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Indoco Remedies – 3QFY2011 Result Update
Angel Broking recommends Buy on Indoco Remedies with a Target Price of Rs. 541.
Indoco Remedies (Indoco) reported its 3QFY2011 results, which were below our
expectations on the back of lower-than-expected domestic formulation sales,
which grew only by 11.1% during the quarter. For FY2011, the company has
guided 20% growth on the domestic formulation front and 30–35% growth on the
export front, translating to a top-line target of `500cr and OPM in the range of
14.7% (inclusive of R&D expenses).
Domestic segment disappoints: Indoco reported net sales of `114.3cr (`95.7cr),
up 19.4% yoy, but was below our expectation of `121.7cr for 3QFY2011, mainly
on the back of lower-than-expected sales on the domestic high-margin
formulation segment. This led a decline in gross margins to 55.4% (56.6%), with
OPM falling to 11.6% (12.9%). Indoco reported net profit of `8.8cr (`7.7cr) an
increase of 14.1%, which was lower than our expectation.
Outlook and valuation: We expect net sales to post a 21.7% CAGR to `590cr and
EPS to post a 25.7% CAGR to `54.1 over FY2010–12E. At ` 460, the stock is
trading at 11.4x and 8.5x FY2011E and FY2012E earnings, respectively.
We recommend a Buy rating on Indoco with a Target Price of `541.
Revenue below expectation, domestic segment disappoints: Indoco reported net
sales of `114.3cr (`95.7cr), up 19.4% yoy but below our expectation, on the back
of lower-than-expected sales on the domestic formulation front. Domestic sales
grew by mere 11.1% yoy to `74cr (`66.6cr) for the quarter. However, exports
posted higher-than-expected growth of 35.0% during the period, led by strong
growth in the regulated and semi-regulated markets, which grew by 28.3%
and 69.3%, respectively.
During the quarter, with respect to developments on the business front, Indoco
launched a new product called Snow dent dental cream through the domestic
division–Warren. In the regulated markets, Indoco signed a deal in the derma
space with US-based Zumanta, wherein product development would take 12–
14 months. Also, during the quarter, Indoco signed new product development
deals with Aspen Pharma, extending its reach to Europe and Australia, which
would start contributing (though marginally) from 4QFY2011, while major
revenue will be coming from FY2012 through the basket of 5–6 products.
In the emerging market division, Indoco achieved eight new product
registrations during the quarter, which are expected to be commercialised in
4QFY2011.
On the regulatory front, the company filed two ANDAs with the USFDA in this
quarter. With regards to Watson, from the total of five ANDAs, one has been
filed and would be commercialised in the next 18 months.
Disappointing on the operating front: Indoco reported a drop in its gross margins
to 55.4% (56.6%) due to lower contribution from the high-margin domestic
formulation segment. The domestic formulation segment contributed 64.7% of
sales in 3QFY2011vis-à-vis 69.6% of sales in 3QFY2010. Consequently, OPM
for the quarter came in at 11.6% (12.9%), down 130bp.
Net profit lower than expectation: Indoco reported net profit of `8.8cr (`7.7cr),
an increase of 14.1% yoy, which was lower than our expectation due to lower
OPM and higher tax charges. Indoco has stopped availing full MAT credit, as
the company would be utilising it in future as 1) contribution from non-tax free
zone Goa and Waluj plant would start increasing and 2) the Baddi plant
would come out of 100% tax exemption in FY2011 and will be under 30%
exemption. The tax guidance ranges from 13–14% for FY2011 and 20% for
FY2012.
Concall takeaways
For FY2011, Indoco expects the domestic formulation segment to grow by
around 20%, while exports would register 30–35% yoy growth. The company
has given the top-line target of ~`500cr, with OPM of around 14.7%
(inclusive of R&D expenses). However, we are maintaining our assumptions of
18.8% growth in the top line, with OPM of 15.4% for FY2011E.
Management has indicated a possible USFDA inspection at the Goa
ophthalmic plant-II by February 2011, which was last inspected in October
2005.
During the quarter, the Baddi manufacturing plant cleared the regulatory audit
of UKMHRA successfully, which was done for the second time.
The expansion at the tablet manufacturing plant at Goa plant-III is nearing
completion and expected to be commercialised by April 2011, increasing the
capacity by 40% to 10bn tablets per year by July 2011.
Overall DSO has reduced to 74 days as on December 31, 2010, from 82 as
on March 31, 2010.
Investment arguments
Domestic formulations back on the growth trajectory: Indoco has a strong
brand portfolio of 120 products and a base of 1,500MRs. The company
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’s Top-10 brands contribute 60% to domestic sales.
Post the restructuring of the domestic business in FY2009, which has resulted
in improvement in working capital cycle, Indoco is back on the growth
trajectory with its domestic formulation business outpacing the industry growth
rate in the last two quarters. The company has seen strong growth across the
respiratory, anti-infective, ophthalmic and alimentary therapeutic segments.
Further, the company plans to increase its sales force by 200MRs 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. The company plans to incur capex of `95cr (34% of
FY2010 GFA) for building formulation facilities in Goa and Waluj funded
through debt and internal accruals to cater to increased export demand.
Watson and Aspen Pharma contract a long-term growth driver: 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 deals
have the potential to contribute a combined amount of US $38mn (38% of
FY2011 top line) to the top line on full commercialisation of the contracts.
During 3QFY2011, Indoco signed new product development deals with Aspen
Pharma, extending its reach to Europe and Australia, which would start
contributing (though marginally) from 4QFY2011, while major revenue will be
coming from FY2012 through the basket of 5–6 products.
Valuations: For FY2011, Indoco has guided 20% growth on the domestic
formulation front and 30–35% growth on the export front, which translates to a
top-line target of `500cr and OPM in the range of 14.7% (inclusive of R&D
expenses). We expect net sales to post a 21.7% CAGR to `590cr and EPS to post a
25.7% CAGR to `54.1 over FY2010–12E. At `460, the stock is trading at 11.4x
and 8.5x FY2011E and FY2012E earnings, respectively. We recommend Buy on
the stock with a Target Price of `541.
