Indoco Remedies | Q3FY15 Result Update | Future remains encouraging | Maintain BUY rating with PT of Rs392 ::IndiaNivesh

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Indoco Remedies' (INDR IN) adjusted PAT at Rs216mn was below expectation, due to lower than expected sales and higher than expected operating cost. However, INDR's adjusted PAT grew at strong rate of 53% on y-y basis. We expect this momentum in earnings to continue going forward. We maintain our estimates for FY15E, FY16E and FY17E. We continue to value INDR at 20x FY17E EPS of Rs19.6 to arrive at price target of Rs392. At CMP of Rs326, the stock is trading at comfortable valuation of 19.5x FY16E EPS of Rs16.5 and 16.4x FY17E EPS of Rs19.6. We maintain BUY rating on the stock. Future remains encouraging Source: IndiaNivesh Research Formulation-Exports and API drive earnings for the quarter: Net sales at Rs2.1bn grew by 13% y-y, led by formulation exports and API segment. Exports formulation grew by 24% y-y to Rs768mn and formed 36% of net sales for the quarter against 31.8% during 3QFY14. API sales grew 15.3% y-y growth to Rs129mn supporting overall sales growth for the quarter. EBITDA margin improved by 214bps y-y to 18.3%, due to superior product mix and improved productivity. However, there is 229bps q-q fall in EBITDA margin due to higher operating expenses. Other operating income at Rs37mn had forex gain of Rs23mn during the quarter. The tax rate for the quarter has been 23%, however management has guided for higher tax rate of 26% for FY15 and FY16E. INDR has spent Rs300mn as capex in 9MFY15. INDR has guided for Rs400-450mn as capex for FY16. High base and seasonality lowered y-y sales growth for the quarter: After showing strong growth of 18.6% y-y in H1FY15, DF sales grew at a muted rate of 6.9% y-y to Rs1.2bn. This is mainly due to high base of past year and seasonal nature of some part of portfolio. The seasonal portfolio formed 45% of net sales. In 9MFY15, INDR launched 17 products, out of which 11 were new to market. INDR has guided for better-than-industry average growth to be maintained over next 2-3 years on the back of new product launches and increased traction in existing products. Efforts on track to advance meaningfully in US market: Exports formulation sales at Rs768mn are up 24% y-y. Though the y-y growth has been decent, however, export formulation sales were flat, sequentially. This is due to lumpy nature of UK business. US sales have been Rs210mn against Rs144mn q-q. The recently USFDA approved products contributed marginally to US sales for the quarter. The major positive impact on sales is expected in Q4FY15. INDR’s cumulative filing stands at 28, out of which 9 are approved. Out of 19 ANDAs pending for approval, 14 are under Watson agreement. There are other 16 products under development out of which 3 ANDAs would be filed in 4QFY15. INDR has guided for 3 dossiers to be filed for Europe market. Management has guided for overall exports formulation sales growth of 25% y-y for FY16. Valuation: At CMP of Rs326, the stock is trading at comfortable valuation of 19.5x FY16E EPS of Rs16.5 and 16.4x FY17E EPS of Rs19.6. We maintain our estimates for FY15E, FY16E and FY17E, respectively. We remain positive on the stock on the back of superior execution in US market, improved sales mix as well as productivity in DF and higher profitability in UK market going forward. We continue to value INDR at 20x FY17E EPS of Rs19.6 to arrive at price target of Rs392 and maintain BUY rating on the stock.

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