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Analyst Nishith K. Sanghvi +91-22-4322 1355 email@example.com
Indoco Remedies Ltd.
Indoco Remedies (Indoco’s) growth outperformance during FY13 in the domestic business (15% YoY) despite an acute heavy portfolio inspires confidence on the strength of the franchise (albeit on a lower base). Supplies of high margin ophthalmic products (~5 products) of market size US$638 mn in FY14 and similar number of launches in FY15 will be the next growth engine. We believe continued momentum in domestic business and beginning of supplies to the US, will address investor concerns on margins. We initiate coverage with BUY.
Nifty: 5,924; Sensex: 19,568
CMP Target Price Potential Upside/Downside Rs64 Rs80 +25%
Domestic business: Acute therapy outperformance; 15% CAGR over FY13-FY15E
Indoco’s domestic business has witnessed healthy growth on a sustained basis since Q1FY12 despite the company having a acute:chronic mix (90:10). The company has reported 12.9% YoY growth in Q4FY13 and 15.4% in FY13. Outperformance in Anti-infectives and GI space coupled with stomatological products have driven the growth for FY13. Indoco’s carving of cardio and diabeto (CND) products into a new CND division which includes sartan, statins and glyclazide with 245 MR’s is a step in the right direction. The domestic business size at Rs3.4 bn/Rs3.9 bn in FY12/FY13 is expected to grow at 15% CAGR over the next two years.
Key Stock Data Sector Pharmaceuticals Bloomberg / Reuters INDR IN / INRM.BO Shares o/s (mn) 92 Market cap. (Rs mn) 5,898 Market cap. (US$ mn) 104 3-m daily average vol. 10,774
International business: Opthal launches in US to address US$638 mn market in FY14
Indoco is expected to launch 5 products with cumulative market size of US$638 mn in FY14 in partnership with a large US generic company. We believe the strength of Indoco’s partner in gaining market share coupled with low competition can present a substantial upside as the company has a profit sharing model in the same. We have conservatively factored US$5 mn in FY14E and US$11 mn in FY15E from the partnership.
Price Performance 52-week high/low Absolute (%) Rel to Sensex (%) -1m 2 3 Rs83/52 -3m -12m 1 18 (1) (4)
Operational parameters to witness improvement: Capex set to decline
Indoco’s EBITDA margin improvement from 13.7% in FY10 to 14.2%/14.7% in FY12/FY13 is mainly due to high growth in the domestic business. With high margin supplies to US partner along with continued momentum in the domestic business, the EBITDA margin will improve going ahead. The company does not envisage any major capex over the next 2 years. Indoco’s RoE/RoCE is expected to witness an improvement from 10.8%/12.8% in FY13 to 17.3%/16.9% in FY15E.
Shareholding Pattern (%) Promoters FIIs/NRIs/OCBs/GDR MFs/Banks/FIs Non Promoter Corporate Public & Others Relative to Sensex
140 130 120 110 100 90 Nov-12 Dec-12 May-13 Oct-12 Jun-12 Jan-13 Apr-13 Jul-12 Feb-13 Aug-12 Sep-12 Mar-13 Jun-13
59.2 2.9 14.1 2.9 20.9
Outlook and Valuation
The stock has underperformed the Sensex over the last 6 months mainly on back of investor concerns on operating margins and delay in supplies of ophthalmic products to its US partner. The stock currently trades at 6.7x on our FY15E EPS, which is cheaper than its peer set. Indoco looks set for promising growth prospects over the next couple of years led by strength in domestic business and likely trigger from its US launches. We initiate coverage with a BUY rating, with a TP of Rs80 (8.4x FY15E EPS). Table: Financial snapshot (Standalone)
Year FY12 FY13 FY14E FY15E Revenue EBITDA EBITDA (%) Adj. PAT EPS (Rs) 5,643 6,295 7,384 8,653 801 922 1,091 1,315 14.2 14.7 14.8 15.2 464* 432* 678* 878* 5.0 4.7 7.4 9.5 12.7 13.7 8.7 6.7 8.3 7.1 5.8 4.5 12.6 10.8 15.3 17.3
P/E (x) EV/EBITDA (x) RoE (%) RoCE (%) 12.3 12.8 14.6 16.9
* Includes forex loss in lieu of ECB.
Source: Company; IDBI Capital Research
6 30.8 5.3 (4. IDBI Capital Research (%) Q2FY13 27.0 20.2 Q4FY13 13.3 Q1FY13 11.2 13. Table: Growth in Lifestyle segment over the last 4 qtrs Q1FY13 Lifestyle segment growth Source: Company.1 0.8 11.2 6. gradual increase in productivity Indoco’s domestic business (65% of revenue) currently has 8 marketing divisions with 2.9 21.0 15.8 8.9 27.2) 11.6 16.7 8. Investment Arguments Domestic business: Acute therapy outperformance.8 13.2 8.0 8. anti-infectives and GI have outperformed the market while respiratory segment has grown in-line with the market.3 12.5 7.2 4.9 13.5 6.0 18.300 MR’s.0 5.9 31.4 25.7 13.4 7.0 Q3FY13 20.5 (%) FY13 8.4 Q2FY13 9.6 15.7 17.5% in Q4FY13.7 14.4 3.4 22. Gastro Intestinal (15%) and Gynaecology (6%). For FY13. The current acute:chronic mix stands at 90:10.8 10. Acute/Chronic mix which is currently at 90:10 is expected change to 80:20 (management comments) in the next two years.9) Q4FY12 15. Table: Key therapy growth performance vis-à-vis IPM Q1FY12 Respiratory – IPM Respiratory – Indoco Anti-Infectives – IPM Anti-Infectives – Indoco Gastrointestinal – IPM Gastro Intestinal – Indoco 9.8 16.6 17.4 11.0 13.Company Report – Indoco Remedies Ltd.3 9.6 2 .3 Q3FY13 8.8 34.6 5.4 Source: Company.4 (0. The company has outperformed the domestic IPM growth during FY13 on primary basis.7 14.8 H1FY12 10.0 16. Anti-Infectives (18%). Table: Products reporting strong quarterly growth Q1FY13 Cyclopam Tab Sensodent-K 100 Gms Cital liquid-100 ML Source: Company.1 12.0 18. Its chronic portfolio has products in Cardiac-Diabetes and Multi-vitamin segments.8 9.4 7.1 10.9 5.3 Q4FY13 6. Industry.1 11. Stomatologicals (15%).2 16. IDBI Capital Research We observe that the company’s has been growing in-line with market growth and secondary growth over the 7-8 quarters.8 7. Key therapies in domestic market include Respiratory (21% of DF revenues).5 12.9 (%) FY13 11. IDBI Capital Research (%) Q2FY13 20.5 12.3 23.8 Q4FY13 22.6 20.2 7.1 Q3FY12 18. The Top-5 therapies contribute 74% to the total domestic formulations revenues of the Company.9 15. Indoco’s domestic business has been witnessing higher than market growth since Q1FY12.1 7.8 7.0 17.9 11.9 12. IDBI Capital Research The growth in the anti-infectives and GI has been higher than industry over the last 3 quarters while respiratory segment has been impacted owing to seasonality.9 12.3 7.4 17.5 12.8 14.8 9.7 14.7 16.1 5. due to strong growth in chronic portfolio (upwards of 20%).4 12.8 19.7 (1.1 Q3FY13 16.1) 10.6 3.0 The lifestyle segment has been growing upwards of 20% in Q2FY13 and Q3FY13 and 13.7 13.4 Source: Company.5 17.9 14.2 9. According to the company’s management.2 17.6 14.0 12. Table: Domestic growth performance Q1FY12 H1FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 H1FY13 Q3FY13 9MFY13 Q4FY13 Total – IPM Secondary Growth Primary Growth 13. Industry.
2 FY11 3.7 International Market – Shift in Focus to Partnership Model from Contract Manufacturing Indoco’s key markets in the EU include the UK and Germany.111 23 305 60 1.300 1.4 2. The supply partnerships are more of contract manufacturing in nature and hence there is a cap on margin upside.0 FY15E 5. This we think will continue to improve gradually as the portfolio mix changes. The company plans to launch 4-5 products with cumulative market size of US$638 mn.800 1.707 1. Indoco is in process of filing its own product dossiers in the EU market.0 2.7 2. Indoco entered into a dossier licensing and supply deal with Aspen for the supply of 7 ophthalmic products to 30 emerging countries – including BRICS.490 15.814 21 195 (46) 2.208 22 245 26 2. The company has added brands like Telmicheck (Telmisartan). Gradual improvement in MR productivity Indoco had created a new division i. Cardio & Diabeto (CND) with 6-7 products and 245 Medical Representatives (MRs) in Feb-12.e. IDBI Capital Research (Rs mn) FY12 3.1 2. which will aid the company in commanding better pricing.5 FY13 3.500 1.0 2. The company expects a similar number of launches in FY15 which we have not factored in our estimates.091 Contracts with DSM and Aspen may give additional kicker In Mar’10. for marketing eight of Indoco’s Active Pharmaceutical Ingredient in various geographies.200 1.009 FY14E 2. 3 . Table: Market size for product launches in US of US$638 mn Products Product I (plain + combination) Product II (combination) Product III Source: Company.300 2.163 15. The company has also signed an agreement with DSM. Table: Domestic business to continue growth momentum FY10 Domestic Formulations YoY (%) MR MR productivity Source: Company.855 FY13 1.453 FY15E 2. of competitors 4-5 4-5 4-5 We have factored in US$5 mn coming from Watson supplies in FY14 and US$11 mn in FY15. Indoco’s MR productivity is one of the lowest in the industry due to its acute heavy portfolio. Table: Indoco’s Export formulations business FY10 Regulated Markets (includes Watson) YoY (%) Semi-Regulated markets (includes Aspen) YoY (%) Total Source: Company. Austria. IDBI Capital Research (Rs mn) FY11 1. we believe that price erosion is likely to be lower and may present a high margin profile.300 2. Over the last 2 years the deal has been expanded to include 50 products which include both steriles and solid dosages.685 22 295 20 2.Company Report – Indoco Remedies Ltd.5 1.7 FY14E 4.416 FY12 1.904 15.382 10. Given that the products have lower competition and are sterile. Product launches from Watson: A key event The Watson portfolio currently has 21 products – with cumulative market size of US$3 bn in the US – out of which 10 have been filed. Rosuvastatin & Glychek (Gliclazide).980 900 19 191 0 1.495 34 360 18 1.073 13. IDBI Capital Research Market Size (US$) 250 200 188 Launch Q2FY14 Q4FY14 Q4FY14 No.
The company’s RoCE is likely to improve from 13. These capacities can aid revenue growth for the next 3 years.3 With declining capex and improving EBITDA margin we expect the company’s return ratios to improve from 11.2% in FY15 owing to scale up in domestic formulations business and beginning of high margin opthal supplies to Watson.8 16 Q2FY12 932 1447 663 45.9 14. 4 .6 We expect the company’s EBITDA margin to improve to 14. translating to TP of Rs80.2 12. Indoco’s earnings are growing at fastest pace among peers (see Peer Table). Q1FY12 Domestic formulations Total revenues Material cost % of sales EBITDA margin (%) Source: Company.1 Q3FY13 943 1503 635 42.Company Report – Indoco Remedies Ltd.0 14. Declining Capex leading to improving return ratios… Indoco’s capex is expected to decline from Rs803 mn in FY11 to Rs250 mn in FY15 which will aid expansion in the return ratios.5 782 1256 540 43.9% in FY15E with company’s capex declining from Rs587 mn in FY12 to Rs250 mn in FY15.2 11. we expect Indoco to report 17.1% in FY13 to 1 6.6 14. we have not factored in any improvement in the material cost going ahead Table: Material cost improvement on a consistent basis….4x.5 Q4FY13 925 1605 639 39. IDBI Capital Research (Rs mn) Q4FY12 820 1477 648 43.8 Q3FY12 850 1415 639 45. Going forward.3 FY13 (487) 14. Table: Lower capex leading to higher operating performance FY10 Capex EBITDA margin (%) RoCE (%) Source: Company.2% in FY15E.8 11.8% in Q4FY13. Financial Outlook and Valuation With strong focus on high growth domestic segment and improving operating parameters.3% in FY10 to 16. Historically EBITDA margin improvement lags material cost : Set to change going forward Indoco’s material costs have reduced from peak of 45.2% revenue and 43.8 13.7 16. IDBI Capital Research (Rs mn) FY12 (587) 14.8 FY14 (200) 14. However. We expect significant improvement in EBITDA margin from 14.6 FY15 (250) 15.8% in Q2FY12 to 39.8% in FY14E and 15.5 Q1FY13 940 1512 661 43.2 12.9 FY11 (803) 13.2 16.8 14.0% earnings CAGR over FY13-FY15E.7% in FY13 to 15.1 (478) 13.7 12. the company does not envisage any major capex as expansion of its Goa and Patalganga facilities has been expensed. We value the company at a P/E multiple of 8.4 Q2FY13 1096 1645 685 41.9 12.9% in FY15. Initiate with a BUY rating.
Broadly it has been in the range of 14-16% over the last 8 quarters. Figure: EBITDA margin performance broadly in range of 14–16% 20 (%) 18 16 14 12 10 8 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 EBITDA margin (%) Source: Company.531 18.6 43.7 25.8 10.Company Report – Indoco Remedies Ltd.333 12.3 31. Table: Peer Valuation Revenues Market cap Indoco Remedies Torrent Pharma Unichem Alembic Pharma FY14E 7.7 13. The earnings growth is highest amongst all the companies in our coverage space.653 40.2 13.228 FY15E CAGR (%) 8. This is also because its return ratios are lowest in our coverage space.9 20.2% in FY15. its valuation will improve as return ratios start expanding.9 21.6 FY14E 7.2 18.7 14.384 35.015 22.204 14. Indoco is trading at 6.1 Source: Company. lower than any company in our coverage space.2% in revenue during FY13-FY15 (albeit on a lower base) only lower than Alembic Pharma.6 22.070 17. IDBI Capital Research Though the scale of the operations for Indoco are lower than its competitors we believe that with the continued ramp up in the business.8% EBITDA margin in FY14 and 15.4 50.0 13. We have factored in 14.5 57.1 16.7x FY15E.5 8. 5 .3 13. IDBI Capital Research The operating performance of the company has witnessed gyrations in Q3 of FY12 & FY13.2 RoCE (%) FY14E 14.5 27.4 (Rs mn) P/E (x) FY15E 6. Strong growth profile in revenue and earnings but trading at very low multiples… Indoco is expected to witness a CAGR of 17.0 10 EPS (Rs) FY15E CAGR (%) 9.
5 13.4x multiple or higher. IDBI Capital Research 3. We value the company at 8. 6 .0 Mar-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Jan-13 Mar-13 May-13 0. the multiple started declining over the last 1.0 (Rs) 60. Figure: Trading at an average PE of 7.1 10. We believe the beginning of opthal supplies to Watson is a key trigger for the stock.0 80.5 years with investors shifting to companies which offer them growth prospects.0 100.0 20.4 7.1x over the last 5 years 120.Company Report – Indoco Remedies Ltd.0 Prices Source: Bloomberg.9 During the period Aug-10 to Dec-12 the stock has traded at a multiple of 10.4x FY15E with TP of Rs80 and have a BUY rating on the stock. Post the start of supplies the stock can be re-rated to 8. However.5x factoring in the turnaround happening in the domestic formulations space.0 40.
2 54 74 46 Valuation Year-end: March PER (x) Price/Book value (x) EV/EBITDA (x) Dividend Yield (%) FY12 12. EPS (Rs) Adj.448 1.256 5.384 17.411 1.1 12.035 (54) 17 998 (120) 12.8 12. tax) Chg in minorities Other financing activities Cash flow from financing (c) Net chg in cash (a+b+c) FY12 513 187 4 (124) 580 (581) (1) (582) 0 (25) (119) (111) (114) FY13 484 237 (17) (109) 596 (487) (3) (490) 61 112 (119) 27 132 FY14E 770 260 (92) (349) 589 (200) (200) (286) (119) (405) (16) (Rs mn) FY15E 998 280 (120) (404) 754 (250) (250) (200) (119) (319) 186 * Includes forex loss of Rs96 mn in FY12 and Rs128 mn in FY13.653 17.137 105 907 6.0 1.747 379 1.2 9.5 1.5 (4.4 15.8 1. IDBI Capital Research (Rs mn) FY12 3.6 1.2 11.985 4.503 4 4.725 974 974 294 1.295 11.8 0.2 66 74 58 FY13 4.491 194 1.848 1.842) 801 20.592 4 3.7 (6.2 432* FY14E 7.8 10.0 678 (Rs mn) FY15E 8.140 184 3.5 17.6 (5.459 4.515 800 800 348 1.7 7.848 2.411 2.1 4.389 928 1.Company Report – Indoco Remedies Ltd.086 348 1.2 (7.3 5.6 15.611 1.1 1.7 1.985 45 FY14E 3.564 3.7 10.7 1.700 184 4.7 7 .4 7.3 (6.338) 1.459 51 FY15E 3.3 16.7) 14.448 2.845 6.0 878 Cash Flow Statement Year-end: March Pre-tax profit Depreciation Tax paid Chg in working capital Other operating activities Cash flow from operations (a) Capital expenditure Chg in investments Other investing activities Cash flow from investing (b) Equity raised/(repaid) Debt raised/(repaid) Dividend (incl.7 1.848 123 3.220 1.7 FY15E 6.3 14.3 0.8 14.1 1.1 (237) 685 (91) (111) 484 (54) 11.3 (260) 831 (72) 11 770 (92) 12.532 4 3.7 FY14E 8.315 20.5 (280) 1.275 600 600 348 1.923 1.019 1.6 464* FY13 6. Financial Summary (Standalone) Profit & Loss Account Year-end: March Net sales Growth (%) Operating expenses EBITDA Growth (%) Depreciation EBIT Interest paid Other income Pre-tax profit Tax Effective tax rate (%) Adjusted net profit FY12 5.9 54 74 46 FY14E 7.150 7.4 56.7 6.0 (9.564 42 FY13 3.293) 1.5 8.342 1 3. Balance Sheet Year-end: March Net fixed assets Investments Current assets Inventories Sundry Debtors Cash and Bank Loans and advances Total assets Shareholders’ funds Share capital Reserves & surplus Total Debt Secured loans Other liabilities Curr Liab & prov Current liabilities Total liabilities Total equity & liabilities Book Value (Rs) Source: Company.7 FY13 13.459 184 5.7 1.091 18.5 10.611 2.3 1.749 1.2 54 74 46 FY15E 9.6 9.716 6.643 17.5 29.7 8.796 8.956 1. EPS growth (%) EBITDA margin (%) Pre-tax margin (%) RoE (%) RoCE (%) Turnover & Leverage ratios (x) Asset turnover (x) Leverage factor (x) Net margin (%) WC & Liquidity ratio Inventory days Receivable days Payable days FY12 5.275 1.256 59 Financial Ratios Year-end: March Adj.348 8.271 210 980 6.9 1.8 (192) 609 (68) (28) 513 (49) 9.9 1.1) 14.759 7.088 1.373) 922 15.9 1.6 12.086 1.
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