2QFY2017 Result Update | Pharmaceutical

November 10, 2016

Indoco Remedies

REDUCE

CMP

`277

Performance Highlights

Target Price

`240

Y/E March (` cr)

2QFY17

1QFY17

% chg (qoq) 2QFY16

% chg (yoy)

Investment Period

Net sales

276

253

9.4

248

11.6

Other operating income

13.7

(25.4)

Stock Info

Gross profit

179

164

9.6

160

12.4

Sector

Pharmaceutical

Operating profit

0.5 bp

(3.0)bp

Market Cap (` cr)

2,550

Net profit

11.8

2.7

Net Debt (` cr)

113

Source: Company, Angel Research

Beta

0.5

52 Week High / Low

360/244

Indoco Remedies posted sales of `276cr vs. `248cr in 2QFY16, up by 11.6% yoy,

Avg. Daily Volume

14,497

mainly on back of domestic sales (`168.8cr, which grew by 22.0% yoy). Overall,

Face Value (`)

the formulations, which posted sales of `261.4cr grew, by 13.0% yoy. The

BSE Sensex

27,591

API (`135.9cr) dipped by 11.0% yoy. On the operating front, the gross margin

Nifty

8,544

came in at 64.9% (65.0% expected) vs. 64.4% in 2QFY2016, with EBIDTA margin

Reuters Code

INRM.BO

coming in at 13.5% (15.5% expected) vs. 15.5% in 2QFY2016. Consequently, the

Bloomberg Code

INDR@IN

PAT came in at `22.1cr vs. `21.5cr, a yoy growth of 2.7%. This was against the

expectations of `25cr. We recommend a reduce rating on back of expensive

valuations.

Shareholding Pattern (%)

Promoters

59.2

Results lower than expected: Indoco Remedies posted sales of `276cr vs. `248cr,

MF / Banks / Indian Fls

11.8

up by 11.6% yoy, mainly on back of domestic sales (`168.8cr, which grew by

FII / NRIs / OCBs

12.6

22.0% yoy). Overall, the formulations, which posted sales of `261.4cr, grew by

Indian Public / Others

16.4

13.0% yoy. The API (`135.9cr) dipped by 11.0% yoy. On the operating front, the

gross margin came in at 64.9% (65.0% expected) vs. 64.4% in 2QFY2016, with

EBIDTA margin coming in at 13.5% (15.5% expected) vs. 15.5% in 2QFY2016.

Abs. (%)

3m 1yr 3yr

Consequently, the PAT came in at `22.1cr vs. `21.5cr, a yoy growth of 2.7%. This

Sensex

(2.1)

5.0

33.5

was against, the expectations of `25cr.

Indoco

(11.0)

(9.3)

198.2

Outlook and valuation: We expect net sales to post a CAGR of 14.9% to `1,289cr

and EPS to post a CAGR of 33.2% to `16.0 over FY2016-18E. At the current

3-Year Daily Price Chart

market price, the stock is trading at 23.9x and 17.3x its FY2017E and FY2018E

450

400

earnings, respectively. We recommend a reduce rating on back of the valuations.

350

Key financials (Consolidated)

300

250

Y/E March (` cr)

FY2015

FY2016

FY2017E

FY2018E

200

Net sales

852

977

1112

1289

150

100

% chg

18.0

14.6

13.8

16.0

Net profit

82.8

83.0

106.6

147.1

% chg

42.3

0.2

28.4

38.0

EPS (`)

9.0

11.6

16.0

EBITDA margin (%)

18.9

14.9

16.2

18.2

Source: Company, Angel Research

P/E (x)

30.8

30.7

23.9

17.3

RoE (%)

17.0

15.1

17.0

20.1

RoCE (%)

18.3

11.9

14.4

19.1

P/BV (x)

4.9

4.4

3.8

3.2

Sarabjit Kour Nangra

EV/Sales (x)

3.1

2.7

2.4

2.0

+91 22 39357600 - Ext: 6806

EV/EBITDA (x)

16.3

18.3

14.9

11.1

[email protected]

Source: Company, Angel Research; Note: CMP as of November 8, 2016

Please refer to important disclosures at the end of this report

Indoco Remedies | 2QFY2017 Result Update

Exhibit 1: 2QFY2017 (Consolidated) performance

Y/E March (` cr)

2QFY2017

1QFY2017

% chg (qoq) 2QFY2016

% chg (yoy) 1HFY2017 1HFY2016

% chg (yoy)

Net sales

276

253

9.4

248

11.6

529

467

13.4

Other income

5.6

5.0

13.7

(25.4)

(30.0)

Total income

282

258

9.4

255

10.5

540

482

12.0

Gross profit

179

164

9.6

160

12.4

343

297

15.4

Gross margin (%)

64.9

64.8

64.4

64.8

63.7

Operating profit

37.3

37.2

0.5

38.5

(3.0)

74.5

72.7

2.4

OPM (%)

13.5

14.7

15.5

14.1

15.6

Interest

(35.7)

(40.1)

(1.5)

Dep & amortisation

(0.7)

12.0

12.1

PBT

8.1

(13.4)

(11.7)

Provision for taxation

2.6

3.1

(15.9)

(56.3)

(50.9)

Reported Net profit

11.8

2.7

(1.0)

Less : Exceptional items

PAT after exceptional items

11.8

2.7

(1.0)

EPS (`)

2.4

2.1

2.3

4.5

4.6

Source: Company, Angel Research

Exhibit 2: 2QFY2017 - Actual vs. Angel estimates

(` cr)

Actual

Estimate

Variation (%)

Net sales

276

274

0.8

Other operating income

12.8

Operating profit

(12.2)

Tax

(16.5)

Net profit

(11.5)

Source: Company, Angel Research

Revenues just in line with expectations: Indoco Remedies posted sales of `276cr vs.

`248cr, up by 11.6% yoy, mainly on back of domestic sales (`168.8cr, which grew

by 22.0% yoy). Overall the formulations, which posted sales of `264cr, grew by

13.0% yoy. The API (`135.9cr) posted a sales dip of 11.0% yoy.

The formulations (`261.3cr) posted a yoy growth of 13.0%, while API (`135.9cr)

de-grew 11.0% yoy. Formulations growth was driven by domestic formulations

(`168.8cr), which posted a yoy growth of 22.0%, while export formulations

(`92.5cr) de-grew by 0.4% yoy.

During the quarter, the company launched 3 new products, one each in Gastro

Intestinal, Pain / Analgesics and Stomatologicals, respectively.

During the quarter, the international formulation business revenues were at

`92.5cr as against ` 92.9cr during the same period last year. Europe contributed

to 35.8 % of International formulation sales, followed by US at 29.4 %, South

Africa, Australia & New Zealand at 19.5 % and Emerging markets at15.3 %.

The regulated markets during the quarter de-grew by 6.3% yoy to `77.2cr as

against `82.3cr, during the same quarter last year. The Emerging markets

(`15.4cr) posted a yoy growth of 46.2%.

During the quarter, the company’s US business de-grew by 0.75% yoy with

revenues at `26.2cr. The market share of ophthalmic products launched through

Actavis is showing an upward trend. The company (through partners or by itself)

November 10, 2016

Indoco Remedies | 2QFY2017 Result Update

filed 24 ANDAs which are pending approvals; 10 ANDAs have been approved till

date.

For the quarter, emerging markets grew by 46.2% to `15.3cr as against `10.3cr,

during the same quarter last year. The markets which are driving growth are

Kenya, French West Africa, Myanmar, Tanzania, and Sri Lanka.

Exhibit 3: Domestic Formulation sales trend

180

169

170

160

150

142

138

136

140

131

130

120

110

100

2QFY2016

3QFY2016

4QFY2016

1QFY2017

2QFY2017

Source: Company, Angel Research

Exhibit 4: Export sales trend

120.0

118

115.0

112

110.0

105.0

101

100

100.0

95.0

90.0

2QFY2016

3QFY2016

4QFY2016

1QFY2017

2QFY2017

Source: Company, Angel research

OPM lower than estimated: On the operating profit front, the OPM came in at

13.5% vs. 15.5% in 2QFY2016 and vs. 15.5% expected. Dip in the OPM was

mainly on back of low sales growth and 34.8% yoy rise in R&D expenses, which

were around 4.4% of sales vs. 3.6% of sales in 2QFY2016.

November 10, 2016

Indoco Remedies | 2QFY2017 Result Update

Exhibit 5: OPM trend

16.0

15.5

15.4

15.0

14.7

14.0

13.5

13.0

12.0

2QFY2016

3QFY2016

4QFY2016

1QFY2017

2QFY2017

Source: Company, Angel Research

Net profit lower than expectation: Company posted an Adj. net profit of `22cr vs.

`23cr in 2QFY2016, a yoy de-growth of 2.2%. The net profit came below our

expectation of `25cr.

Exhibit 6: Net profit trend

25.0

20.0

15.0

10.0

5.0

0.0

2QFY2016

3QFY2016

4QFY2016

1QFY2017

2QFY2017

Source: Company, Angel Research

Concall Highlights

 With medical reps of 2800, management expects 15-20% sales growth in

India formulations.

 USFDA audited Goa Plant II & III in September16. The inspection was

triggered on account of injectable filings. The Company has submitted the

compliance with documentary evidence to USFDA on all the observations

covered in the inspection report.

 The company has guided for ~4% of sales of R&D in FY2017-2018.

 Indoco plans to file 8-10 ANDAs in FY2017E including 3-4 own ANDAs and

6-7 Actavis ANDAs. Till date, the company has filed 16 ANDAs (including 14

ophthalmic) out of its partnership of 25 ANDAs with Actavis and Akorn.

November 10, 2016

Indoco Remedies | 2QFY2017 Result Update

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

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.

Post the restructuring of the domestic business in FY2009, which has resulted in an

improvement in the working capital cycle, Indoco is back on the growth trajectory

with its domestic formulation business growing at 15.1% in FY2015. We expect the

domestic formulation segment to grow at a CAGR of 15.0% over FY2016-18E,

factoring in a muted FY2016, restructuring, and low monsoon.

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 ~46% of

its revenues from exports in 2015-16.

The US cumulative ANDA filings stood at 34 with 26 pending approvals (including

3 tentative approvals). 54 products are under the development pipeline for the US.

The company has launched 8 products in the US market (five ophthalmic, one

solid dosage and two products supplied by Watson). A total of 14 products have

been filed through Watson. We expect the exports segment to grow at an 18.1%

CAGR over FY2016-18E.

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. The company 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, 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 14.9% to `1,289cr and EPS to

post a CAGR of 33.2% to `16.0 over FY2016-18E. At the current market price, the

stock is trading at

23.9x and

17.3x its FY2017E and FY2018E earnings,

respectively. We recommend a reduce rating on back of the valuations.

November 10, 2016

Indoco Remedies | 2QFY2017 Result Update

Exhibit 7: Key assumptions

FY2017E

FY2018E

Domestic sales growth (%)

15.0

Exports growth

18.0

Operating margins (%)

18.2

Capex (` cr)

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

Exhibit 9: Recommendation summary

Company

Reco

CMP Tgt. price Upside

FY2018E

FY16-18E

FY2018E

(`)

(%) PE (x) EV/Sales (x) EV/EBITDA (x) CAGR in EPS (%) RoCE (%) RoE (%)

Alembic Pharma

Neutral

655

21.6

2.9

13.5

(10.8)

27.5

25.3

Aurobindo Pharma

Buy

757

877

15.9

16.0

2.6

11.1

18.1

22.5

26.1

Cadila Healthcare

Buy

375

19.5

3.0

13.7

13.4

22.7

25.7

Cipla

Neutral

536

19.7

2.5

13.6

20.4

13.5

15.2

Dr Reddy's

Neutral

3,115

21.8

2.8

12.5

1.7

16.2

15.9

Dishman Pharma

Neutral

237

21.0

2.3

10.3

3.1

10.3

10.9

GSK Pharma*

Neutral

2,719

44.7

6.8

32.8

17.3

35.3

32.1

Indoco Remedies

Reduce

277

240

(13.4)

17.3

2.0

11.1

33.2

19.1

20.1

Ipca labs

Accumulate

572

613

7.2

29.0

2.0

13.1

36.5

8.8

9.4

Lupin

Buy

1,509

1,809

19.9

21.8

3.6

13.4

17.2

24.4

20.9

Sanofi India*

Neutral

4,277

24.9

3.3

17.8

22.2

24.9

28.8

Sun Pharma

Buy

635

944

48.6

19.4

3.8

12.2

22.0

33.1

18.9

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

November 10, 2016

Indoco Remedies | 2QFY2017 Result Update

Profit & loss statement (Consolidated)

Y/E March (` cr)

FY13

FY14

FY15

FY16

FY17E

FY18E

Gross sales

638

735

863

987

1,124

1,303

Less: Excise duty

Net sales

626

722

852

977

1,112

1,289

Other operating income

Total operating income

630

733

857

1,004

1,139

1,316

% chg

10.4

16.2

17.0

17.1

13.5

15.6

Total expenditure

537

612

691

831

932

1,055

Net raw materials

262

272

300

341

434

477

Other mfg costs

Personnel

100

130

140

183

199

231

Other

138

168

201

250

234

272

EBITDA

110

161

145

180

234

% chg

5.4

23.5

46.1

(9.7)

23.7

30.3

(% of Net Sales)

14.2

15.2

18.9

14.9

16.2

18.2

Depreciation& amortisation

EBIT

114

164

% chg

0.1

21.0

43.7

(25.4)

34.7

43.3

(% of Net Sales)

10.4

11.0

13.3

8.7

10.3

12.7

Interest & other charges

Other income

(% of PBT)

1.8

2.4

1.6

1.1

0.9

0.6

Share in profit of Associates

1.0

2.0

3.0

Recurring PBT

110

101

130

179

PBT (reported)

110

101

130

179

Tax

(% of PBT)

11.8

19.6

24.3

17.5

18.0

PAT (reported)

107

147

Add: Share of earnings of asso.

Less: Minority interest (MI)

Prior period items

PAT after MI (reported)

107

147

ADJ. PAT

107

147

% chg

(7.9)

36.5

42.3

0.2

28.4

38.0

(% of Net Sales)

6.8

8.1

9.7

8.5

9.6

11.4

Basic EPS (`)

4.6

6.3

9.0

11.6

16.0

Fully Diluted EPS (`)

4.6

6.3

9.0

11.6

16.0

% chg

(7.9)

36.5

42.3

0.2

28.4

38.0

November 10, 2016

Indoco Remedies | 2QFY2017 Result Update

Balance Sheet (Consolidated)

Y/E March (` cr)

FY13

FY14

FY15

FY16

FY17E

FY18E

SOURCES OF FUNDS

Equity share capital

Reserves & surplus

396

439

500

566

652

778

Shareholders funds

414

457

519

583

669

796

Minority Interest

Total loans

127

130

Other Long Term Liab.

Long Term Provisions

Deferred tax liability

Total liabilities

555

585

659

762

824

890

APPLICATION OF FUNDS

Gross block

447

481

561

649

709

769

Less: acc. depreciation

126

156

203

264

329

399

Net block

321

325

358

386

380

370

Capital work-in-progress

Goodwill

Investments

Long Term Loans And Adv.

109

126

Current assets

273

305

385

448

549

653

Cash

Loans & advances

111

129

Other

220

249

285

356

430

499

Current liabilities

134

144

187

201

274

318

Net current assets

139

160

199

247

275

335

Mis. Exp. not written off

Total assets

555

585

659

762

824

890

November 10, 2016

Indoco Remedies | 2QFY2017 Result Update

Cash Flow Statement (Consolidated)

Y/E March (` cr)

FY13

FY14

FY15

FY16

FY17E

FY18E

Profit before tax

110

101

130

179

Depreciation

(Inc)/Dec in working capital

(18)

(39)

(63)

(73)

(60)

Less: Other income

Direct taxes paid

Cash Flow from Operations

156

(Inc.)/Dec.in fixed assets

(49)

(41)

(80)

(88)

(60)

(Inc.)/Dec. in investments

Other income

Cash Flow from Investing

(48)

(39)

(78)

(87)

(59)

Issue of equity

(1)

Inc./(Dec.) in loans

(22)

(9)

(60)

Dividend Paid (Incl. Tax)

(12)

(22)

(21)

Others

(16)

(3)

(15)

Cash Flow from Financing

(30)

(37)

(9)

(81)

Inc./(Dec.) in Cash

(7)

(2)

Opening Cash balances

Closing Cash balances

November 10, 2016

Indoco Remedies | 2QFY2017 Result Update

Key Ratios

Y/E March

FY13

FY14

FY15

FY16

FY17E

FY18E

Valuation Ratio (x)

P/E (on FDEPS)

59.8

43.8

30.8

30.7

23.9

17.3

P/CEPS

38.4

28.6

19.6

17.8

14.8

11.7

P/BV

6.2

5.6

4.9

4.4

3.8

3.2

Dividend yield (%)

0.4

0.7

EV/Sales

4.2

3.6

3.1

2.7

2.4

2.0

EV/EBITDA

29.5

23.7

16.3

18.3

14.9

11.1

EV / Total Assets

4.7

4.5

4.0

3.5

3.2

2.9

Per Share Data (`)

EPS (Basic)

4.6

6.3

9.0

11.6

16.0

EPS (fully diluted)

4.6

6.3

9.0

11.6

16.0

Cash EPS

7.2

9.7

14.1

15.6

18.7

23.6

DPS

1.1

1.0

2.0

Book Value

44.9

49.6

56.3

63.3

72.6

86.4

DuPont Analysis

EBIT margin

10.4

11.0

13.3

8.7

10.3

12.7

Tax retention ratio

88.2

80.4

75.7

82.5

82.0

Asset turnover (x)

1.2

1.3

1.4

1.5

1.6

ROIC (Post-tax)

10.8

11.6

14.2

10.3

12.3

16.3

Cost of Debt (Post Tax)

18.9

18.7

10.0

9.6

8.0

10.3

Leverage (x)

0.2

0.1

0.2

0.1

Operating ROE

8.9

10.4

14.8

10.5

13.1

17.0

Returns (%)

ROCE (Pre-tax)

11.9

13.9

18.3

11.9

14.4

19.1

Angel ROIC (Pre-tax)

13.0

15.3

20.2

13.0

15.5

20.5

ROE

10.7

13.4

17.0

15.1

17.0

20.1

Turnover ratios (x)

Asset Turnover (Gross Block)

1.5

1.6

1.7

1.8

Inventory / Sales (days)

Receivables (days)

Payables (days)

WC cycle (ex-cash) (days)

Solvency ratios (x)

Net debt to equity

0.2

0.1

0.2

0.1

Net debt to EBITDA

0.9

0.5

0.8

0.7

0.2

Interest Coverage (EBIT / Int.)

3.0

4.2

10.7

6.8

9.1

13.1

November 10, 2016

Indoco Remedies | 2QFY2017 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

DISCLAIMER

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offering of securities of the company covered by Analyst during the past twelve months.

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

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Disclosure of Interest Statement

Indoco Remedies

1. Financial interest of research analyst or Angel or his Associate or his relative

2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives

3. Served as an officer, director or employee of the company covered under Research

4. Broking relationship with company covered under Research

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 10, 2016