4QFY2016 Result Update | Pharmaceutical

June 17, 2016

Indoco Remedies

SELL

CMP

`282

Performance Highlights

Target Price

`225

Y/E March (` cr)

4QFY16

3QFY16

% chg (qoq) 4QFY15

% chg (yoy)

Investment Period

Net sales

255

0.1

212

20.5

Other operating income

113.7

(1)

(788.5)

Stock Info

Gross profit

173

162

6.3

143

20.6

Sector

Pharmaceutical

Operating profit

(17.3)

(17.0)

Market Cap (` cr)

2,597

Net profit

(2.0)

6.7

Net Debt (` cr)

113

Source: Company, Angel Research

Beta

0.7

Indoco Remedies (Indoco) results for 4QFY2016 have come in much below our

52 Week High / Low

396/244

expectations. The company posted a 20.5% yoy growth in sales to `255cr,

Avg. Daily Volume

15,102

although the same is lower than our expectation of `300cr. The growth was

Face Value (`)

mainly driven by exports (`117.8cr), which grew by 43.8% yoy, while domestic

BSE Sensex

27,010

sales (`136.3cr) rose 5.6% yoy. On the operating front, the EBDITA margin for the

Nifty

8,266

quarter came in at 12.7% V/s 18.4% in 4QFY2015. The reported net profit came

Reuters Code

INRM.BO

in at `20cr V/s `18.8cr in 4QFY2015, registering a yoy growth of 6.7%. We

Bloomberg Code

INDR@IN

recommend a SELL on the stock, on back of the valuations.

Results lower than expected: The company posted a 20.5% yoy growth in sales for

Shareholding Pattern (%)

the quarter to `255cr, although the same is lower than our expectation of

Promoters

59.3

`300cr. The growth was mainly driven by exports (`117.8cr), which grew by

MF / Banks / Indian Fls

11.5

43.8% yoy, while domestic sales (`136.3cr) rose 5.6% yoy. Export sales were

FII / NRIs / OCBs

12.2

driven by a 47.3% yoy growth in Formulation exports (`110.5cr) while domestic

Indian Public / Others

17.0

formulation sales (`130.8cr) rose 6.4% yoy. On the operating front, the gross

margin for the quarter came in at 67.7% V/s 67.6% in 4QFY2015, while the

EBDITA margin came in at 12.7% V/s 18.4% in 4QFY2015.The reported net profit

Abs. (%)

3m 1yr 3yr

came in at `20cr V/s `18.8cr in 4QFY2015, i.e. a yoy growth of 6.7%. This was

Sensex

9.6

0.9

39.0

however lower than our expectation of a net profit of `35cr for the quarter.

Indoco

1.9

(22.6)

343.9

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

and EPS to post a 31.5% CAGR to `15.6 over FY2016-18E. At the current market

3-Year Daily Price Chart

price, the stock is trading at 21.3x and 18.1x its FY2017E and FY2018E earnings,

1,000

respectively. We recommend a SELL, given the expensive valuations.

800

Key financials (Consolidated)

600

Y/E March (` cr)

FY2015

FY2016

FY2017E

FY2018E

Net sales

852.2

976.6

1111.7

1289.2

400

% chg

18.0

14.6

13.8

16.0

200

Net profit

82.8

83.0

121.8

143.5

% chg

42.3

0.2

46.7

17.9

EPS (`)

9.0

13.2

15.6

Source: Company, Angel Research

EBITDA margin (%)

18.9

14.9

18.2

P/E (x)

31.4

31.3

21.3

18.1

RoE (%)

17.0

15.1

19.2

RoCE (%)

18.3

11.9

17.1

19.1

P/BV (x)

5.0

4.5

3.8

3.2

Sarabjit Kour Nangra

EV/Sales (x)

3.1

2.8

2.4

2.0

+91 22 39357600 - Ext: 6806

EV/EBITDA (x)

16.6

18.7

13.4

11.2

[email protected]

Source: Company, Angel Research; Note: CMP as of June 7, 2016

Please refer to important disclosures at the end of this report

Indoco Remedies |4QFY2016 Result Update

Exhibit 1: 4QFY2016 (Consolidated) performance

Y/E March (` cr)

4QFY2016

3QFY2016

% chg (qoq)

4QFY2015

% chg (yoy) FY2016 FY2015

% chg (yoy)

Net sales

255

0.1

212

20.5

977

849

15.0

Other income

9.0

4.2

113.7

(1)

(788.5)

304.4

Total income

264

259

2.0

210

25.5

1,005

856

17.4

Gross profit

173

162

6.3

143

20.6

635

550

15.5

Gross margins (%)

67.7

63.7

67.6

65.0

64.8

Operating profit

32.3

39.1

(17.3)

39.0

(17.0)

145.2

160.4

(9.5)

OPM (%)

12.7

15.4

18.4

14.9

18.9

Interest

64.7

110.9

25.1

Dep & amortisation

0.1

21.9

28.4

PBT

(15.2)

(6.5)

101

110

(8.9)

Provision for taxation

1.4

4.9

(70.4)

(65.6)

(34.8)

Reported Net profit

(2.0)

6.7

0.6

Less : Exceptional items

PAT after exceptional items

(2.0)

6.7

0.6

EPS (`)

2.2

2.0

9.0

Source: Company, Angel Research

Exhibit 2: 4QFY2016 - Actual vs. Angel estimates

(` cr)

Actual

Estimate

Variation (%)

Net sales

255

300

(15.1)

Other operating income

0.5

Operating profit

(31.4)

Tax

(43.8)

Net profit

(40.9)

Source: Company, Angel Research

Revenues below our expectation: For 4QFY2016, Indoco Remedies posted a

20.5% yoy growth in sales to `255cr, although the same is lower than our

expectation of `300cr. The growth was mainly driven by exports (`117.8cr), which

grew by 43.8% yoy, while domestic sales (`136.3cr) rose 5.6% yoy. Export sales

were driven by a 47.3% yoy growth in Formulation exports (`110.5cr) while

domestic formulation sales (`130.8cr) rose 6.4% yoy.

Domestic markets (`136.3cr) posted a growth of 5.6% yoy, mainly driven by

formulation sales (`130.8cr; up 6.4% yoy), while API sales (`5.49cr) posted a dip

of 10.6% yoy. The top-10 therapies of the company contributed by 88.3% to the

IPM market.

Exports (`118cr) grew 43.8% yoy on back of formulation exports (`110cr; up

47.3% yoy), while API exports (`6.5cr) de-grew by 5.0% yoy. The regulated markets

grew by 52.5% yoy to `95.1cr during the quarter as against `62.4cr during the

same quarter last year.

During the quarter, the company’s US business grew by 69.5% yoy with revenues

at `28.4cr. The company (through partners or by itself) filed 23 ANDAs with 8

ANDAs approved till date. There are 54 under the pipeline for the company.

For the quarter, the emerging markets grew by 22.0% to `15.4cr as against

`12.6cr during the same quarter last year. Kenya, French West Africa, Uganda,

Tanzania and Myanmar drove sales during the quarter.

June 17, 2016

Indoco Remedies |4QFY2016 Result Update

Exhibit 5: OPM trend

18.4

16.3

15.5

15.4

12.7

4QFY2015

1QFY2016

2QFY2016

3QFY2016

4QFY2016

Source: Company, Angel Research

Net profit lower than expectation: The reported net profit grew 6.7% yoy to `20cr

V/s `18.8cr in 4QFY2015.

Exhibit 6: Net profit trend

25.0

20.0

15.0

10.0

5.0

0.0

4QFY2015

1QFY2016

2QFY2016

3QFY2016

4QFY2016

Source: Company, Angel Research

Concall Highlights

 As per the Management, the proposed ban on fixed dose combinations

(FDCs; accounting for 2-3% of domestic sales) would have an minimal impact

on the company’s sales.



9.5-10% of the company’s domestic portfolio is currently under NLEM.

 The company has guided for ~15% growth in the domestic market for

FY2017.

 Watson contributed ~US$3mn to the company’s revenues in FY2016; Aspen

has filed for 22 products with MCC, the regulatory authority of South Africa.

For FY2016, Aspen generated sales of `20cr.

 The company received the Establishment Inspection Report (EIR) on 25th May,

2016 from the USFDA for its sterile and solid dosage facility (Goa Plant II).

June 17, 2016

Indoco Remedies |4QFY2016 Result Update

The company also received the EIR from USFDA for its Goa Plant I (solid

dosages facility) and Goa Plant III.

 The company expects US revenues to be ~`150cr for FY2017.

 As per the company, the approvals expected in FY2017 have an addressable

market size of ~US$800mn.

 The company expects international sales to grow at 30-35% in FY2017.

Overall, the company expects a high teen growth in revenues in FY2017.

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.

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 (5 Ophthalmic, 1 solid

dosage and 2 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.

June 17, 2016

Indoco Remedies |4QFY2016 Result Update

Valuation: We expect net sales to post a 14.9% CAGR to `1,289cr and EPS to post

a 31.5% CAGR to `15.6 over FY2016-18E. At the current market price, the stock is

trading at 21.3x and 18.1x its FY2017E and FY2018E earnings, respectively. We

recommend a SELL rating on the stock, given the valuations.

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

1,200

1,000

800

600

400

200

10x

15x

20x

25x

Source: Company, Angel Research

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

557

29.8

3.0

18.2

11.4

22.0

20.1

Aurobindo Pharma Accum.

773

850

10.0

18.7

3.1

13.1

6.9

24.0

29.6

Cadila Healthcare Buy

320

400

25.0

18.7

2.9

13.2

22.9

24.2

28.8

Cipla

Neutral

469

21.6

2.7

15.3

4.9

11.1

13.7

Dr Reddy's

Accum.

3,158

3,476

10.1

20.7

3.0

12.3

6.8

19.2

18.7

Dishman Pharma Neutral

152

15.2

1.6

7.7

15.9

9.4

11.0

GSK Pharma

Neutral

3,515

58.4

8.1

43.0

0.0

33.0

29.9

Indoco Remedies

SELL

282

225

(20.2)

21.3

2.4

13.4

8.6

17.1

19.2

Ipca labs

Buy

431

750

74.0

15.4

1.6

8.8

17.9

11.8

14.9

Lupin

Buy

1,435

1,809

26.1

24.7

4.1

15.6

13.1

29.6

24.7

Sanofi India*

Accum.

4,300

4,738

10.2

28.0

3.9

22.3

34.2

21.0

25.6

Sun Pharma

Buy

739

950

28.6

26.4

5.4

17.9

10.5

17.7

18.7

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

June 17, 2016

Indoco Remedies |4QFY2016 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)

FY2013

FY2014

FY2015

FY2016

FY2017E

FY2018E

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

910

1,055

Net raw materials

262

272

300

341

411

477

Other mfg costs

Personnel

100

130

140

183

199

231

Other

138

168

201

250

234

272

EBITDA

110

161

145

202

234

% chg

5.4

23.5

46.1

(9.7)

39.0

16.0

(% of Net Sales)

14.2

15.2

18.9

14.9

18.2

Depreciation& amortisation

EBIT

114

136

164

% chg

0.1

21.0

43.7

(25.4)

60.9

20.0

(% of Net Sales)

10.4

11.0

13.3

8.7

12.3

12.7

Interest & other charges

Other income

(% of PBT)

1.8

2.4

1.6

1.1

0.7

0.6

Share in profit of Associates

1.0

2.0

3.0

Recurring PBT

110

101

152

179

PBT (reported)

110

101

152

179

Tax

(% of PBT)

11.8

19.6

24.3

17.5

20.0

PAT (reported)

122

144

Add: Share of earnings of asso.

Less: Minority interest (MI)

Prior period items

PAT after MI (reported)

122

144

ADJ. PAT

122

144

% chg

(7.9)

36.5

42.3

0.2

46.7

17.9

(% of Net Sales)

6.8

8.1

9.7

8.5

11.0

11.1

Basic EPS (`)

4.6

6.3

9.0

13.2

15.6

Fully Diluted EPS (`)

4.6

6.3

9.0

13.2

15.6

% chg

(7.9)

36.5

42.3

0.2

46.7

17.9

June 17, 2016

Indoco Remedies |4QFY2016 Result Update

Balance Sheet (Consolidated)

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E

FY2018E

SOURCES OF FUNDS

Equity share capital

Reserves & surplus

396

439

500

566

667

790

Shareholders funds

414

457

519

583

685

808

Minority Interest

Total loans

127

120

Other Long Term Liab.

Long Term Provisions

Deferred tax liability

Total liabilities

555

585

659

762

829

882

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

554

644

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

280

326

Mis. Exp. not written off

Total assets

555

585

659

762

829

882

June 17, 2016

Indoco Remedies |4QFY2016 Result Update

Cash Flow Statement (Consolidated)

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E FY2018E

Profit before tax

110

101

152

179

Depreciation

(Inc)/Dec in working capital

(18)

(39)

(63)

(73)

(60)

Less: Other income

Direct taxes paid

Cash Flow from Operations

113

153

(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)

(7)

(70)

Dividend Paid (Incl. Tax)

(12)

(22)

(21)

Others

(16)

(3)

(15)

Cash Flow from Financing

(30)

(37)

(9)

(19)

(82)

Inc./(Dec.) in Cash

(7)

(2)

Opening Cash balances

Closing Cash balances

June 17, 2016

Indoco Remedies |4QFY2016 Result Update

Key Ratios

Y/E March

FY2013

FY2014

FY2015

FY2016

FY2017E

FY2018E

Valuation Ratio (x)

P/E (on FDEPS)

60.9

44.6

31.4

31.3

21.3

18.1

P/CEPS

39.1

29.1

20.0

18.1

13.9

12.1

P/BV

6.3

5.7

5.0

4.5

3.8

3.2

Dividend yield (%)

0.4

0.7

EV/Sales

4.3

3.7

3.1

2.8

2.4

2.0

EV/EBITDA

30.0

24.1

16.6

18.7

13.4

11.2

EV / Total Assets

4.8

4.5

4.1

3.6

3.3

3.0

Per Share Data (`)

EPS (Basic)

4.6

6.3

9.0

13.2

15.6

EPS (fully diluted)

4.6

6.3

9.0

13.2

15.6

Cash EPS

7.2

9.7

14.1

15.6

20.3

23.2

DPS

1.1

1.0

2.0

Book Value

44.9

49.6

56.3

63.3

74.3

87.6

Dupont Analysis

EBIT margin

10.4

11.0

13.3

8.7

12.3

12.7

Tax retention ratio

88.2

80.4

75.7

82.5

80.0

Asset turnover (x)

1.2

1.3

1.4

1.5

1.6

ROIC (Post-tax)

10.8

11.6

14.2

10.3

14.3

15.9

Cost of Debt (Post Tax)

18.9

18.7

10.0

9.6

8.1

11.8

Leverage (x)

0.2

0.1

0.2

0.1

Operating ROE

8.9

10.4

14.8

10.5

15.4

16.3

Returns (%)

ROCE (Pre-tax)

11.9

13.9

18.3

11.9

17.1

19.1

Angel ROIC (Pre-tax)

13.0

15.3

20.2

13.0

18.5

20.5

ROE

10.7

13.4

17.0

15.1

19.2

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

0.0

Net debt to EBITDA

0.9

0.5

0.8

0.5

0.1

Interest Coverage (EBIT / Int.)

3.0

4.2

10.7

6.8

10.9

13.1

June 17, 2016

Indoco Remedies |4QFY2016 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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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

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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)

June 17, 2016