Indoco Remedies Ltd. Good prospects… BUY :IDBI cap

Indoco Remedies Ltd.
Good prospects… BUY
Summary
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.

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Investment Highlights
 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.
 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.
 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.
 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).