3QFY2017 Result Update | Pharmaceutical

January 31, 2017

Indoco Remedies

REDUCE

CMP

`275

Performance Highlights

Target Price

`240

Y/E March (` cr)

3QFY17

2QFY17

% chg (qoq) 3QFY16

% chg (yoy)

Investment Period

Net sales

272

276

(1.5)

256

6.2

Other operating income

26.2

68.7

Stock Info

Gross profit

174

179

(3.0)

162

7.6

Sector

Pharmaceutical

Operating profit

(9.2)

(13.4)

Market Cap (` cr)

2,533

Net profit

(20.5)

(7.3)

Source: Company, Angel Research

Net Debt (` cr)

Beta

0.4

Indoco Remedies posted lower than expected numbers for 3QFY2017. In sales,

52 Week High / Low

360/244

the company posted revenues of

`272cr

(`276cr expected) v/s

`256cr in

Avg. Daily Volume

10,283

3QFY2016, growth of 6.2% yoy. The lower growth was on the back of the

Face Value (`)

formulation business at `252.2cr, up 4.5% yoy, API at `18.2cr up 32.8% yoy. The

BSE Sensex

27,882

domestic formulation at `144.2cr recorded a yoy growth of 5.2%. On EBITDA

Nifty

8,641

front, the company posted an EBITDA of 12.4% (14.5% expected) v/s 15.4% in

Reuters Code

INRM.BO

3QFY2016. The dip came in on the back of the high R&D expenses, which came

Bloomberg Code

INDR@IN

in at 5.1% of sales v/s 3.5% of sales in 3QFY2016. Consequently, PAT came in at

`18cr (lower than expectations) v/s `19cr in 3QFY2016, de-growth of 7.3% yoy.

On the back of valuations, we maintain our Reduce stance on the stock.

Shareholding Pattern (%)

Results lower than expected: Indoco Remedies posted numbers lower than

Promoters

59.2

expectations. In sales, the company posted revenues of `272cr (`276cr expected)

MF / Banks / Indian Fls

11.3

v/s `255cr in 3QFY2016, growth of 6.2% yoy. The low growth was on back of the

FII / NRIs / OCBs

13.0

formulation business at `252.2cr, up 4.5% yoy, API at `18.2cr up 32.8% yoy. The

Indian Public / Others

16.5

domestic formulation at `144.2cr recorded a yoy growth of 5.2%. On EBITDA

front, the company posted an EBITDA of 12.4% (14.5% expected) v/s 15.4% in

Abs. (%)

3m 1yr 3yr

3QFY2016. The dip came in on the back of the high R&D expenses, which came

Sensex

(0.1)

13.8

34.6

in at 5.1% of sales v/s 3.5% of sales in 3QFY2016. Consequently, PAT came in at

Indoco

(4.8)

(13.8)

126.9

`18cr (lower than expectations) v/s `19cr in 3QFY2016, de-growth of 7.3% yoy.

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

3-Year Daily Price Chart

and EPS to post a CAGR of 33.2% to `16 over FY2016-18E. At the current market

450

price, the stock is trading at 23.8x and 17.2x its FY2017E and FY2018E earnings,

400

respectively. We maintain our reduce rating on back of the valuations.

350

300

Key financials (Consolidated)

250

200

Y/E March (` cr)

FY2015

FY2016

FY2017E

FY2018E

150

Net sales

852

977

1112

1289

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

Source: Company, Angel Research

EBITDA margin (%)

18.9

14.9

16.2

18.2

P/E (x)

30.6

30.5

23.8

17.2

RoE (%)

17.0

15.1

17.0

20.1

RoCE (%)

18.3

11.9

14.4

19.1

P/BV (x)

4.9

4.3

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)

16.2

18.2

14.8

11.0

[email protected]

Source: Company, Angel Research; Note: CMP as of January 27, 2017

Please refer to important disclosures at the end of this report

Indoco Remedies | 3QFY2017 Result Update

Exhibit 1: 3QFY2017 (Consolidated) performance

Y/E March (` cr)

3QFY2017

2QFY2017

% chg (qoq) 3QFY2016

% chg (yoy) 9MFY2017 9MFY2016

% chg (yoy)

Net sales

272

276

(1.5)

256

6.2

801

723

10.8

Other income

7.1

5.6

26.2

68.7

(8.5)

Total income

279

282

(1.0)

261

7.2

819

742

10.3

Gross profit

174

179

(3.0)

162

7.6

517

459

12.6

Gross margins (%)

63.9

64.9

63.0

64.5

63.5

Operating profit

33.9

37.3

(9.2)

39.1

(13.4)

108.0

111.4

(3.1)

OPM (%)

12.4

13.5

15.3

13.5

15.4

Interest

86.6

(47.9)

(28.4)

Dep & amortisation

(13.8)

(5.6)

6.1

PBT

(4.2)

5.4

(6.7)

Provision for taxation

5.8

2.6

122.8

84.3

(22.1)

Reported Net profit

(20.5)

(7.3)

(3.0)

Less : Exceptional items

PAT after exceptional items

(20.5)

(7.3)

(3.0)

EPS (`)

1.9

2.4

2.1

6.5

6.7

Source: Company, Angel Research

Exhibit 2: 3QFY2017 - Actual vs. Angel estimates

(` cr)

Actual

Estimate

Variation (%)

Net sales

272

276

(1.5)

Other operating income

27.1

Operating profit

(15.5)

Tax

121.9

Net profit

(29.1)

Source: Company, Angel Research

Revenues below expectations: In sales, the company posted revenues of `272cr

(`276cr expected) v/s `255cr in 3QFY2016, growth of 6.9% yoy. The lower growth

was on the back of the formulation business at `252.2cr, up 4.5% yoy, API at

`18.2cr up 32.8% yoy. The domestic formulation at `144.2cr recorded a yoy

growth of 5.2%.

Domestic Formulation markets (`144cr) posted a growth of 5.2% yoy, mainly,

while API sales (`5.7cr) posted a dip of 11.6% yoy. Exports Formulations

(`108cr) grew 3.6% yoy, while API exports (`12.5cr) grew 72.4% yoy. Europe

contributed 34.9% of International formulation sales, followed by US at 31.5%,

South Africa, Australia & New Zealand at 18.4% and Emerging markets at

15.3%.

During the quarter, the revenues grew by 27.5 % at `37.8cr as against

`29.7cr for the same period last year. YTD, the revenue grew by 17.9% at

`92.1cr as against `78.2cr for the same period last year. The company is

awaiting Establishment Inspection Report (EIR) from the USFDA for its Goa

Plant II & III for the audit conducted in the month of September 2016.

In terms of filings, the company (through partners or by itself), filed 25 ANDAs

which are pending approvals with 10 ANDAs approved till date.

January 31, 2017

Indoco Remedies | 3QFY2017 Result Update

The revenues for the quarter grew by 18.1% at `16.4cr, as against `13.9cr for the

same period last year. YTD to date, the revenues grew by 32.7% at `44.7cr as

against ` 33.7cr.

Exhibit 3: Domestic Formulation sales trend

180

169

170

160

150

142

144

136

140

131

130

120

110

100

3QFY2016

4QFY2016

1QFY2017

2QFY2017

3QFY2017

Source: Company, Angel research

Exhibit 4: Export sales trend

140.0

121

118

120.0

112

100

100.0

80.0

60.0

40.0

20.0

0.0

3QFY2016

4QFY2016

1QFY2017

2QFY2017

3QFY2017

Source: Company, Angel research

OPM lower than estimated: On EBITDA front, the company posted an EBITDA of

12.4% (14.5% expected) v/s 15.4% in 3QFY2016. The dip came in on back of the

high R&D expenses, which came in at 5.1% of sales v/s 3.5% of sales in

3QFY2016.

January 31, 2017

Indoco Remedies | 3QFY2017 Result Update

Concall takeaways

 The company has re-structured 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 speciality segments.

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

to grow at a fast pace, 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 ~2,800 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

January 31, 2017

Indoco Remedies | 3QFY2017 Result Update

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

23.8x and

17.2x its FY2017E and FY2018E earnings,

respectively. We recommend a reduce rating on back of 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

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

FY2017E

FY15-17E

FY2017E

(`)

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

Alembic Pharma

Neutral

575

18.9

2.5

11.8

(10.8)

27.5

25.3

Aurobindo Pharma Accumulate

713

877

22.9

15.1

2.5

10.5

18.1

22.5

26.1

Cadila Healthcare

Accumulate

363

400

10.3

18.9

2.9

13.2

13.4

22.7

25.7

Cipla

Sell

580

490

(15.6)

21.3

2.7

14.7

20.4

13.5

15.2

Dr Reddy's

Neutral

2,999

21.0

2.7

10.2

1.7

16.2

15.9

Dishman Pharma

Neutral

234

20.7

2.3

10.2

13.3

10.3

10.9

GSK Pharma

Neutral

2,732

44.9

6.8

33.0

17.3

35.3

32.1

Indoco Remedies

Reduce

275

240

(12.7)

17.2

2.0

11.0

33.2

19.1

20.1

Ipca labs

Accumulate

537

613

14.2

27.3

1.9

12.4

36.5

8.8

9.4

Lupin

Buy

1,492

1,809

21.3

21.5

3.5

13.3

17.2

24.4

20.9

Sanofi India*

Neutral

4,181

24.3

3.2

17.3

22.2

25.6

28.8

Sun Pharma

Buy

640

847

32.4

18.1

3.5

11.5

26.5

18.9

20.1

Source: Company, Angel Research; Note: *December year ending, Price as of January 27, 2017

January 31, 2017

Indoco Remedies | 3QFY2017 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

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

January 31, 2017

Indoco Remedies | 3QFY2017 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

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

January 31, 2017

Indoco Remedies | 3QFY2017 Result Update

Cash Flow Statement (Consolidated)

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E FY2018E

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

January 31, 2017

Indoco Remedies | 3QFY2017 Result Update

Key Ratios

Y/E March

FY2013

FY2014

FY2015

FY2016

FY2017E

FY2018E

Valuation Ratio (x)

P/E (on FDEPS)

59.4

43.5

30.6

30.5

23.8

17.2

P/CEPS

38.2

28.4

19.5

17.7

14.7

11.6

P/BV

6.1

5.5

4.9

4.3

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

29.3

23.6

16.2

18.2

14.8

11.0

EV / Total Assets

4.7

4.4

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

January 31, 2017

Indoco Remedies | 3QFY2017 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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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)

January 31, 2017