, Furosemide, Chroloquine and Hydrochlorothiazide) (2) recouping lost market share in few months (6-8 months) post re-launch. She states that IPCA’s US revenues may not be impacted to the extent it was assumed.
Meeta Shetty has recommended a buy with a target price of Rs. 850.
Meeta’s confidence is being echoed by others as well.
Angel Broking made it clear that it was bullish about IPCA and recommended a buy with a target price of Rs. 986. Motilal Oswal also recommended a buy and has foreseen a target price of Rs. 930. ICICI-Direct also recommended a buy with a target price of Rs. 827. Sharekhan suggested a HOLD with a target price of Rs. 820. The same advice came from Religare with a target price of Rs. 835.
Daljeet Kohli is also in the “Buy” camp with a target price of Rs. 823. He expressed confidence that “the company will be able to solve issues with USFDA & Ratlam facility shall face temporary setback”.
However, IPCA does have its share of detractors. Dolat Capital, which had earlier foreseen a target of price Rs. 1020 for the stock, appears to have lost its nerve. It now recommended a Sell with a target price of Rs. 648.
Speaking for myself, I am not inclined to let go of an opportunity like this to tuck into a top-quality stock. I already have a chunk of the stock which I bought on the day of the debacle and I intend to keep adding to that on every decline. We’ll know in six months whether Mohnish Pabrai’s theory was correctly applied to IPCA or not!