2QFY2018 Result Update | Pharmaceutical

November 24, 2017

Indoco Remedies

SELL

CMP

`280

Performance Highlights

Target Price

`136

Y/E March (` cr)

2QFY18

1QFY18

% chg (qoq) 2QFY17 % chg (yoy)

Investment Period

Net sales

280

204

37.1

276

1.3

Other operating income

25.8

26.1

Stock Info

Gross profit

180

133

35.1

179

0.3

Sector

Pharmaceutical

Operating profit

(3)

(3.1)

Market Cap (` cr)

2 ,579

Net profit/(loos)

(22)

(10.7)

Net Debt (` cr)

188

Source: Company, Angel Research

Beta

0 .2

52 Week High / Low

287/179

For 2QFY2018 Indoco Remedies sales came in at

`280cr, in line with

Avg. Daily Volum e

19,371

expectations, posting a yoy growth of 1.3%. The growth was impacted by lower

Face Value (`)

exports, mainly on the back of US (` post a 69.5% yoy dip in sales). Indian

BSE Sensex

33,562

Formulation sales posted 11.5% yoy growth. On operating front, the EBITDA

Nifty

10,342

margins came in at 12.9% (11.8% expected) v/s. 13.5% in 2QFY2017, following

Reuters Code

INRM.BO

lower than expected other expenses during the quarter. Thus, the PAT came in

Bloom berg Code

INDR@IN

at ` 20cr (`13cr expected) v/s. `22cr in 2QFY2017. We maintain our sell rating on

the stock, with a price target of `136.

Shareholding Pattern (%)

Prom oters

58.9

Results better than expected: Sales came in at `280cr v/s. `276cr in 2QFY2017, a

MF / Banks / Indian Fls

12.9

yoy growth of 1.3%. The growth was impacted by lower exports, mainly on the

FII / NRIs / OCBs

11.4

Indian Public / Others

16.8

back of US (` post a dip of 69.5% yoy dip in sales). Indian Formulation sales

posted a 11.5% yoy growth. The formulation sales (`262.5cr accounting for 92.2%

of total sales in 2QFY2018) posted a flat growth of 0.4% yoy. The domestic

Abs . (% )

1 yr

3 yr

formulation sales (`188cr) registered a growth of 11.5% yoy. The International

Sensex

6 .3

29.3

17.8

Indoco

(18.7)

(39.9)

(15.8)

formulation sales (`74cr) posted a yoy dip of 19.8%. The API sales (`14.7cr)

posted a yoy grow of 8.3%. On operating front, the EBITDA margins came in at

12.9% (11.8% expected) v/s. 13.5% in 2QFY2017, following lower than expected

3-Year Daily Price Chart

other expenses during the quarter. Gross margins came in at 64.2% v/s. 64.9% in

2QFY2017, while R&D expenses were 4.9% of sales in 2QFY2018 v/s. 4.4% of sales

500

in 2QFY2017. Thus, the PAT came in at ` 20cr (` 13cr expected) v/s. `22cr in

400

2QFY2017.

300

200

Outlook and valuation: We expect net sales to post a CAGR of 10.3% to `1,297cr

100

and EPS to post a CAGR of 16.2% to `11.4 over FY2017-19E. We maintain our SELL

rating on back of the valuations and the corresponding lower profitability.

Key financials (Consolidated)

Y/E March (` cr)

FY2016

FY2017

FY2018E

FY2019E

Source: Company, Angel Research

Net sales

977

1067

1114

1297

% chg

14.6

9.2

4.4

16.5

Net profit

83.0

77.5

51.3

104.6

% chg

0.2

(6.7)

(33.7)

103.7

EPS (`)

9.0

8.4

5.6

11.4

EBITDA margin (%)

14.9

12.1

9.9

13.9

P/E (x)

29.7

31.8

47.9

23.5

RoE (%)

15.1

12.6

7.7

14.5

RoCE (%)

11.9

7.9

3.8

10.1

Sarabjit Kour Nangra

P/BV (x)

4.2

3.8

3.6

3.2

+91 22 39357600 - Ext: 6806

EV/Sales (x)

2.6

2.5

2.4

2.1

[email protected]

EV/EBITDA (x)

17.7

20.5

24.7

14.9

Source: Company, Angel Research; Note: CMP as of November 22, 2017

Please refer to important disclosures at the end of this report

Indoco Remedies |2QFY2018 Result Update

Exhibit 1: 2QFY2018 (Consolidated) performance

Y/E March (` cr)

2QFY2018

1QFY2018

% chg (qoq) 2QFY2017

% chg (yoy) 1HFY2018 1HFY2017

% chg (yoy)

Net sales

280

204

37.1

276

1.3

484

529

(8.4)

Other income

7.1

5.7

25.8

5.6

26.1

8.7

Total income

287

210

36.8

282

1.8

497

541

(8.1)

Gross profit

180

133

35.1

179

0.3

313

635

(50.7)

Gross margins (%)

64.2

65.2

64.9

64.6

64.8

Operating profit

36.2

(3.5)

37.3

(3.1)

32.7

74.5

(56.1)

OPM (%)

12.9

(1.7)

13.5

6.7

14.1

Interest

343.9

153.6

Dep & amortisation

2.0

3.2

1.8

PBT

(21)

(2)

Provision for taxation

(0.7)

0.9

2.6

Reported Net profit

(22)

(10.7)

(2)

Less : Exceptional items

PAT after exceptional items

(22)

(10.7)

(2)

EPS (`)

2.1

2.4

4.5

Source: Company, Angel Research

Exhibit 2: 2QFY2018 - Actual vs. Angel estimates

(` cr)

Actual

Estimate

Variation (%)

Net sales

280

0.0

Other operating income

27.0

Operating profit

9.7

Tax

(1)

Net profit

49.7

Source: Company, Angel Research

Revenues just in-line with expectations: Sales came in at `280cr (`280cr

expected) v/s. `276cr in 2QFY2017, a yoy growth of 1.3%. The growth was

impacted by lower exports mainly on the back of US (`post a dip of 69.5%

yoy dip in sales). Indian Formulation sales posted a 11.5% yoy growth.

The formulation sales (`262.5cr; 92.2% of total sales in 2QFY2018) posted a

growth of 0.4% yoy. The domestic formulation sales (`188.2cr) registered a

growth of 11.5% yoy. The International formulation sales (`74cr) posted a yoy

dip of 19.8%. The API sales (`14.7cr) posted a yoy growth of 8.3%.

In US, during the quarter, the revenues de-grew by 69.5% at `8.0cr as

against `26.2cr for the same period last year. In terms of filings, the

company (through partners or by itself), filed 35 ANDAs, which are pending

approvals with 10 ANDAs approved till date, with 2 tentative approvals.

On the progress of remediation measures, the Company has sent its final

response to USFDA with all the supporting documentation and updates of

completed actions. Detailed investigations were performed to identify root

cause of the observations and to have an effective Corrective and

Preventive action (CAPA) plan.

Consequent to the responses, Indoco continues to work with the US based

consultant to assess all GMP systems at site and ensure upgradations as per

latest GMP trends. The Company informed that it is on track in sending all its

responses and will seek an audience with USFDA. The Company will soon

November 24, 2017

Indoco Remedies |2QFY2018 Result Update

commence production of some of the existing ophthalmic products from

Goa plant II for US market.

Exhibit 3: Domestic Formulation sales trend

210

188

190

169

170

150

144

130

110

100

2QFY2017

3QFY2017

4QFY2017

1QFY2018

2QFY2018

Source: Company, Angel research

Exhibit 4: Export sales trend

140.0

130

121

120.0

101

100.0

80.0

60.0

40.0

20.0

0.0

2QFY2017

3QFY2017

4QFY2017

1QFY2018

2QFY2018

Source: Company, Angel research

OPM dips yoy, but better than expected: On operating front, the EBITDA

margins came in at 12.9% (11.8% expected) v/s. 13.5% in 2QFY2017, mainly on

the back of lower than expected other expenses during the quarter. Gross

margins came in at 64.2% v/s. 64.9% in 2QFY2017, while R&D expenses were 4.9%

of sales in 2QFY2018 v/s. 4.4% of sales in 2QFY2017. On yoy basis, the decline was

mainly on back of 13.0% yoy rise in the R&D expenses.

November 24, 2017

Indoco Remedies |2QFY2018 Result Update

Concall takeaways

 Management expects that stoppage of exports of its ophthalmic

solution to US, and sluggish growth in the unregulated markets are one-

offs. All these markets are expected to deliver robust growth going

ahead.

 Company’s exports also remain lackluster with lower supply from its OSD

plant in Goa Unit-I. EU sales declined by 6% qoq due to lower offtake in

tender business in Germany. EM sales also declined down by 15% due

to volatile currencies in South Africa and New Zealand.

Investment arguments

Focus on domestic formulations- Aiming for a higher-than-industry growth:

Indoco has a strong brand portfolio of 135 products and a base of ~2,800

MRs. It operates in various therapeutic segments, including anti-infective,

anti-diabetic, CVS, ophthalmic, dental care, pain management and

respiratory. Prominent Indoco brands include Cyclopam, Vepan, Febrex

Plus, ATM, Sensodent-K and Sensoform. The company has seen strong

growth across the respiratory, anti-infective, ophthalmic and alimentary

therapeutic segments. Further, the company is investing to enhance the

share of the chronic segment, which constitutes 10% of overall sales. With a

market share of 0.7% and overall rank of 31, the company is still a marginal

player with some top brands in smaller categories such as stomatologicals.

We expect the domestic formulation segment to grow at a 11.5CAGR of

13.0% over FY2017-19E.

Scaling-up on the exports front: Indoco has also started focusing on

regulated markets by entering into long-term supply contracts. The

company is currently executing several contract-manufacturing projects,

and covering a number of products for its clients in the UK, Germany and

Slovenia. Indoco has received a nod from the USFDA for two of its facilities

in Goa. The company derived ~49% of its revenues from exports in 2016-17.

The US cumulative ANDA filings stood at 42 with 29 pending approvals

(including 3 tentative approvals). Of these, 18 were filed under the Actavis

deal. The Goa plant warning letter is likely to weigh on company’s US

business, as most of the pending ANDAs are from this unit. Watson deal,

which is at the core of US business prospects, is also likely to witness a

slowdown, as the development may lead to a delay in approval for

products that are part of the deal. The deal covers 18 pending ANDAs. We

expect the exports segment to grow at 15.0% CAGR over FY2017-19E.

Partnering with pharmaceutical majors: The Company has a large customer

base of small and medium sized generic companies across the globe and

has major tie-ups with generic companies for certain territories and

products. It has a deal with Watson Pharmaceuticals to develop and

manufacture a number of sterile (ophthalmic) products for marketing in the

USA. The agreement with South Africa's largest pharmaceutical company,

November 24, 2017

Indoco Remedies |2QFY2018 Result Update

Aspen Pharmacare, encompasses a number of solid dosages and

ophthalmic products, extending to 30 emerging market countries, while the

contract signed with DSM, Austria is for marketing 8 of Indoco's APIs in

various geographies. These deals have further strengthened Indoco's image

in the international arena.

Valuation: We expect net sales to post a CAGR of 10.3% to `1,297cr and EPS

to post a CAGR of 16.2% to `11.4 over FY2017-19E. At the current market

price, the stock is trading at 47.9x and 16.7x its FY2018E and FY2019E earnings

respectively. We maintain a SELL rating on the stock considering the

valuations.

Exhibit 7: Key assumptions

FY2018E

FY2019E

Domestic sales growth (%)

6.0

18.0

Exports growth

15.0

Operating margins (%)

9.9

13.9

Capex (` cr)

90.0

60.0

Source: Company, Angel Research

Exhibit 8: One-year forward PE band

450

400

350

300

250

200

150

100

20x

25x

30x

35x

Source: Company, Angel Research

November 24, 2017

Indoco Remedies |2QFY2018 Result Update

Exhibit 9: Recommendation summary

Company

Reco

CMP Tgt. price Upside

FY2019E

FY17-19E

FY2019E

EV/Sales

RoCE

RoE

(`)

(%)

EV/EBITDA (x) CAGR in EPS (%)

(x)

(%)

Alembic Pharma

Buy

511

600

17.3

21.4

2.9

13.0

5.7

20.6

18.4

Aurobindo Pharma Buy

699

823

17.8

13.6

2.5

9.9

14.2

25.3

22.7

Cadila Healthcare Reduce

443

411

(7.2)

21.6

4.1

17.6

18.9

16.5

22.2

Cipla

Sell

619

462

(25.3)

25.5

3.2

16.2

39.3

10.9

13.1

Dr Reddy's

Reduce

2,361

2,040

(13.6)

23.2

3.1

13.3

18.5

10.3

12.4

Dishman Pharma

Under Review

301

19.3

2.7

10.1

23.3

4.5

4.4

GSK Pharma

Sell

2,496

2,000

(19.9)

53.9

6.9

39.3

19.3

25.8

23.5

Indoco Remedies Sell

280

136

(49.0)

23.5

2.1

14.9

16.2

10.1

14.5

Ipca labs

Neutral

535

21.2

1.9

13.5

24.7

12.4

11.0

Lupin

Buy

828

1,091

31.8

16.7

2.4

9.3

(6.6)

13.7

Sanofi India*

Neutral

4,434

27.1

3.8

17.0

12.8

25.8

27.5

Sun Pharma

Buy

535

615

15.0

24.0

3.7

16.3

(17.5)

11.3

14.0

Source: Company, Angel Research; Note: *December year ending,

November 24, 2017

Indoco Remedies |2QFY2018 Result Update

Company Background

Indoco has a strong brand portfolio of 135 products and a base of 2,300

MRs. The company operates in various therapeutic segments including anti-

infective, anti-diabetic, CVS, ophthalmic, dental care, pain management

and respiratory areas. Prominent Indoco brands include Cyclopam, Vepan,

Febrex Plus, ATM, Sensodent-K and Sensoform. The company’s top-10

brands contribute over 50% of its domestic sales. Indoco now proposes to

scale up its exports through higher exposure to the regulated markets.

Profit & loss statement (Consolidated)

Y/E March (` cr)

FY2014

FY2015

FY2016

FY2017

FY2018E FY2019E

Gross sales

735

863

987

1,078

1,126

1,312

Less: Excise duty

722

852

977

1,067

1,114

1,297

Net sales

Other operating income

Total operating income

733

857

1,004

1,094

1,141

1,325

% chg

16.2

17.0

17.1

9.0

4.3

16.1

Total expenditure

612

691

831

937

1,003

1,117

272

300

341

382

412

480

Net raw materials

Other mfg costs

Personnel

130

140

183

216

226

263

Other

168

201

250

277

301

298

EBITDA

110

161

145

129

110

180

23.5

46.1

(9.7)

(11.0)

(14.7)

63.6

% chg

(% of Net Sales)

15.2

18.9

14.9

12.1

9.9

13.9

Depreciation& amortisation

EBIT

114

% chg

21.0

43.7

(25.4)

(22.2)

(46.9)

178.9

11.0

13.3

8.7

6.2

3.1

7.5

(% of Net Sales)

Interest & other charges

Other income

(% of PBT)

2.4

1.6

1.1

4.5

6.9

3.4

Share in profit of Associates

1.0

2.0

3.0

4.0

110

101

123

Recurring PBT

PBT (reported)

110

101

123

Tax

(% of PBT)

19.6

24.3

17.5

15.2

15.0

PAT (reported)

105

Add: Share of earnings of asso.

Less: Minority interest (MI)

Prior period items

PAT after MI (reported)

105

ADJ. PAT

105

36.5

42.3

0.2

(6.7)

(33.7)

103.7

% chg

(% of Net Sales)

8.1

9.7

8.5

7.3

4.6

8.1

Basic EPS (`)

6.3

9.0

8.4

5.6

11.4

Fully Diluted EPS (`)

6.3

9.0

8.4

5.6

11.4

% chg

36.5

42.3

0.2

(6.7)

(33.7)

103.7

November 24, 2017

Indoco Remedies |2QFY2018 Result Update

Balance Sheet (Consolidated)

Y/E March (` cr)

FY2014

FY2015 FY2016 FY2017 FY2018E FY2019E

SOURCES OF FUNDS

Equity share capital

Reserves & surplus

439

500

566

633

664

748

Shareholders funds

457

519

583

651

681

765

Minority Interest

Total loans

127

251

300

250

Other Long Term Liab.

Long Term Provisions

(28)

Deferred tax liability

Total liabilities

585

659

762

903

954

988

APPLICATION OF FUNDS

Gross block

481

561

560

715

805

865

Less: acc. depreciation

156

203

264

327

402

485

Net block

325

358

296

388

403

380

Capital work-in-progress

Goodwill

Investments

Long Term Loans And Adv.

109

127

Current assets

305

385

448

572

575

659

Cash

Loans & advances

107

111

130

Other

249

285

355

403

431

502

Current liabilities

144

187

201

265

275

320

Net current assets

160

199

247

307

301

339

Mis. Exp. not written off

Total assets

585

659

761

903

954

988

November 24, 2017

Indoco Remedies |2QFY2018 Result Update

Cash Flow Statement (Consolidated)

Y/E March (` cr)

FY2014

FY2015

FY2016

FY2017

FY2018E FY2019E

110

101

123

Profit before tax

Depreciation

(Inc)/Dec in working capital

(18)

(39)

(62)

(8)

(66)

(62)

Less: Other income

Direct taxes paid

128

121

Cash Flow from Operations

(Inc.)/Dec.in fixed assets

(41)

(80)

(155)

(90)

(60)

(Inc.)/Dec. in investments

Other income

Cash Flow from Investing

(39)

(78)

(151)

(86)

(56)

(1)

Issue of equity

Inc./(Dec.) in loans

(9)

126

(50)

Dividend Paid (Incl. Tax)

(12)

(22)

(21)

Others

(7)

(4)

(103)

(35)

(29)

Cash Flow from Financing

(28)

(10)

(83)

(0)

(71)

(0)

(30)

(5)

Inc./(Dec.) in Cash

Opening Cash balances

Closing Cash balances

November 24, 2017

Indoco Remedies |2QFY2018 Result Update

Key Ratios

Y/E March

FY2014

FY2015

FY2016

FY2017

FY2018E FY2019E

Valuation Ratio (x)

P/E (on FDEPS)

42.3

29.7

31.8

47.9

23.5

P/CEPS

27.6

18.9

17.2

17.5

19.4

13.1

5.4

4.7

4.2

3.8

3.6

3.2

P/BV

Dividend yield (%)

0.4

0.7

3.5

3.0

2.6

2.5

2.4

2.1

EV/Sales

EV/EBITDA

22.9

15.8

17.7

20.5

24.7

14.9

EV / Total Assets

4.3

3.8

3.4

2.9

2.7

Per Share Data (`)

EPS (Basic)

6.3

9.0

8.4

5.6

11.4

6.3

9.0

8.4

5.6

11.4

EPS (fully diluted)

Cash EPS

9.7

14.1

15.6

15.3

13.7

20.3

DPS

1.0

2.0

Book Value

49.6

56.3

63.3

70.6

74.0

83.1

Dupont Analysis

11.0

13.3

8.7

6.2

3.1

7.5

EBIT margin

Tax retention ratio

80.4

75.7

82.5

84.8

85.0

Asset turnover (x)

1.3

1.4

1.3

1.4

ROIC (Post-tax)

11.6

14.2

10.3

7.2

3.5

9.0

Cost of Debt (Post Tax)

18.7

10.0

9.6

2.8

1.9

0.2

0.1

0.2

0.3

Leverage (x)

Operating ROE

10.4

14.8

10.5

8.3

4.0

11.4

Returns (%)

ROCE (Pre-tax)

13.9

18.3

11.9

7.9

3.8

10.1

Angel ROIC (Pre-tax)

15.3

20.2

14.0

10.0

4.7

12.2

13.4

17.0

15.1

12.6

7.7

14.5

ROE

Turnover ratios (x)

Asset Turnover (Gross Block)

1.6

1.8

1.7

1.5

1.6

Inventory / Sales (days)

Receivables (days)

Payables (days)

WC cycle (ex-cash) (days)

Solvency ratios (x)

Net debt to equity

0.1

0.2

0.3

0.4

0.3

Net debt to EBITDA

0.5

0.8

1.5

2.4

1.2

4.2

10.7

6.8

10.7

5.7

15.9

Interest Coverage (EBIT / Int.)

November 24, 2017

Indoco Remedies |2QFY2018 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

DISCLAIMER

Angel Broking Private Limited (hereinafter referred to as “Angel”) is a registered Member of National Stock Exchange of

India Limited, Bombay Stock Exchange Limited and Metropolitan Stock Exchange of India Limited. It is also registered as a

Depository Participant with CDSL and Portfolio Manager with SEBI. It also has registration with AMFI as a Mutual Fund

Distributor. Angel Broking Private Limited is a registered entity with SEBI for Research Analyst in terms of SEBI (Research

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suspended by SEBI or any other regulatory authority for accessing /dealing in securities Market. Angel or its associates

including its relatives/analyst do not hold any financial interest/beneficial ownership of more than 1% in the company

covered by Analyst. Angel or its associates/analyst has not received any compensation / managed or co-managed public

offering of securities of the company covered by Analyst during the past twelve months. Angel/analyst has not served as

an officer, director or employee of company covered by Analyst and has not been engaged in market making activity of

the company covered by Analyst.

This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any

investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this

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Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding

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information contained in this report. Angel Broking Pvt. Limited has not independently verified all the information contained

within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the

accuracy, contents or data contained within this document. While Angel Broking Pvt. Limited endeavors to update on a

reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that

prevent us from doing so.

This document is being supplied to you solely for your information, and its contents, information or data may not be

reproduced, redistributed or passed on, directly or indirectly.

Neither Angel Broking Pvt. Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may

arise from or in connection with the use of this information.

Note: Please refer to the important ‘Stock Holding Disclosure' report on the Angel website (Research Section). Also, please

refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Pvt. Limited

Disclosure of Interest Statement

Indoco Remedies

1. Analyst ownership of the stock

2. Angel and its Group companies ownership of the stock

3. Angel and its Group companies' Directors ownership of the stock

4. Broking relationship with company covered

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Based on expected returns

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

over 12 months investment period):

Reduce (-5% to -15%)

Sell (< -15)

November 24, 2017