3QFY2016 Result Update | Pharmaceutical

February 2, 2016

Indoco Remedies

NEUTRAL

CMP

`323

Performance Highlights

Target Price

Y/E March (` cr)

3QFY16

2QFY16

% chg (qoq) 3QFY15

% chg (yoy)

Investment Period

Net sales

255

248

2.8

213

19.6

Other operating income

(44.2)

7.4

Stock Info

Gross profit

162

160

1.7

135

20.0

Sector

Pharmaceutical

Operating profit

1.6

0.4

Market Cap (` cr)

2,977

Net profit

(9.7)

(5.6)

Net Debt (` cr)

Source: Company, Angel Research

Beta

1.0

For 3QFY2016, Indoco Remedies (Indoco)’ results were in line with our

52 Week High / Low

413/289

expectations on the sales front, while the net profit came in lower owing to a lower

Avg. Daily Volume

16,565

than expected OPM. The company posted sales of `255cr (V/s `257cr estimated),

Face Value (`)

a growth of 19.6% yoy. The growth during the quarter came in through exports

BSE Sensex

24,871

(`112.1cr) which rose 34.6% yoy, while domestic market sales grew 9.8% yoy to

Nifty

7,564

`141.9cr. On the operating front, the OPM came in at 15.4% V/s 18.3% in

Reuters Code

INRM.BO

3QFY2015 (and V/s an expected 16.5%). Thus, the net profit came in at `20.4cr

V/s `21.6cr in 3QFY2015, a dip of 5.6% yoy. This is against our expectation of

Bloomberg Code

INDR@IN

`25.4cr. Overall, we are Neutral on the stock.

Results lower than expected: The company posted sales of `255cr (V/s `257cr

Shareholding Pattern (%)

estimated), a growth of 19.6% yoy. The growth during the quarter came in

Promoters

59.2

through exports (`112.1cr) which rose 34.6% yoy, while domestic market sales

MF / Banks / Indian Fls

14.0

grew 9.8% yoy to `141.9cr. Exports growth during the period was aided by the

FII / NRIs / OCBs

9.5

regulated markets (`90.4cr) which grew 36.3% yoy and emerging markets

(`139.0cr) which grew 32.6% yoy. On the operating front, the OPM came in at

Indian Public / Others

17.3

15.4% V/s 18.3% in 3QFY2015 (and V/s an expected 16.5%). The margins

declined owing to 30.7% and 76.3% yoy rise in employee expenditure and R&D

expenditure respectively. Thus, the net profit came in at `20.4cr V/s `21.6cr in

Abs. (%)

3m 1yr 3yr

3QFY2015, a dip of 5.6% yoy. This is against our expectation of `25.4cr.

Sensex

(7.3)

(16.2)

24.4

Indoco

(0.3)

0.7

424.5

Outlook and valuation: We expect net sales to post a 19.6% CAGR to `1,199cr

and EPS to post a 23.0% CAGR to `13.6 over FY2015-17E. At the current market

price, the stock is trading at 34.3x and 23.7x its FY2016E and FY2017E earnings,

3-Year Daily Price Chart

respectively. We recommend a Neutral rating on the stock, given the valuations.

Key financials (Consolidated)

Y/E March (` cr)

FY2014

FY2015

FY2016E

FY2017E

Net sales

722.3

852.2

1032.6

1198.6

% chg

15.3

18.0

21.2

16.1

Net profit

58.2

82.8

86.8

125.3

% chg

36.5

42.3

4.9

44.4

EPS (`)

6.3

9.0

9.4

13.6

EBITDA margin (%)

15.2

18.9

15.9

18.2

Source: Company, Angel Research

P/E (x)

51.1

35.9

34.3

23.7

RoE (%)

13.4

17.0

15.7

19.7

RoCE (%)

13.9

18.3

15.5

19.7

P/BV (x)

6.5

5.7

5.1

4.3

Sarabjit Kour Nangra

EV/Sales (x)

4.2

3.6

3.0

2.6

+91 22 39357600 - Ext: 6806

EV/EBITDA (x)

27.6

19.0

14.2

[email protected]

Source: Company, Angel Research; Note: CMP as of January 29, 2016

Please refer to important disclosures at the end of this report

Indoco Remedies |3QFY2016 Result Update

Exhibit 1: 3QFY2016 (Consolidated) performance

Y/E March (` cr)

3QFY2016

2QFY2016

% chg (qoq) 3QFY2015

% chg (yoy) 9MFY2016 9MFY2015

% chg (yoy)

Net sales

255

248

2.8

213

19.6

718

637

12.7

Other income

4.2

7.6

(44.2)

7.4

142.5

Total income

259

255

1.4

217

19.4

738

645

14.3

Gross profit

162

160

1.7

135

20.0

461

407

13.3

Gross margins (%)

63.7

64.4

63.5

64.2

63.9

Operating profit

39.1

38.5

1.6

39.0

0.4

112.8

121.5

(7.2)

OPM (%)

15.4

15.5

18.3

15.7

19.1

Interest

8.0

4.4

(4.9)

Dep & amortisation

2.3

27.1

28.8

PBT

(11.4)

(10.4)

(8.1)

Provision for taxation

4.9

5.9

(17.9)

(26.1)

(26.5)

Reported Net profit

(9.7)

(5.6)

(1.2)

Less : Exceptional items

PAT after exceptional items

(9.7)

(5.6)

(1.2)

EPS (`)

2.2

2.5

2.3

6.9

7.0

Source: Company, Angel Research

Exhibit 2: 3QFY2016 - Actual vs. Angel estimates

(` cr)

Actual

Estimate

Variation (%)

Net sales

255

257

(1.1)

Other operating income

8.2

Operating profit

(7.8)

Tax

42.5

Net profit

(19.6)

Source: Company, Angel Research

Revenues below expectations: The company posted sales of `255cr (V/s `257cr

estimated), a growth of 19.6% yoy. The growth during the quarter came in through

exports (`112.1cr) which rose 34.6% yoy, while domestic market sales grew 9.8%

yoy to `141.9cr. Exports growth during the period was aided by the regulated

markets (`90.4cr) which grew 36.3% yoy and emerging markets (`139.0cr) which

grew 32.6% yoy. Domestic formulations (`135.7cr) posted a yoy growth of 10.5%.

Domestic markets (`141.9cr) posted a growth of 9.8% yoy, mainly on back of

formulation sales (`136cr; up 10.5% yoy), while API sales (`6.02cr) a dip of 5.9%

yoy. The top-10 therapies of the company contributed by 88.3% to the IPM market.

Exports (`112cr) grew 34.6% yoy on back of formulation exports (`104.3cr; up

35.8% yoy), while API exports (`7.3cr) grew 12.0% yoy. The regulated markets

during the quarter grew by 36.3% yoy to `90.4cr as against `66.3cr during the

same quarter last year.

During the quarter, the company’s US business grew by 22% yoy with revenues at

`29.7cr. The company (through partners or by itself) filed 21 ANDAs which are

pending approvals with 6 ANDAs approved till date. There are 33 under the

pipeline for the company.

For the quarter, the emerging markets grew by 32.6% to `13.9cr as against

`10.5cr during the same quarter last year. Kenya, French West Africa, Uganda,

Tanzania and Myanmar drove sales during the quarter.

February 2, 2016

Indoco Remedies |3QFY2016 Result Update

Concall takeaways

 During the quarter, the USFDA audited the company’s finished dosage plant

(Plant I) at Goa. Establishment Inspection Reports (EIRs) for the Finished

Dosage Plant I, Sterile Plant II and Finished Dosage Plant III at Goa are

awaited.

 The company has restructured some of its marketing divisions in domestic

markets with addition to the field force to accelerate growth and build on its

core strengths in the mass specialty segments.

 Going forward, the company’s business from US and EU territory is expected

to grow speedily as ANDAs and Dossiers will be commercialized at regular

intervals.

 While surging ahead in the regulated markets, Indoco is also consolidating its

position in the emerging markets through active brand promotion. Part of the

emerging market is exploited through distributors appointed by Indoco and

part through alliances.

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 ~2,300 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.

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 9.3% over FY2015-17E,

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 ~39% of

its revenues from exports in 2014-15.

In the last four years, the company has filed ~15 ANDAs in the ophthalmic space

and expects to secure approval for ~5 products over FY2015-16E, addressing

opportunities of US$1bn brand sales. Thus, we estimate the company to garner

around `120cr of sales in FY2016. We expect the exports segment to grow at a

35.6% CAGR over FY2015-17E.

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

February 2, 2016

Indoco Remedies |3QFY2016 Result Update

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 the company to post a net sales CAGR of 19.6% to `1,199cr

and EPS to post a 23.0% CAGR to `13.6 over FY2015-17E. At the current market

price, the stock is trading at 34.3x and 23.7x its FY2016E and FY2017E earnings,

respectively. We recommend a Neutral rating on the stock, given the valuations.

Exhibit 7: Key assumptions

FY2016E

FY2017E

Domestic sales growth (%)

4.0

15.0

Exports growth

55.6

18.0

Operating margins (%)

15.9

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

February 2, 2016

Indoco Remedies |3QFY2016 Result Update

Exhibit 9: Recommendation summary

Company

Reco

CMP Tgt. price Upside

FY2017E

FY15-17E

FY2017E

(`)

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

Alembic Pharma

Neutral

618

21.5

3.0

15.3

38.2

31.3

31.2

Aurobindo Pharma Neutral

833

19.5

3.1

13.5

15.6

23.5

30.2

Cadila Healthcare

Buy

305

352

15.5

17.3

2.6

11.8

24.6

25.2

29.0

Cipla

Accumulate

586

636

8.6

20.3

2.8

14.5

21.4

17.1

16.8

Dr Reddy's

Buy

3,104

3,933

26.7

17.4

2.6

11.2

17.2

19.1

20.4

Dishman Pharma

Neutral

331

16.6

1.8

8.2

15.9

9.5

11.2

GSK Pharma*

Neutral

3,224

47.2

8.2

37.3

6.6

33.7

34.3

Indoco Remedies

Neutral

323

23.8

2.6

14.1

23.0

19.7

Ipca labs

Buy

669

900

34.6

23.9

2.4

12.9

17.9

11.8

14.0

Lupin

Neutral

1,710

25.0

4.3

15.9

13.1

29.6

24.7

Sanofi India*

Neutral

4,242

28.0

3.6

17.4

33.1

27.9

25.5

Sun Pharma

Accumulate

873

950

8.8

32.5

5.8

18.8

8.4

15.8

16.6

Source: Company, Angel Research; Note: *December year ending, Price as of November 6, 2015

February 2, 2016

Indoco Remedies |3QFY2016 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)

FY2012

FY2013

FY2014

FY2015

FY2016E

FY2017E

Gross sales

576

638

735

863

1,043

1,211

Less: Excise duty

Net sales

569

626

722

852

1,033

1,199

Other operating income

Total operating income

571

630

733

857

1,038

1,204

% chg

17.4

10.4

16.2

17.0

21.0

16.0

Total expenditure

484

537

612

691

868

981

Net raw materials

245

262

272

300

382

443

Other mfg costs

Personnel

100

130

140

185

215

Other

119

138

168

201

241

253

EBITDA

110

161

164

218

% chg

31.2

5.4

23.5

46.1

2.3

32.3

(% of Net Sales)

14.9

14.2

15.2

18.9

15.9

18.2

Depreciation& amortisation

EBIT

114

112

160

% chg

28.1

0.1

21.0

43.7

(1.2)

42.9

(% of Net Sales)

11.5

10.4

11.0

13.3

10.9

13.4

Interest & other charges

Other income

(% of PBT)

0.0

1.8

2.4

1.6

1.1

Share in profit of Associates

1.0

2.0

Recurring PBT

110

109

157

PBT (reported)

110

109

157

Tax

(% of PBT)

9.6

11.8

19.6

24.3

20.0

PAT (reported)

125

Add: Share of earnings of asso.

Less: Minority interest (MI)

Prior period items

PAT after MI (reported)

125

ADJ. PAT

125

% chg

(9.2)

(7.9)

36.5

42.3

4.9

44.4

(% of Net Sales)

8.1

6.8

8.1

9.7

8.4

10.5

Basic EPS (`)

5.0

4.6

6.3

9.0

9.4

13.6

Fully Diluted EPS (`)

5.0

4.6

6.3

9.0

9.4

13.6

% chg

(9.2)

(7.9)

36.5

42.3

4.9

44.4

February 2, 2016

Indoco Remedies |3QFY2016 Result Update

Balance Sheet (Consolidated)

Y/E March (` cr)

FY2012

FY2013

FY2014

FY2015

FY2016E

FY2017E

SOURCES OF FUNDS

Equity share capital

Reserves & surplus

372

396

439

500

566

669

Shareholders funds

385

414

457

519

584

688

Minority Interest

Total loans

114

181

120

Other Long Term Liab.

Long Term Provisions

Deferred tax liability

Total liabilities

542

555

585

659

792

835

APPLICATION OF FUNDS

Gross block

404

447

481

561

621

681

Less: acc. depreciation

102

126

156

203

255

312

Net block

302

321

325

358

366

369

Capital work-in-progress

Goodwill

Investments

Long Term Loans And Adv.

101

117

Current assets

267

273

305

385

535

600

Cash

Loans & advances

103

120

Other

219

220

249

285

400

464

Current liabilities

114

134

144

187

255

296

Net current assets

152

139

160

199

280

304

Mis. Exp. not written off

Total assets

542

555

585

659

792

835

February 2, 2016

Indoco Remedies |3QFY2016 Result Update

Cash Flow Statement (Consolidated)

Y/E March (` cr)

FY2012

FY2013

FY2014

FY2015

FY2016E FY2017E

Profit before tax

110

109

157

Depreciation

(Inc)/Dec in working capital

(28)

(18)

(39)

(109)

(56)

Less: Other income

Direct taxes paid

Cash Flow from Operations

125

(Inc.)/Dec.in fixed assets

(84)

(49)

(41)

(80)

(60)

(Inc.)/Dec. in investments

Other income

Cash Flow from Investing

(84)

(48)

(39)

(78)

(58)

Issue of equity

Inc./(Dec.) in loans

(22)

(9)

(61)

Dividend Paid (Incl. Tax)

(12)

(22)

Others

(16)

(3)

(15)

Cash Flow from Financing

(30)

(37)

(9)

(74)

Inc./(Dec.) in Cash

(2)

(7)

Opening Cash balances

Closing Cash balances

February 2, 2016

Indoco Remedies |3QFY2016 Result Update

Key Ratios

Y/E March

FY2012

FY2013

FY2014

FY2015

FY2016E

FY2017E

Valuation Ratio (x)

P/E (on FDEPS)

64.2

69.8

51.1

35.9

34.3

23.7

P/CEPS

45.4

44.8

33.4

22.9

21.4

16.3

P/BV

7.7

7.2

6.5

5.7

5.1

4.3

Dividend yield (%)

0.2

0.3

EV/Sales

5.4

4.9

4.2

3.6

3.0

2.6

EV/EBITDA

36.4

34.3

27.6

19.0

14.2

EV / Total Assets

5.7

5.5

5.2

4.6

3.9

3.7

Per Share Data (`)

EPS (Basic)

5.0

4.6

6.3

9.0

9.4

13.6

EPS (fully diluted)

5.0

4.6

6.3

9.0

9.4

13.6

Cash EPS

7.1

7.2

9.7

14.1

15.1

19.8

DPS

0.7

1.1

Book Value

41.8

44.9

49.6

56.3

63.4

74.6

Dupont Analysis

EBIT margin

11.5

10.4

11.0

13.3

10.9

13.4

Tax retention ratio

90.4

88.2

80.4

75.7

80.0

Asset turnover (x)

1.2

1.3

1.4

1.5

ROIC (Post-tax)

12.2

10.8

11.6

14.2

12.9

16.3

Cost of Debt (Post Tax)

15.5

18.9

18.7

10.0

6.3

5.6

Leverage (x)

0.2

0.1

0.2

Operating ROE

11.6

8.9

10.4

14.8

14.2

18.5

Returns (%)

ROCE (Pre-tax)

13.0

11.9

13.9

18.3

15.5

19.7

Angel ROIC (Pre-tax)

14.8

13.0

15.3

20.2

17.1

21.5

ROE

12.6

10.7

13.4

17.0

15.7

19.7

Turnover ratios (x)

Asset Turnover (Gross Block)

1.6

1.5

1.6

1.8

Inventory / Sales (days)

Receivables (days)

Payables (days)

WC cycle (ex-cash) (days)

Solvency ratios (x)

Net debt to equity

0.3

0.2

0.1

0.3

0.2

Net debt to EBITDA

1.2

0.9

0.5

0.9

0.5

Interest Coverage (EBIT / Int.)

4.0

3.0

4.2

10.7

10.6

15.2

February 2, 2016

Indoco Remedies |3QFY2016 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 Analyst) Regulations, 2014 vide registration number

INH000000164. Angel or its associates has not been debarred/ 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 document should

make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the

companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine

the merits and risks of such an investment.

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

trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's

fundamentals.

The information in this document has been printed on the basis of publicly available information, internal data and other reliable

sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this

document is for general guidance only. Angel Broking Pvt. Limited or any of its affiliates/ group companies shall not be in any way

responsible for any loss or damage that may arise to any person from any inadvertent error in the 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 and its affiliates may

have investment positions in the stocks recommended in this report.

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)

February 2, 2016