Indoco Remedies : Q2FY15 Update: ICICI Securities, PDF link

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Margin expansion a positive surprise…
• Revenues grew ~16% YoY to | 226.4 crore (I-direct estimate: | 233.1
crore) driven by 14% growth in domestic formulations to | 137.4
crore (I-direct estimate: | 142.3 crore) and 21% growth in export
formulations to | 75.1 crore (I-direct estimate: | 76.7 crore)
• EBITDA margins improved 450 bps to 21.4% (I-direct estimate:
18.1%) on the back of a healthy product and business mix. EBITDA in
absolute terms grew 47% YoY to | 48.6 crore (I-direct estimate:
| 42.3 crore)
• The improvement in EBITDA margin led to net profit growth of 40%
YoY to | 22.4 crore below I-direct estimate of | 24.2 crore
MNC deals, US filings key to overall growth
Export formulations (~32% of overall sales) have grown at a CAGR of
19.5% in FY09-14 driven by ~22% growth in regulated markets. The
growth in the regulated markets was driven by growth in the US, UK and
South Africa. German Metformin tenders also contributed to regulated
market growth. It has filed 24 ANDAs with the USFDA and received
approval for three products. Of the 24 ANDAs, 16 were filed under the
Watson deal. The Aspen deal for semi-regulated market is also likely to
drive exports. We expect exports to grow at a CAGR of ~31% between
FY14 and FY17E, driven by 1) growth in regulated market base business
and 2) revenues under the CRAMS deal with Watson (Actavis).
Indian formulations growth yet to peak
Domestic formulations (~60% of overall sales) have grown at a CAGR of
~13%. The subdued growth can be attributed to high concentration of
acute therapies, which account for ~90% of overall formulations. With a
market share of ~0.8% and overall rank of 31, the company is still a
marginal player with some top brands in smaller categories such as
stomatologicals. We expect Indian formulations to grow at a CAGR of
~16% between FY14 and FY17E to | 677.4 crore on the back of new
launches and new therapeutic forays.
Sustainability of margin improvement crucial for further upside
After languishing at 13-18% for quite some time, EBITDA margins have
started showing an improvement from Q2FY15. Pricing pressure in some
of the geographies (Metformin supplies to Germany) and higher R&D
spend were putting pressure on margins. The margins have already hit
the management’s comfort level. However, going ahead, sustainability
will be the key factor to watch.
Upside capped after recent run up; maintain HOLD
The Q2 numbers have demonstrated a marked improvement on the
margins front. The domestic formulations business is back on the growth
trajectory while the new anti-obesity foray reflects Indoco’s endeavour to
push for more chronic and lifestyle products. On the exports front, the
visibility has substantially improved after the recent approvals - EIR for
plant II and first time approval for plant III. We expect product launches
under the Watson deal as well as on own account to gain momentum
from H2FY15 onwards. Other deals such as Aspen and DSN will continue
to provide traction for exports. We expect sales, EBITDA and PAT to grow
at a CAGR of 21%, 33% and 40%, respectively, during FY14-17E. We
have valued the stock at | 274 i.e. 16x FY17E EPS of | 17.1. However,
after the recent run-up, the stock remains fairly priced and any correction
can be used for further accumulation.

LINK
http://content.icicidirect.com/mailimages/IDirect_IndocoRemedies_Q2FY15.pdf