1. 1QFY2011 Result Update | Pharmaceutical
July 23, 2010
Indoco Remedies BUY
CMP Rs430
Performance Highlights Target Price Rs541
Investment Period 12 months
% chg % chg
Y/E March (Rs cr) 1QFY2011 4QFY2010 1QFY2010
(qoq) (yoy) Stock Info
Net sales 111 109 2.3 98 13.3 Sector Pharmaceutical
Other operating income 1 2 (5.7) 2 (37.1) Market Cap (Rs cr) 529
Gross profit 63 57 9.6 58 8.1 Beta 0.6
Operating profit 18 11 59.3 19 (5.6) 52 Week High / Low 523/171
Net profit 15 8 80.1 17 (12.2) Avg. Daily Volume 7539
Source: Company, Angel Research Face Value (Rs) 10
BSE Sensex 18,131
Indoco Remedies’ (Indoco) 1QFY2011 results were below our expectations
Nifty 5,449
because of lower-than-expected domestic formulation sales and other operating
Reuters Code INRM.BO
income. For FY2011, the company has reiterated its guidance of 20–25% growth
on the domestic formulation front and 30–35% growth on the export front, which Bloomberg Code INDR@IN
would result in composite top-line growth of 21–26% with OPM in the range of
18–19%. Indoco plans to incur capex of Rs93cr (34% of GFA) in FY2011.
Shareholding Pattern (%)
We recommend Buy on the stock.
Promoters 60.4
Domestic segment disappoints: Indoco reported net sales of Rs111.4cr (Rs98.3cr) MF / Banks / Indian Fls 11.6
up 13.3% in 1QFY2011, which were below our expectations because of FII / NRIs / OCBs 4.0
lower-than-expected sales on the domestic formulation front. The company Indian Public / Others 24.0
reported OPM of 15.8% (18.9%), which contracted by 316bp due to higher
raw-material cost. Indoco reported net profit of Rs14.8cr (Rs16.8cr), down 12.2%
yoy, which was lower than expectations. Other income for the quarter declined by Abs. (%) 3m 1yr 3yr
37.1% to Rs1.5cr (Rs2.4cr). Sensex 2.5 19.0 15.2
Indoco 5.0 148.3 59.4
Outlook and Valuation: We expect net sales to post CAGR of 16.1% to
Rs536.8cr and EPS to register CAGR of 25.7% to Rs54.1 over FY2010–12E.
At Rs430, the stock is trading at 10.9x and 7.9x FY2011E and FY2012E
earnings, respectively. We recommend Buy on Indoco, as the company’s
long-term drivers are intact, with a Target Price of Rs541.
Key Financials
Y/E March (Rs cr) FY2009 FY2010 FY2011E FY2012E
Net Sales 351 398 455 537
% chg 33.5 13.6 14.2 18.0
Net Profit 32 42 49 67
% chg 4.5 33.7 15.2 37.2
EPS (Rs) 25.6 34.3 39.5 54.1
EBITDA Margin (%) 13.2 13.4 15.4 16.6
P/E (x) 16.8 12.6 10.9 7.9 Sarabjit Kour Nangra
RoE (%) 11.8 14.5 15.2 18.7 Tel: 022 – 4040 3800 Ext: 343
RoCE (%) 10.5 10.9 12.6 14.6 sarabjit@angeltrade.com
P/BV (x) 1.9 1.7 1.6 1.4
Sushant Dalmia
EV/Sales (x) 1.6 1.4 1.3 1.1
Tel: 022 – 4040 3800 Ext: 320
EV/EBITDA (x) 12.0 10.5 8.5 6.7 sushant.dalmia@angeltrade.com
Source: Company, Angel Research
Please refer to important disclosures at the end of this report 1
2. Indoco Remedies | 1QFY2011 Result Update
Exhibit 1: 1QFY2011 performance
Y/E March (Rs cr) 1QFY2011 4QFY2010 % chg (qoq) 1QFY2010 % chg (yoy) FY2010 FY2009 % chg
Net sales 111 109 2.3 98 13.3 398 351 13.6
Other income 1 2 (5.7) 2 (37.1) 5 4 0.3
Total income 113 110 2.2 101 403 355 13.8
Gross profit 63 57 9.6 58 8.1 224 201 11.5
Gross margin (%) 56.3 52.6 59.0 56.3 57.3
Operating profit 17.6 11.0 59.3 18.6 (5.6) 53.2 46.2 15.1
OPM (%) 15.8 10.1 18.9 13.4 13.2
Interest 1 1 (9.7) 1 (30.1) 3 6 (50.3)
Dep & amortisation 3 3 (5.0) 3 15.1 12 11 8.4
PBT 14 7 97.8 15 (8.0) 43 33 30.3
Provision for taxation 0.4 0.3 34.5 0.4 (2.5) 1.1 1.7 (35.3)
Reported net profit 15 8 80.1 17 (12.2) 42 31 33.9
Less : Exceptional items 0 0 - 0 0 0
PAT after exceptional items 15 8 80.1 17 (12.2) 42 31 33.9
EPS (Rs) 12.1 6.7 13.7 34.3 25.6
Source: Company, Angel Research
Exhibit 2: 1QFY2011- Actual v/s Angel estimates
Rs cr Actual Estimate Variation
Net sales 111 116 (4.0)
Other operating income 1 4 (57.4)
Operating profit 18 19 (9.8)
Tax 0.4 0.5 (13.3)
Net profit 15 19 (23.2)
Source: Company, Angel Research
Revenue below expectation, domestic segment disappoints: Indoco reported net
sales of Rs111.4cr (Rs98.3cr) up 13.3% during the quarter, which were below our
expectations because of lower-than-expected sales on the domestic formulation
front. Domestic sales grew by mere 7.0% yoy to Rs72.6cr (Rs67.8cr) on the back of
dismal performance of two of the company’s key brands Vepan and Febrex plus.
However, on the export front, the company’s sales grew by healthy 27.3% yoy to
Rs35.8cr (Rs28.2cr), driven by the formulation business.
July 23, 2010 2
3. Indoco Remedies | 1QFY2011 Result Update
Exhibit 3: Domestic formulation sales trend
75
73
72
70 68
66 67
65
(Rs cr)
60
55
50
1QFY2010 2QFY2010 3QFY2010 4QFY2010 1QFY2011
Source: Company, Angel Research
Exhibit 4: Export sales trend
40
36
34
35
28 29
30 27
25
(Rs cr)
20
15
10
5
0
1QFY2010 2QFY2010 3QFY2010 4QFY2010 1QFY2011
Source: Company, Angel Research
OPM impacted by higher raw-material cost: Indoco reported OPM of 15.8%
(18.9%) during the quarter, which contracted by 316bp on the back of higher
raw-material cost. Raw-material cost (including cost of traded goods) increased by
20.7% yoy to Rs48.7cr (Rs40.3cr), which led to a 271bp contraction in gross
margin to 56.3%. Employee expenses were also up 14.1% yoy to Rs14.8cr
(Rs12.9cr).
July 23, 2010 3
4. Indoco Remedies | 1QFY2011 Result Update
Exhibit 5: OPM trend
20.0 18.9
15.8
16.0
12.9
12.0
13.0
(%)
10.1
8.0
4.0
0.0
1QFY2010 2QFY2010 3QFY2010 4QFY2010 1QFY2011
Source: Company, Angel Research
Net profit lower than expectations: Indoco reported net profit of Rs14.8cr
(Rs16.8cr), down 12.2% yoy, which was lower than expectations. Other
income for the quarter declined by 37.1% to Rs1.5cr (Rs2.4cr).
Exhibit 6: Net profit trend
20
17
15
15
(Rs cr)
10 9
8 8
5
0
1QFY2010 2QFY2010 3QFY2010 4QFY2010 1QFY2011
Source: Company, Angel Research
Conference call takeaways
For FY2011, management expects the domestic formulation business to grow
by 20–25%, while exports are expected to register 30–35% yoy growth, which
would result in composite top-line growth of 21–26%, with OPM in the range
of 18–19%. However, we have conservatively factored in 14% growth in top
line, with OPM of 15.4% for FY2011E.
On the capex front, management plans to incur capex of Rs93cr (around 34%
of FY2010 GFA) for building formulation facilities at Goa and Waluj funded
through debt and internal accruals to cater to higher export demand.
July 23, 2010 4
5. Indoco Remedies | 1QFY2011 Result Update
Recommendation Rationale
Domestic formulations back on the growth trajectory: Indoco has a strong brand
portfolio of 120 products and a base of 1,500 MR. The company operates in
various therapeutic segments, including anti-infective, anti-diabetic, CVS,
ophthalmic, dental care, pain management and respiratory. Indoco’s prominent
brands include Cyclopam, Vepan, Febrex plus, ATM, Sensodent-K and Sensoform.
The company’s top 10 brands contribute 60% to domestic sales. Post the
restructuring of the domestic business in FY2009, which resulted in an improved
working capital cycle, Indoco is back on the growth trajectory with its domestic
formulation business outpacing the industry’s growth rate in the last two quarters.
Indoco has witnessed strong growth across the respiratory, anti-infective,
ophthalmic and alimentary therapeutic segments. Further, management plans to
increase its sales force by 200 MR in FY2011 to increase its penetration in tier-
II/rural markets.
Scaling-up on the export front: Indoco has also started focusing on regulated
markets by entering into long-term supply contracts. The company is currently
executing several contract manufacturing projects covering a number of products
for its clients in the UK, Germany and Slovenia. Through its partner, Indoco has
also started supplying Metformin under a two-year contract for the AOK tender in
Germany. Management plans to incur capex of Rs95cr (34% of FY2010 GFA) for
building formulation facilities at Goa and Waluj funded through debt and internal
accruals to cater to higher export demand.
Watson and Aspen contracts to provide long-term growth: Indoco has entered into
a supply agreement for ophthalmic products with Watson (US market) and Aspen
Pharma (emerging markets). We expect milestone payments from the contracts to
commence from FY2011 on successful regulatory filings and substantial revenue
flow from the deal to commence from FY2013. Our back-of-the-envelope
calculations show that both the deals have the potential to contribute a combined
amount of US $38mn (44% of FY2010 top line) to the top line on full
commercialisation of the contracts.
Valuations: For FY2011, management expects the domestic formulation business
to grow by 20–25%, while exports are expected to register 30–35% yoy growth,
which would result in composite top-line growth of 21–26%, with OPM in the
range of 18–19%. We expect net sales to post CAGR of 16.1% to Rs536.8cr and
EPS to register CAGR of 25.7% to Rs54.1 over FY2010–12E. At Rs430, the stock is
trading at 10.9x and 7.9x FY2011E and FY2012E earnings, respectively. We
recommend a Buy on Indoco, as the company’s long-term drivers are intact
(domestic segment: 120 products, 1,500 MR; export segment: long-term supply
agreement with Watson and Aspen), with a Target Price of Rs541.
July 23, 2010 5
11. Indoco Remedies | 1QFY2011 Result Update
Research Team Tel: 022 - 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com
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Disclosure of Interest Statement Indoco Remedies
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock No
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No
Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors.
Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to 15%) Sell (< -15%)
July 23, 2010 11
