Motilal Oswal's research report has upgraded IPCA Laboratories to a "BUY" recommendation with a target price of Rs 1,950, an upside of 18% from its current market price of Rs 1,659. After several years of lackluster performance, IPCA is now positioned for strong earnings growth driven by broad-based domestic and export market performance, increased productivity, and synergies from its acquisition of Unichem. The company’s renewed focus on compliance, particularly in its U.S. business, combined with new product launches, is expected to drive profitability and improve return ratios over FY24-27.

Key Financial Metrics

Revenue Growth: IPCA’s revenues are projected to grow at a compound annual growth rate (CAGR) of 17.8% over FY24-27, with sales increasing from Rs 88.9 billion in FY25 to Rs 119.6 billion in FY27. EBITDA Growth: The company is expected to post a 30.5% growth in EBITDA by FY27, improving from Rs 17.2 billion in FY25 to Rs 24.9 billion in FY27. Profitability: The adjusted PAT is expected to grow significantly from Rs 8.5 billion in FY25 to Rs 14.2 billion in FY27.

Strong Performance in Domestic Formulations (DF) Segment

Industry-Beating Growth: IPCA’s domestic formulation (DF) business continues to outperform the Indian pharmaceutical market (IPM), with a 14% sales CAGR expected over FY25-27. This growth is driven by its acute therapies (68% of sales) and chronic therapies (32% of sales), with particular strength in the pain management segment. Brand Strength and Execution: The company’s strong brand equity and focus on market share gains have allowed it to outperform in critical therapeutic areas like cardiac, anti-infectives, and dermatology. Key brands such as Zerodol have demonstrated superior growth, and IPCA’s execution strategy is expected to continue delivering strong results.

Export Growth on a Strong Trajectory

Generics Exports Rebound: After years of sluggish growth, IPCA’s export formulation business is expected to see a strong 27% CAGR over FY24-27. This growth is driven by new product launches, enhanced regulatory compliance, and synergies from the Unichem acquisition. US Business Revival: After a decade of underperformance in the U.S. due to compliance issues, IPCA is now geared for recovery. Improved compliance at key manufacturing sites and a robust product pipeline, including new launches expected in the next 6-8 months, will drive growth in the U.S. generics market.

Synergies from the Unichem Acquisition

Cost Optimization: The acquisition of Unichem has provided IPCA with an opportunity to streamline costs, with Unichem’s EBITDA margins expanding by 310 basis points year-over-year to 9.7%. Revenue Expansion: Unichem’s revenue is growing at 16% year-over-year, and the integration of its operations is expected to contribute significantly to IPCA’s growth, particularly in the U.S. market where Unichem holds 75+ ANDAs.

Valuation and Investor Recommendation

Target Price and Valuation: IPCA is valued at 38x its 12-month forward earnings, leading to a target price of Rs 1,950, reflecting an 18% upside from its current market price. The valuation is justified by the company’s improving operational efficiency, enhanced profitability, and synergies from the Unichem acquisition. Return Ratios: IPCA’s return on equity (RoE) is expected to improve from 12.7% in FY25 to 16.5% in FY27, while the return on capital employed (RoCE) will rise from 11.2% to 14% over the same period.

Conclusion

With strong domestic growth, export momentum, and synergies from the Unichem acquisition, IPCA is well-positioned for a significant earnings turnaround. The stock is recommended for a BUY with a target price of Rs 1,950, offering an attractive investment opportunity with long-term growth potential.