It has become fashionable for investors to slay brokerage reports and broking community as whole, while there is no denying fact that sell side analysts often have incentives to churn out report after report to keep the client trading, However we can’t discard the good work done by brokerage community, some of the brokerage houses certainly do a fair leg work and follow-up on their recommendations.

I think we as investors can benefit by using one simple principle – Separate Fact from Fiction

So how do we do it ?

Inquisitiveness will help us, in this post I would run an example using an ICICI Direct and Dolat Capital report on IPCA laboratories to demonstrate how we can leverage on good work done by these brokerage houses. Interestingly one brokerage is recommending sell while other one is recommending buy – Love these situations 🙂

Let’s begin download copies from here & here, and to gain maximum from this post keep those reports and read them in tandem with content below

First up commentary on,

Operating Margin


EBITDA margins increased ~314 bps to 24.7% (I-direct estimate: 24.0%) mainly on the back of an improvement in gross profit margins and savings in manufacturing expenses. EBITDA grew 35% to 230.9 crore


Operating margins were up by 344bps to 24.7%. This was mainly on account of higher export biz.


While both reports have confirmed that operating margins have improved (Fact) but the guess-work is going on in terms of reason for improvement (Fiction)

Operating margins improve when you operate better not when increase sales, So clearly Dolat’s report has got the direction wrong

Having spotted our first fiction I will now turn your attention to growth forecast, as an investor I would take them with a pinch of salt, it is very difficult to predict precisely growth forecast

Side note – Always compare with how industry in growing


We expect export formulations to grow at a CAGR of 14% between FY14 and FY16E to 1879 crore

We expect Indian formulations to grow at a CAGR of 16% between FY14 and FY16E to 1308 crore.


Domestic formulations reported growth of 11.7% YoY at 2.9 bn ,Going forward, expects to grow in the range of 16-17% for FY15E

Both the reports are in sync in terms of growth forecast, for company like IPCA which has ROE 20% + we can safely use it to build DCF value per share

Perhaps this is best advantage of using brokerage reports we can figure out analyst estimates of earnings growth to use it in our valuation models


Now let’s see reasons for increase in bottom line as highlighted by reports


Net profit increased ~103% to 145.5 crore (I-direct estimate: 149.8 crore) on the back of higher EBITDA margins and favourable currency benefits (gains vs. loss in Q1FY14)


PBT for quarter grew 34.2% YoY to ` 1.9bn. Tax rate stood at 26.0% against 17.0% in Q1FY14. Consequently, adjusted PAT grew 19.6% YoY to 1.4bn.

Again you gain few insights here

  1. Currency tailwinds – Will they continue ?
  2. EBITDA margins up due to saving in material cost and manufacturing expenses besides better product mix, is it a constant source of ROE ?
  3. Why tax rate has gone up ? With SEZ it should have gone down, The Dolat numbers are not matching with Q1FY14 tax rate in ICICI report which states it to be 21.5% as against 17% stated by Dolat report

Moving forward ignore the excel work, what is notable – the broker recommending sell is expecting higher PAT 681 Cr in 2016 compared to brokerage house recommending buy 651 Cr





Valuation logic


We expect revenues, EBITDA and adjusted net profit to grow at a CAGR of 13%, 13% and 17%, respectively, in FY14-16E. This is our second revision after the management call to address the Ratlam 483 letter a few days back. We have better clarity of the issues after the Q1FY15 earnings call and believe the management is reasonably prepared for any adverse eventualities in the form of warning letter or import alert from the USFDA. All our qualitative assumptions except this aspect remain constant. Our revised target price is 827 based on 16x FY16E (revised) EPS of 51.7


We believe the inspection observation will be an overhang on the stock price in the near term given the uncertainty regarding the timelines for resolution. Even though the stock would appear to be cheap, we expect the stock to languish in the near term since the Ratlam API facility is critical for Ipca as it is the sole plant catering to the US market. At CMP, the stock trades at 16.3x FY15E & 13.4x FY16E earnings. We downgrade to ‘Reduce’ with a revised target price of ` 648 (12x FY16E EPS).


The buy / sell recommendation is entirely based on PE ratio at which the brokerage thinks the company would trade (Fiction) however both brokerage are predicting EPS of around 50+ for FY16

As investor now it’s your call to decide which way you want to bet

PS – I am not paid by any brokerage to cover them in post