IPCA Laboratories Ltd

NSE:IPCALAB

Earnings Call Analysis

Ipca's Strong Domestic Growth Amid Export Challenges

Ipca Laboratories reported a 12% growth in domestic formulations for Q1 FY25, surpassing the 9% market growth. Despite facing shipping and supply chain issues, which led to a slight 1% decline in export formulations, the company showed resilience. They anticipate a 9% overall growth for FY25, slightly down from an earlier 10.5%-11% forecast. Margins improved, with a stand-alone EBITDA margin of 22.25% against the 21% guidance, and consolidated EBITDA at 18.52%. The company is optimistic about launching 12-13 new products in the U.S. market over the next two years, enhancing plant utilization and profitability.

Strong Domestic Growth Amidst Challenges

Ipca Laboratories has demonstrated a commendable performance in its domestic formulation business, reporting a growth of 12% for Q1 FY'25. The company has outpaced the industry growth, achieving a 15% increase in sales compared to the Indian Pharmaceutical Market (IPM) growth of 9%. These gains are reflected in both the acute and chronic segments, where Ipca recorded growths of 12% and 20%, respectively, compared to the industry averages of 8% and 11%. The company’s market share has also improved significantly, rising from 2.06% in Q1 '23 to 2.17% in Q1 '24 .

Export Challenges and Margins

The export formulation business has faced a 1% decline, largely due to logistics challenges and supply chain issues. The company has struggled with shipping delays and container availability, which adversely affected their performance in markets like Australia and New Zealand. Despite these setbacks, the company has seen a reduction in price erosion to about 2-3%, helping maintain relatively stable costs .

Improvement in Margins

On the profitability front, Ipca has shown an increase in margins due to an improved product mix, lower input costs, and controlled manufacturing costs. The stand-alone EBITDA margin for Q1 stood at 22.25%, surpassing the earlier guidance of 21%. Consolidated EBITDA margins reached 18.52%, also exceeding the annual guidance of 18%. This improvement is attributed to the company’s focused efforts in enhancing operational efficiencies and better procurement strategies .

Guidance and Forward-Looking Statements

Looking ahead, Ipca has adjusted its revenue growth forecast slightly lower, from an initial projection of 10.5-11% to around 9% for the full fiscal year. Despite the decline in export performance, the company remains optimistic about the future, anticipating better results in the upcoming quarters as logistics issues are gradually resolved. Profitability projections are also optimistic, with potential exceeding the guided EBITDA margin by around 0.5 to 1 basis point higher than previously estimated .

Expansion in the U.S. Market

In terms of geographic expansion, Ipca has made progress in the U.S. market, launching 2 products and planning to introduce 3-4 more products within the current financial year. Over the next two years, Ipca expects to have 12-13 products in the U.S. market, which will boost both plant utilization and overall profitability. Although no new pipeline filings were done in the U.S. for the past decade, the company is currently building this pipeline with new filings expected within 6-8 months .

Integration of Unichem Operations

The integration of Unichem's operations into Ipca has shown promising results. Cost efficiencies in procurement and operating expenses have improved margins. The company has implemented operational efficiencies, reduced utility costs, and optimized shipping costs, reversing the air-to-sea shipment ratio to reduce costs despite a general rise in freight charges. These synergies are expected to reflect more significantly in financial results over the next 1.5 to 2 years .

Earnings Call Transcript 2025-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to the Ipca Laboratories Earnings Conference Call, hosted by DAM Capital Advisors Limited. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Nitin Agarwal from DAM Capital Advisors Limited. Thank you, and over to you, Mr. Nitin.

[Nitin Agarwal, analyst]

Thanks, Priya. Good afternoon, everyone, and a very warm welcome to Ipca Lab's Q1 F '25 earnings call hosted by DAM Capital Advisors Limited. On the call today, we have representing Ipca Lab management, Mr. A.K. Jain, Managing Director; and Mr. Harish Kamath, Corporate Counsel and Company Secretary.

I'll hand over the call to Mr. Jain to make the opening comments, and then we'll open the floor for a quick Q&A. Mr. Jain, please go ahead, sir.

[Ajit Kumar Jain, executive]

Thanks, Nitin, and DAM Capital for organizing this call. Good afternoon to all participants, and thanks for taking out time and joining us for FY -- Q1 FY '25 earnings call. Today's call and discussions and answer given may include some forward-looking statements based on our current business expectation that must be viewed in conjunction with the risk that pharmaceutical industry business faces.

Our actual future financial performance may differ from what is projected and perceived. You may take your own judgment on information given during the call. Our domestic formulation business for the quarter has delivered a growth of around 12%. If you look at external data, [ mid ] June '24, Ipca is ranked as a 16th pharma company in IQVIA, and it's the fastest-growing company among the top 20 players as per mid-June '24.

We have delivered market beating growth in both acute and chronic segment and that are recorded by IQVIA for Q1 '25. Overall, IPM in this period has grown by around 9% and Ipca delivered growth of 15%. On acute segment, IPM growth was around 8%; we have growth of around 12%. And on chronic segment, IPM growth was 11%, and we have delivered around 20% growth as per IQVIA.

The company continued to increase its market share, the mid-June 2024, our market share has crossed around 2.01% from 1.91% in mid-June '23. And for Q1 '24, our market share has gone up to around 2.17% as against Q1 '23 of 2.06%. So there is a clear gain of almost around 11 basis points.

On export formulation business, there is a decline of 1% in Q1 '25 from around INR 398 crores to INR 395 crores. We have faced major challenges in shipping, getting containers timely and some of the challenge also faced in -- on supply chain side, that has resulted in a decline in the business.

On API business, we continue to face some challenges. And in Q1 '25, the business declined by 2% to INR 295 crores as against -- from INR 295 crores to around INR 287 crores. On margin basis, if you look at margin or stand-alone EBITDA margin for Q1 is 22.25% is better than our guidelines of 21% for the financial year.

Our consolidated EBITDA margin is around 18.52% is also better than overall guidelines for the year at around 18% for the year. Improvement is -- in the margin are because of improvement in overall product mix, lower input costs as well as lower manufacturing and other costs.

Income from operations, if you look at, the company has delivered a stand-alone growth of around 5%. It is lower compared to our guidelines of around 10.5% to 11%, largely because of exports that we have discussed above. We expect better growth in line with our projections for Q1 '25 and also for the rest of the year.

Consolidation results are not comparable as Unichem results are consolidating -- consolidated from the second quarter of the FY '24. Having given the broad numbers, then I would request participants to ask the questions.

[Operator]

[Operator Instructions] The first question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.

[Tushar Manudhane, analyst]

Sir, on the gross margin front, firstly on an ex-Unichem basis, there has been a very healthy win. Is this to do with lower exports? And so as the exports scale up, would we see some rationalization of gross margin going forward?

[Ajit Kumar Jain, executive]

Let's say, our export also, we have good margins. It's not that except the U.K. where the margins are a little lower, but all other markets also we have got good margins. So that's the reason for overall...

[Tushar Manudhane, analyst]

So this kind of gross margin is sustainable for FY '25 per se?

[Ajit Kumar Jain, executive]

If you look at this, the only factor which is there, we have lower gross margin on API side and API business has not grown. So to some extent, because of this product mix also, there is margins could be better. But is largely because of product mix improvement and also because of lower input costs. And also our operating costs remaining in control.

[Tushar Manudhane, analyst]

Understood, sir. And exports...

[Ajit Kumar Jain, executive]

If you look at our manufacturing and other expenditure, that has grown by just 2% here. .

[Tushar Manudhane, analyst]

Right, right. And on the...

[Ajit Kumar Jain, executive]

Employment costs may be around 9%, here.

[Tushar Manudhane, analyst]

Yes. So sorry for that, sir. Sir, secondly, on the exports also, do you see revival happening soon or this logistics issue might prevail for a couple of quarters?

[Ajit Kumar Jain, executive]

Logistics issue will take some more time because the ground situation has not improved yet. So those issues will continue for some more time. But export certainly will improve. I think the major setback in this quarter, we have faced -- in one particular geography, Australia, New Zealand, where the business has gone down by almost around INR 40 crores, so that is the one, which is, by and large, is relating to some supply chain on the API side that got a little issue. So we didn't -- we are not able to manufacture those kind of products, supplies may come in the -- maybe in this quarter. So if things start happening again on [indiscernible] from that market. So that was the major challenge we have faced during this quarter and some export shipments also got a little delayed in the market here because of the shipping issues.

[Tushar Manudhane, analyst]

Understood. And lastly, on API side, if you could just share what would have been the volume growth and the price erosion that would happen in the quarter?

[Ajit Kumar Jain, executive]

So erosion now very limited, right? Price erosions were there, but now it's very, very limited. Now it's not, maybe 2%, 3% here and there, but price erosion trend has stopped now. And I would say that the input cost is also now moving up to that extent. There is a marginal improvement here and there in solvents and others. But by and large, margins are -- your material costs are also very stable here.

[Operator]

The next question is from the line of [ Ayan ] from Nomura.

[Unknown Analyst]

Just wanted to understand the issue on export formulation and API, you highlighted supply issues. So the guidance that you had given end of last quarter, now with respect to API delivering 6%, 7% growth and generic also double-digit growth. How should we think about that given this uncertainty? And how much it can be recovered for the rest of the year?

[Ajit Kumar Jain, executive]

Yes. Guidance is around -- the overall guidance, if you look at was 10.5% to 11% growth for the year. And I think second quarter, we will certainly deliver that kind of growth. And going forward, also that kind of growth will come, but I think whatever deficiency has come in the quarter, that's very difficult to bridge. So overall, for the year, there could be overall growth of around 9% or so, broadly.

[Unknown Analyst]

Okay. Understood. And on Unichem, if you can update on the progress that you've seen. We've seen improvement in gross margins. And the overheads have remained largely flat. So how are you thinking about the progress there? And the synergies that you mentioned, both on the revenue and the cost side, where are we with respect to realizing those? And if you can give some color on the future here.

[Ajit Kumar Jain, executive]

So on the top line side, I think there is marginal pressure on pricing. So it's not very high. Even looking at that also, the overall -- the gross margins have improved because we could substantially reduce the lower pricing on procurement side and advantage, we could extent for the overall, combining the volumes of procurement of Ipca and Unichem put together and then negotiating the price. So our price negotiation is far more improved. There are certain operating efficiencies has come in their operations, and that is also resulting in the overall better margin side.

And on utility side, they have further improved the cost on utilities, and therefore, the manufacturing other expenses have not grown in line with overall business growth and all so that also savings has come. Some of the intermediates, they could reduce the cost of production. And I think that's going to be commercialized in next 2 quarters. So that advantage will also come.

And as far as other objectives of market extensions are concerned, there is every month review is happening and lot of work are happening on that line. But it's maybe -- I think those advantage would come in the, I think, maybe around 1, 1.5 years from now. It's -- nothing is going to come very quickly because a lot of work are happening, the other compilations are going on. They will be filed with regulators.

And once they review and whatever their queries are there, that replied, only after then, we will get the approvals and then marketing preparations, all that. So it's a 1.5 to 2 years kind of journey. So that work is continuously going on for extending products to the various markets, whether it's Europe, whether it's a market in Latin America, like Chile or whether it's Australia and New Zealand or those kind of Canada markets.

So everywhere those kind of work are happening. So that's a little longer term, and that is what will give the real advantage once those benefits start coming in. On API process reduction side, also a lot of work is happening. But again, it may take 1.5 years' time for that to reflect in the results.

So right now, it's basically all low-hanging fruits, that is what we could like, say, operating efficiencies, purchasing efficiencies. And their shipping costs, I think earlier, they were practically almost around 60% of their volumes were going through air and 40% by sea for U.S. market. So that has been reversed now. It's only 17%, 18% is now going by air. But in spite of that, their freight costs have moved up in this quarter is largely because sea freight has also gone almost around 3x. So that is some -- but overall, maybe I think in time to come, the situation [indiscernible] and I think what operational efficiencies which we have built up, that will bring even shipping costs and time to come down. So that will further add to the overall profitability of Unichem. Yes.

[Operator]

Next question will be from the line of [ Shiva ] from Purnartha Investment Advisors.

[Unknown Analyst]

Congrats on strong margins posted. My first question is with respect to Unichem. For the full year, I just wanted to understand, obviously, Unichem posted a great number last year in generics. So the base has been a little bit on the higher side. And the first quarter, as you pointed out, one was the logistics, which is pulled off. But on an overall level, how do you see the environment of generics in U.S.A. per se? And how do you look at it for Unichem?

[Ajit Kumar Jain, executive]

So there are not much of pricing pressure. It's only marginal pressures are there. But otherwise, let's say, the U.S. is a good market, and we are not seeing that kind of bloodbath now. So it's a better time for this business overall.

[Unknown Analyst]

And the demand outlook is strong. How are you -- like, do you feel there's a double-digit potential growth? Or how do you look at the overall growth?

[Ajit Kumar Jain, executive]

It's possible to achieve double-digit kind of growth for us, yes.

[Unknown Analyst]

Okay. Helpful. Okay. And with respect to MR, obviously, we've added substantial amount earlier. Just wanted to understand what was the productivity of the MR for the full last year? And what is the current strength? And how do you look at the productivity for this year -- as a percentage of [indiscernible] the exact number, but how -- what kind of improvement are we looking at?

[Ajit Kumar Jain, executive]

We have around -- close to around 6,500 MRs right now, last year may around a little less than 6,000 around that time. And some more MRs are being added now because 1 more division on pain we are starting now. It may be around next 2 months' time that division will be launched in the market. So in overall productivity, I think around first quarter last year, we had a productivity of 4.21 lakhs.

And current year first quarter, it is around, I think, 4.52% kind of -- 4.52 lakhs of the productivity for month. So -- but there is a significant improvement from 4.21 lakhs to 4.52 lakhs per month, despite the overall increase in the sale staff.

[Operator]

[Operator Instructions] The next question will be from the line of Damayanti Kerai from HSBC.

[Damayanti Kerai, analyst]

Sir, you mentioned the shortfall on the export side, which you have seen in 1 quarter that might not be bridged. So how do you see the overall export growth for the market? And in terms of profitability at the consolidated level, what are your expectations for FY '25?

[Ajit Kumar Jain, executive]

Overall, I think top line growth, our earlier projection was around 10.5% to 11%. That may remain around 9% for the whole of the year for the company. I'm talking Ipca as a stand-alone. And as far as profitability are concerned, I think that it's going to be better than what we have initially projected -- what the earlier guidelines we have given last year was -- for Q4, around that time the profitability of around 18.5% overall, we have the consolidated margins we have guided.

And overall EBITDA for the stand-alone was guided around 20.5% to 21%. So there are possibility of further improvement in that because our current quarter margins are better and second quarters are much better quarter. So it may further exceed that and overall, margins are -- maybe around 0.5 basis point to 1 basis point, it will be higher than what guidance we have given earlier.

[Damayanti Kerai, analyst]

Okay. That's helpful, sir. And my second question is if you can update us on your advancement in the U.S. market in terms of how you're advancing in supplies or in filing for the market? Like I understand it's slightly longer term to scale up, but nonetheless, if you can talk about the progress which have -- which you have seen so far. .

[Ajit Kumar Jain, executive]

So currently, we are -- I think, 2 products are launched already there. And I think in this balance period of current financial year, at least 3 to 4 products will be commercialized more. So around 5 to 6 products will be launched in current year, and then next year may be another 6 to 7 products may be launched. So overall, next 2 years, I think we should reach to around 12 to 13 kind of products in the market, yes.

[Damayanti Kerai, analyst]

Okay. But this should be helping at least in better utilization of your U.S. plants, right? Although sales will come maybe later on. We'll see better sales later. But at this point of time, you are utilizing plants better and that has been...

[Ajit Kumar Jain, executive]

Utilizing plants better, and that will also improve the overall profitability because most of these products are from captive consumption. So particularly, everything is from captive consumption. So our API plant utilizations and our formulation plant utilization, both will -- would be -- and that will lead to the overall margins also.

[Damayanti Kerai, analyst]

So sir, 12 to 13 launches in next 2 years, cumulatively. And what's the update on the filing part? Are you filing new products or on the existing ANDAs only you are trying to update those deals?

[Ajit Kumar Jain, executive]

See, last [ 10 years ], we did not work on U.S. market. So there is no pipeline for filing in Ipca as far as -- so that pipeline is building now. So -- and it takes time. So a lot of [indiscernible] studies and other things are going on. So once we file, then we will start updating. But still, I think maybe 6, 8 months away from filing anything new.

[Damayanti Kerai, analyst]

Okay. Sir, that's helpful.

[Operator]

[Operator Instructions] As there are no further questions from the participants, I'd like to hand over the conference to the management for closing comments.

[Unknown Executive]

We have nothing to add. So if there are no further questions, we can close this con call.

[Operator]

Thank you. On behalf of DAM Capital Advisors Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.