HOLD Indoco Remedies:: Karvy

Multiple levers of growth – Rich valuation
Indoco Remedies (Indoco’s) robust growth in the domestic space over the last
two quarters and strong traction in key therapies enthuses confidence.
Convergence of primary and secondary growth data coupled with visibility
of product launches in Watson gives additional comfort. However, rich
valuations limit upside. HOLD.

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Uptrend in Domestic Formulations to Continue – On a Low Base: Indoco’s
relatively small base of Rs.3.4 bn in the domestic market can facilitate the
company to outperform the IPM growth. The growth uptick since 1HFY12
onwards is secular in nature and convergence has been observed for the
primary and secondary numbers which gives us comfort in the company’s
growth outlook of higher than 15% growth in the domestic market. The new
CND division will be the key to change the acute: chronic mix from 90:10 to
80:20. We factor growth in the domestic business for Indoco at 16% to Rs. 3.92
bn in FY13E and at 15% to Rs. 4.51 bn in FY14E.
Watson & Aspen Deals – Major Product Launches Likely in FY14 & FY15: We
anticipate the Watson deal to pan out in Q3FY12 with the launch of two
products. The ramp up in revenues will be from Rs.142 mn in FY13 to Rs.695
mn in FY14 and Rs.1163 mn in FY15. We expect the revenues from Aspen deal
to be Rs.200 mn in FY13 and Rs. 450 mn in FY14.
Capitalization of R&D expense boosts margins: On account of surge in
research expenses and auditors advice the company is capitalizing research
expenses and amortizing over 5 year time span. We believe this is not in line
with the practice followed by majority of companies. We have adopted a more
prudent practice of writing off the same from the P&L Account and removing
amortization from depreciation. We have also excluded MAT credit in order to
reflect normalized earnings.
Valuations: We upgrade our domestic formulations growth from 14% to 16% in
FY13 and from 14% to 15% in FY14. We also upgrade our export formulations
business based on product launches and outlook for Watson and Aspen. We
downgrade our EBITDA margins for FY13 owing to higher R&D while upgrade
our EBITDA margins for FY14 due to better gross margins and lower overheads
on the Watson and Aspen deal. We upgrade our FY14 EPS estimates by 2.1% to
Rs.7.9. Due to price performance, we downgrade our rating to HOLD with a
price target of Rs 79 based on 10X FY14E (10 % discount to its peers).