1QFY2017 Result Update | Pharmaceutical

August 4, 2016

Indoco Remedies

SELL

CMP

`313

Performance Highlights

Target Price

`225

Y/E March (` cr)

1QFY17

4QFY16

% chg (qoq) 1QFY16

% chg (yoy)

Investment Period

Net sales

253

255

(0.9)

216

17.0

Other operating income

(45.0)

(34.9)

Stock Info

Gross profit

164

173

(5.1)

140

17.3

Sector

Pharmaceutical

Operating profit

14.9

5.6

Market Cap (` cr)

2,857

Net profit

(1.1)

(4.9)

Net Debt (` cr)

113

Source: Company, Angel Research

Beta

0.7

52 Week High / Low

363/244

For 1QFY2017, the company posted sales of `253cr V/s `220cr expected and V/s

Avg. Daily Volume

15,003

`216cr in 1QFY2016, a yoy growth of 17.0%. The formulations (`234.5cr) grew

Face Value (`)

14.8% yoy while API (`175.9cr) grew 40.8% yoy. On the operating profit front, the

BSE Sensex

27,982

OPM came in at 14.7% V/s 16.3% in 1QFY2016 and V/s 17.0% expected. The

Nifty

8,623

dip in the OPM was mainly on back of 85.0% yoy rise in R&D expenses, which

Reuters Code

INRM.BO

were around 4.7% V/s 3.0% in 1QFY2016. This led the company to post an Adj.

Bloomberg Code

INDR@IN

net profit of `19.7cr V/s `20.8cr in 1QFY2016, a yoy de-growth of 4.9%. We

maintain our Sell rating.

Shareholding Pattern (%)

Results lower than expected: For 1QFY2017, the company posted sales of `253cr

Promoters

59.2

V/s `220cr expected and V/s `216cr in 1QFY2016, a yoy growth of 17.0%. The

MF / Banks / Indian Fls

11.3

formulations (`234.5cr) grew 14.8% yoy while API (`175.9cr) grew 40.8% yoy.

FII / NRIs / OCBs

12.5

Formulations growth was driven by domestic formulations (`142.1cr) which grew

Indian Public / Others

17.0

12.7% yoy while export (`92.3cr) grew 18.4% yoy. On the operating profit front,

the OPM came in at 14.7% V/s 16.3% in 1QFY2016 and V/s 17.0% expected. A

dip in the OPM was mainly on back of 85.0% yoy rise in R&D expenses, which

Abs. (%)

3m 1yr 3yr

were around 4.7% V/s 3.0% in 1QFY2016. This led the company to post an Adj.

Sensex

3.1

(8.7)

28.2

Indoco

15.8

(9.2)

405.0

net profit of `19.7cr V/s `20.8cr in 1QFY2016, a yoy de-growth of 4.9%.

Outlook and valuation: We expect net sales to post a 14.9% CAGR to `1,289cr

3-Year Daily Price Chart

and EPS to post a 31.5% CAGR to `15.6 over FY2016-18E. At the current market

450

price, the stock is trading at 23.7x and 20.1x its FY2017E and FY2018E earnings,

400

respectively. We recommend a SELL rating.

350

300

Key financials (Consolidated)

250

200

Y/E March (` cr)

FY2015

FY2016

FY2017E

FY2018E

150

Net sales

852

977

1112

1289

100

% chg

18.0

14.6

13.8

16.0

Net profit

82.8

83.0

121.8

143.5

% chg

42.3

0.2

46.7

17.9

EPS (`)

9.0

13.2

15.6

Source: Company, Angel Research

EBITDA margin (%)

18.9

14.9

18.2

P/E (x)

34.9

34.8

23.7

20.1

RoE (%)

17.0

15.1

19.2

RoCE (%)

18.3

11.9

17.1

19.1

P/BV (x)

5.6

4.9

4.2

3.6

Sarabjit Kour Nangra

EV/Sales (x)

3.5

3.1

2.7

2.3

+91 22 39357600 - Ext: 6806

EV/EBITDA (x)

18.4

20.7

14.8

12.5

[email protected]

Source: Company, Angel Research; Note: CMP as of August 3, 2016

Please refer to important disclosures at the end of this report

Indoco Remedies |1QFY2017 Result Update

Exhibit 1: 1QFY2017 (Consolidated) performance

Y/E March (` cr)

1QFY2017

4QFY2016

% chg (qoq)

1QFY2016

% chg (yoy) FY2016 FY2015

% chg (yoy)

Net sales

253

255

(0.9)

216

17.0

977

849

15.0

Other income

5.0

9.0

(45.0)

(34.9)

304.4

Total income

258

264

(2.4)

224

15.2

1005

856

17.4

Gross profit

164

173

(5.1)

140

17.3

635

550

15.5

Gross margins (%)

64.8

67.7

64.6

65.0

64.8

Operating profit

37.2

32.3

14.9

35.2

5.6

145.2

160.4

(9.5)

OPM (%)

14.7

12.7

16.3

14.9

18.9

Interest

(47.6)

13.0

25.1

Dep & amortisation

10.2

12.2

28.4

PBT

6.6

(10.9)

101

110

(8.9)

Provision for taxation

3.1

1.4

113.9

(42.9)

(34.8)

Reported Net profit

(1.1)

(4.9)

0.6

Less : Exceptional items

PAT after exceptional items

(1.1)

(4.9)

0.6

EPS (`)

2.1

2.2

2.3

9.0

Source: Company, Angel Research

Exhibit 2: 1QFY2017 - Actual vs. Angel estimates

(` cr)

Actual

Estimate

Variation (%)

Net sales

255

220

15.7

Other operating income

(53.1)

Operating profit

4.6

Tax

556.2

Net profit

(20.6)

Source: Company, Angel Research

Revenues above expectations: For 1QFY2017, the company posted sales of

`253cr V/s `220cr expected and V/s `216cr in 1QFY2016, a yoy growth of

17.0%. The formulations (`234.5cr) posted a yoy growth of 14.8%, while API

(`175.9cr) grew

40.8% yoy. Formulations growth was driven by domestic

formulations (`142.1cr), which posted a yoy growth of 12.7%, while export

formulations (`92.3cr) grew 18.4% yoy.

During the quarter, the company launched 14 new products, 6 in Anti-diabetic

category, 2 each in Gynaec and Stomatologicals, and 1 each in Anti-infective,

Gastro intestinal, Ophthalmic and Urological respectively.

Exports formulations (`92.3cr) grew 18.4% yoy while API exports (`7.8cr) de-grew

by 57.9% yoy. The regulated markets during the quarter grew by 15.5% yoy to

`79.4cr as against `68.7cr during the same quarter last year. The Emerging

markets (`12.9cr) posted a yoy growth of 39.3%.

During the quarter, the company’s US business grew by 27.5% yoy with revenues

at `28.1cr. The company (through partners or by itself) filed 23 ANDAs which are

pending approvals; 9 ANDAs have been approved till date.

For the quarter, emerging markets grew by 39.4% to `12.9cr as against `9.3cr

during the same quarter last year. Kenya, French West Africa, Tanzania, Sri Lanka,

Croatia and Bolivia are the major revenue contributors. The company launched

three ophthalmic products in Kenya.

August 4, 2016

Indoco Remedies |1QFY2017 Result Update

Exhibit 5: OPM trend

18.0

16.3

16.0

15.5

15.4

14.7

14.0

12.7

12.0

10.0

1QFY2016

2QFY2016

3QFY2016

4QFY2016

1QFY2017

Source: Company, Angel Research

Net profit lower than expectation: The company posted an Adj. net profit of

`19.7cr V/s `21cr in 1QFY2016, a yoy de-growth of 4.9%. The net profit came

below our expectation of `26cr.

Exhibit 6: Net profit trend

25.0

23.0

21.0

19.0

17.0

15.0

1QFY2016

2QFY2016

3QFY2016

4QFY2016

1QFY2017

Source: Company, Angel Research

Concall Highlights

 Company’s 9.5-10% of domestic portfolio is currently under NLEM.

 The company guided for ~15% growth in the domestic market for FY2017.

 The company has guided for ~4% of R&D in FY2017.

 Watson contributed `5.5cr to revenues in 1QFY2017.

 Capex guidance of `125-150cr in FY2017.

 Tax rate guidance of 17-18% for FY2017.

August 4, 2016

Indoco Remedies |1QFY2017 Result Update

Investment arguments

Focus on domestic formulations- Aiming for a higher-than-industry growth: Indoco

has a strong brand portfolio of 135 products and a base of ~2,800 MRs. It

operates in various

therapeutic

segments, including anti-infective,

anti-diabetic, CVS, ophthalmic, dental care, pain management and respiratory.

Prominent Indoco brands include Cyclopam, Vepan, Febrex Plus, ATM,

Sensodent-K and Sensoform. The company has seen strong growth across the

respiratory, anti-infective, ophthalmic and alimentary therapeutic segments.

Further, the company is investing to enhance the share of the chronic segment,

which constitutes 10% of overall sales.

Post the restructuring of the domestic business in FY2009, which has resulted in an

improvement in the working capital cycle, Indoco is back on the growth trajectory

with its domestic formulation business growing at 15.1% in FY2015. We expect the

domestic formulation segment to grow at a CAGR of 15.0% over FY2016-18E,

factoring in a muted FY2016, restructuring, and low monsoon.

Scaling-up on the exports 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, and covering a number of

products for its clients in the UK, Germany and Slovenia. Indoco has received a

nod from the USFDA for two of its facilities in Goa. The company derived ~46% of

its revenues from exports in 2015-16.

The US cumulative ANDA filings stood at 34 with 26 pending approvals (including

3 tentative approvals). 54 products are under the development pipeline for the US.

The company has launched 8 products in the US market (five ophthalmic, one

solid dosage and two products supplied by Watson). A total of 14 products have

been filed through Watson. We expect the exports segment to grow at an 18.1%

CAGR over FY2016-18E.

Partnering with pharmaceutical majors: The company has a large customer base

of small and medium sized generic companies across the globe and has major

tie-ups with generic companies for certain territories and products. The company

has a deal with Watson Pharmaceuticals to develop and manufacture a number of

sterile (ophthalmic) products for marketing in the USA. The agreement with South

Africa's largest pharmaceutical company, Aspen Pharmacare, encompasses a

number of solid dosages and ophthalmic products, extending to 30 emerging

market countries, while the contract signed with DSM, Austria is for marketing 8 of

Indoco's APIs in various geographies. These deals have further strengthened

Indoco's image in the international arena.

Valuation: We expect net sales to post a 14.9% CAGR to `1,289cr and EPS to post

a 31.5% CAGR to `15.6 over FY2016-18E. At the current market price, the stock is

trading at 23.7x and 20.1x its FY2017E and FY2018E earnings, respectively. We

recommend a SELL rating on the stock, given the valuations.

August 4, 2016

Indoco Remedies |1QFY2017 Result Update

Exhibit 7: Key assumptions

FY2017E

FY2018E

Domestic sales growth (%)

15.0

Exports growth

18.0

Operating margins (%)

18.2

Capex (` cr)

60.0

Source: Company, Angel Research

Exhibit 8: One-year forward PE band

450

400

350

300

250

200

150

100

20x

25x

30x

35x

Source: Company, Angel Research

Exhibit 9: Recommendation summary

Company

Reco

CMP Tgt. price Upside

FY2017E

FY15-17E

FY2017E

(`)

(%) PE (x) EV/Sales (x) EV/EBITDA (x) CAGR in EPS (%) RoCE (%) RoE (%)

Alembic Pharma

Neutral

622

20.5

2.7

12.8

(10.8)

27.5

25.3

Aurobindo Pharma Buy

749

877

17.2

15.8

2.6

11.0

18.1

22.5

26.1

Cadila Healthcare

Buy

347

399

15.3

17.4

2.6

11.8

15.8

24.3

26.6

Cipla

Neutral

529

19.5

2.5

13.4

20.4

13.5

15.2

Dr Reddy's

Neutral

2,942

18.6

2.7

10.9

6.9

18.1

17.1

Dishman Pharma

Neutral

164

15.8

1.7

8.0

(1.1)

9.6

10.2

GSK Pharma*

Neutral

3,139

52.9

6.8

36.2

15.9

35.8

31.8

Indoco Remedies

Sell

313

225

(19.6)

20.1

2.3

12.8

31.5

19.1

19.2

Ipca labs

Buy

508

613

20.6

25.8

1.8

11.7

17.9

11.8

14.9

Lupin

Accumulate

1,680

1,809

7.7

24.2

4.0

14.9

17.2

24.4

20.9

Sanofi India

Neutral

4,545

26.9

3.4

19.5

21.2

24.9

28.4

Sun Pharma

Buy

838

944

12.6

25.6

5.2

16.7

22.0

33.1

18.9

Source: Company, Angel Research; Note: *December year ending,

August 4, 2016

Indoco Remedies |1QFY2017 Result Update

Company Background

Indoco has a strong brand portfolio of 135 products and a base of 2,300 MRs.

The company operates in various therapeutic segments including anti-infective,

anti-diabetic, CVS, ophthalmic, dental care, pain management and respiratory

areas. Prominent Indoco brands include Cyclopam, Vepan, Febrex Plus, ATM,

Sensodent-K and Sensoform. The company’s top-10 brands contribute over 50%

of its domestic sales. Indoco now proposes to scale up its exports through higher

exposure to the regulated markets.

Profit & loss statement (Consolidated)

Y/E March (` cr)

FY13

FY14

FY15

FY17E

FY18E

Gross sales

638

735

863

987

1,124

1,303

Less: Excise duty

Net sales

626

722

852

977

1,112

1,289

Other operating income

Total operating income

630

733

857

1,004

1,139

1,316

% chg

10.4

16.2

17.0

17.1

13.5

15.6

Total expenditure

537

612

691

831

910

1,055

Net raw materials

262

272

300

341

411

477

Other mfg costs

Personnel

100

130

140

183

199

231

Other

138

168

201

250

234

272

EBITDA

110

161

145

202

234

% chg

5.4

23.5

46.1

(9.7)

39.0

16.0

(% of Net Sales)

14.2

15.2

18.9

14.9

18.2

Depreciation& amortisation

EBIT

114

136

164

% chg

0.1

21.0

43.7

(25.4)

60.9

20.0

(% of Net Sales)

10.4

11.0

13.3

8.7

12.3

12.7

Interest & other charges

Other income

(% of PBT)

1.8

2.4

1.6

1.1

0.7

0.6

Share in profit of Associates

1.0

2.0

3.0

Recurring PBT

110

101

152

179

PBT (reported)

110

101

152

179

Tax

(% of PBT)

11.8

19.6

24.3

17.5

20.0

PAT (reported)

122

144

Add: Share of earnings of asso.

Less: Minority interest (MI)

Prior period items

PAT after MI (reported)

122

144

ADJ. PAT

122

144

% chg

(7.9)

36.5

42.3

0.2

46.7

17.9

(% of Net Sales)

6.8

8.1

9.7

8.5

11.0

11.1

Basic EPS (`)

4.6

6.3

9.0

13.2

15.6

Fully Diluted EPS (`)

4.6

6.3

9.0

13.2

15.6

% chg

(7.9)

36.5

42.3

0.2

46.7

17.9

August 4, 2016

Indoco Remedies |1QFY2017 Result Update

Balance Sheet (Consolidated)

Y/E March (` cr)

FY13

FY14

FY15

FY17E

FY18E

SOURCES OF FUNDS

Equity share capital

Reserves & surplus

396

439

500

566

667

790

Shareholders funds

414

457

519

583

685

808

Minority Interest

Total loans

127

120

Other Long Term Liab.

Long Term Provisions

Deferred tax liability

Total liabilities

555

585

659

762

829

882

APPLICATION OF FUNDS

Gross block

447

481

561

649

709

769

Less: acc. depreciation

126

156

203

264

329

399

Net block

321

325

358

386

380

370

Capital work-in-progress

Goodwill

Investments

Long Term Loans And Adv.

109

126

Current assets

273

305

385

448

554

644

Cash

Loans & advances

111

129

Other

220

249

285

356

430

499

Current liabilities

134

144

187

201

274

318

Net current assets

139

160

199

247

280

326

Mis. Exp. not written off

Total assets

555

585

659

762

829

882

August 4, 2016

Indoco Remedies |1QFY2017 Result Update

Cash Flow Statement (Consolidated)

Y/E March (` cr)

FY13

FY14

FY15

FY17E

FY18E

Profit before tax

110

101

152

179

Depreciation

(Inc)/Dec in working capital

(18)

(39)

(63)

(73)

(60)

Less: Other income

Direct taxes paid

Cash Flow from Operations

113

153

(Inc.)/Dec.in fixed assets

(49)

(41)

(80)

(88)

(60)

(Inc.)/Dec. in investments

Other income

Cash Flow from Investing

(48)

(39)

(78)

(87)

(59)

Issue of equity

(1)

Inc./(Dec.) in loans

(22)

(9)

(7)

(70)

Dividend Paid (Incl. Tax)

(12)

(22)

(21)

Others

(16)

(3)

(15)

Cash Flow from Financing

(30)

(37)

(9)

(19)

(82)

Inc./(Dec.) in Cash

(7)

(2)

Opening Cash balances

Closing Cash balances

August 4, 2016

Indoco Remedies |1QFY2017 Result Update

Key Ratios

Y/E March

FY13

FY14

FY15

FY17E

FY18E

Valuation Ratio (x)

P/E (on FDEPS)

60.9

44.6

31.4

31.3

21.3

18.1

P/CEPS

39.1

29.1

20.0

18.1

13.9

12.1

P/BV

6.3

5.7

5.0

4.5

3.8

3.2

Dividend yield (%)

0.4

0.7

EV/Sales

4.3

3.7

3.1

2.8

2.4

2.0

EV/EBITDA

30.0

24.1

16.6

18.7

13.4

11.2

EV / Total Assets

4.8

4.5

4.1

3.6

3.3

3.0

Per Share Data (`)

EPS (Basic)

4.6

6.3

9.0

13.2

15.6

EPS (fully diluted)

4.6

6.3

9.0

13.2

15.6

Cash EPS

7.2

9.7

14.1

15.6

20.3

23.2

DPS

1.1

1.0

2.0

Book Value

44.9

49.6

56.3

63.3

74.3

87.6

Dupont Analysis

EBIT margin

10.4

11.0

13.3

8.7

12.3

12.7

Tax retention ratio

88.2

80.4

75.7

82.5

80.0

Asset turnover (x)

1.2

1.3

1.4

1.5

1.6

ROIC (Post-tax)

10.8

11.6

14.2

10.3

14.3

15.9

Cost of Debt (Post Tax)

18.9

18.7

10.0

9.6

8.1

11.8

Leverage (x)

0.2

0.1

0.2

0.1

Operating ROE

8.9

10.4

14.8

10.5

15.4

16.3

Returns (%)

ROCE (Pre-tax)

11.9

13.9

18.3

11.9

17.1

19.1

Angel ROIC (Pre-tax)

13.0

15.3

20.2

13.0

18.5

20.5

ROE

10.7

13.4

17.0

15.1

19.2

Turnover ratios (x)

Asset Turnover (Gross Block)

1.5

1.6

1.7

1.8

Inventory / Sales (days)

Receivables (days)

Payables (days)

WC cycle (ex-cash) (days)

Solvency ratios (x)

Net debt to equity

0.2

0.1

0.2

0.0

Net debt to EBITDA

0.9

0.5

0.8

0.5

0.1

Interest Coverage (EBIT / Int.)

3.0

4.2

10.7

6.8

10.9

13.1

August 4, 2016

Indoco Remedies |1QFY2017 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

DISCLAIMER

Angel Broking Private Limited (hereinafter referred to as “Angel”) is a registered Member of National Stock Exchange of India Limited,

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registered entity with SEBI for Research Analyst in terms of SEBI (Research Analyst) Regulations, 2014 vide registration number

INH000000164. Angel or its associates has not been debarred/ suspended by SEBI or any other regulatory authority for accessing

/dealing in securities Market. Angel or its associates/analyst has not received any compensation / managed or co-managed public

offering of securities of the company covered by Analyst during the past twelve months.

This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment

decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should

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Disclosure of Interest Statement

Indoco Remedies

1. Financial interest of research analyst or Angel or his Associate or his relative

2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives

3. Served as an officer, director or employee of the company covered under Research

4. Broking relationship with company covered under Research

Ratings (Based on expected returns

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

over 12 months investment period):

Reduce (-5% to -15%)

Sell (< -15)

August 4, 2016