Indoco Remedies - Future bodes well with full blown Watson execution :: ICICI Securities, report

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Future bodes well with full blown Watson execution • Revenues grew 13% YoY to | 213 crore, lower than I-direct estimate of | 228.8 crore, mainly due to lower-than-expected export formulation sales. Domestic and export formulation sales grew 7% and 24% YoY to | 123 crore and | 78 crore, respectively • EBITDA margins improved 381 bps to 19.7%, below I-direct estimate of 21.1%. The EBITDA grew 43% to | 42.7 crore vs. I-direct estimate of | 48.3 crore • The improvement in EBITDA margin and lower tax outgo led to net profit growth of 53.1% YoY to | 21.6 crore, which was marginally below I-direct estimate of | 22.3 crore MNC deals, US filings core 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 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 28 ANDAs with the USFDA and received approval for nine products. Of the 28 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 ~41.3% between FY14 and FY17E, driven by 1) growth in regulated market base business and 2) revenues under CRAMS deal with Watson (Actavis). Indian formulations growth yet to peak Domestic formulations (~60% of overall sales) have grown at ~13% CAGR. 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 ~15% 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 between 13% and 18% for quite some time, Indoco’s EBITDA margins have started showing an improvement. Pricing pressure in some of the geographies (Metformin supplies to Germany) and higher R&D spend were putting pressure on margins. Margins have already hit the management’s comfort level but, going ahead, sustainability will be the key factor to watch. Watson execution major catalyst for earnings, multiple; upgrade to BUY After getting management insights from Q2, Q3 conference calls we have worked out likely offtake from the Watson (Actavis) deal. Accordingly, we expect revenues of | 125 crore and | 209 crore in FY16 and FY17, respectively. The visibility has improved substantially after the recent approvals- EIR for plant II and first time approval for plant III. Other deals such as Aspen and DSN will continue to provide traction for exports. On the domestic formulations front, the management remains confident of delivering above-industry growth. We expect sales, EBITDA and PAT to grow at a CAGR of 24.7%, 37.2% and 49.1%, respectively, during FY14- 17E. We have valued the stock at | 375 i.e. 18x FY17E EPS of | 20.8. We have upgraded the stock to BUY to factor in better visibility and management’s track record of timely execution.

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