We factor 4QFY20 results, guidance and change in exchange rates into our earnings models.

4QFY20 operationally below estimates; strong guidance for FY21F; earnings visibility to support valuation multiple. IPCA reported strong growth across segments except for branded formulation exports. Revenue growth at 21% y-o-y was 1% below our estimate. The slip in revenues is primarily due to lower branded formulation exports impacted by the domestic lockdown (impact ~2.6% of 4QFY20 sales). India growth at 21% yo-y was driven by strong growth in key brands and higher demand for HCQS. API growth was strong at 30%.

In consolidated financials, IPCA recorded Rs 276.4m as a one-time write-off related to the Pisgah subsidiary. Adjusted for the write-off, the subsidiary performance was largely stable.

Management has guided for revenues of 14-17% growth y-o-y in FY21F with 150bp expansion in the EBITDA margin. To an extent, near-term growth should be supported by supplies of HCQS to the government and other export markets, spill over sales in branded formulation exports, sustained growth in the API segment and ramp-up in the institutional segment. Stable costs, operating leverage and INR depreciation should drive EBITDA margin expansion in FY21F. We factor in 15% revenue growth in FY21F, at the lower end of management’s guidance of 14-17%. Management’s guidance implies an EBITDA range of Rs 11.4 -11.7bn. This compares to our projection of Rs 11.45bn.

We factor 4QFY20 results, guidance and change in exchange rates into our earnings models. Our FY21F/22F EPS estimates are revised by -1%/+3%. We raise our TP to Rs 1,820 based on 21.5x FY22F EPS of 84.7. Our TP implies upside of 16.4%.

Over the past five years, the stock has traded in the range of 15-28.5x and at an average of ~21.5x one year-forward consensus earnings. Hence, our new TP is largely in line with IPCA’s past 5-yr average. We increase our valuation multiple to 21.5x from 20x previously. With relatively strong earnings visibility, we believe IPCA’s multiples can move higher. Based on our assumptions, we find IPCA’s valuations reasonable as we expect 33% earnings CAGR over FY20-22F, a net cash company and ROE of ~20%.