Ipca Laboratories (IPCA IN): Domestic Business Is the Key Growth Driver

Ipca Laboratories is a fully-integrated Indian generic pharmaceutical company manufacturing both formulations and APIs. The company’s domestic formulation business (contributes 42% of total revenue) is back to its double-digit growth path, driven by its focus on fast growing lifestyle related therapeutic segments, including pain management, cardiovascular, and anti-diabetes. With the recovery of the base business (non COVID portfolio), pain management segment grew 36% y/y and contributed ~49% of domestic formulation business in Q1 FY22. Pent up demand with the declining incidences of the COVID-19 and increasing vaccination in India should lead to volume-driven growth for the domestic formulation business. Management guided for 16–18% y/y growth in domestic formulation segment in FY22, which seems conservative. Ipca Laboratories checks most of the boxes for being considered as a sound investment idea, which include stable sales growth (five-years CAGR of 13%, mainly driven by volume), expanding margins (1,700 basis points margin expansion since FY18), debt-free balance sheet, robust liquidity with cash balance of INR 9 billion, and RONW ratio of 20%+. The stock is currently trading at a P/E of 30x, which seems reasonable compared to its peers and industry average. Recent correction in the stock is an attractive buying opportunity for the long-term investors.