Ipca Labs

 

At A P/E Multiple Of 18, Stock's Relatively High For A Mid-Sized Pharma Company

 

THE stock of Ipca Labs, a mid-sized Indian pharma company, has seen a rerating on bourses. The price has quadrupled in the past one year, thus significantly outperforming the Sensex.

   The company's steadily improving financial performance, along with the promise of future growth, has enhanced investor interest in the stock. Traction in the domestic formulation business and increased exports of active pharmaceutical ingredients (APIs) have led to an increase in revenues as well as enhancement of profit margins since the past three consecutive quarters. The company is expected to maintain its current growth trajectory.

   Growth in domestic formulations, increase in exports earnings from the formulations business in the US and other semi-regulated markets and growth in revenues accruing from the Indore SEZ plant — once it receives US FDA approval — are going to be the growth drivers for the company, going forward. Consequently, several broking firms, over the past quarter, have recommended this stock to investors as an attractive bet in the mid-cap segment, fuelling a rally in its stock price. In February, the company announced a stock split, which further added bullishness to the stock.

   The stock hit an all-time high of Rs 304 on March 22 and is now priced at Rs 269. It is currently trading at a price-to-earnings multiple of 18 — relatively high for a mid-sized pharma company. At a market cap of Rs 3,400 crore, the company is valued at a little over twice its annual revenues of Rs 1,500 crore. These are fair valuations in the pharma sector for a growth-oriented company.

   Most of the near-term bullish factors leading to an upside in earnings have been factored into the current stock price. Considering this, along with current stock valuations, there seems to be a limited upside to the company's stock price. New investors would be better off avoiding buying this stock at a high price level.