Buy Indoco Remedies; target Rs 355: Karvy

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Buy Indoco Remedies; target Rs 355: Karvy

Karvy Stock Broking is bullish on Indoco Remedies and has maintained buy rating on the stock and expects target price of Rs 355.

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Karvy Stock Broking is bullish on Indoco Remedies and has maintained buy rating on the stock and expects target price of Rs 355.

Karvy Stock Broking research report on Indoco Remedies

Indoco Remedies Ltd, Rs2.7bn company with 80% revenues from domestic formulations business has set itself on a transition path and is graduating from CRAMS to offering whole ANDAs in the regulated markets like UK, USA and Europe. Exports, which constitute 16% of current revenues, is expected to scale-up to 50% by 2010. On account of MAT credit entitlement, the company would not have to pay current tax for the next couple of years. We are upgrading our earnings by 11.9% to Rs32.7 in FY07E and to Rs47.2 in FY08E respectively. We however maintain our price target of Rs355 and our BUY recommendation based on 7.93x FY08E and P/S of 1.03x FY08E.

Formulations exports to show increased traction:

Exports constitute 16% of the total revenues (Rs432million in FY06) and is expected to be the fulcrum of growth going ahead. Indoco's export strategy is focused on the CRAMS model, which caters to development of product dossiers to supply of finished dosage. Indoco's main focus is the regulated markets of Europe, US and South Africa. CRAMS ANDA revenues and niche ophthalmic opportunities are expected to pan out in foreseeable future. The company's exports composition is expected to ramp up from 16% currently to 21% to Rs880million in FY2008E.

Domestic formulations set to record strong double-digit growth:

Domestic formulations business, which accounts for 80% of total revenues grew by 16% to Rs 2,166million in FY2006. The company has strong presence in respiratory, anti-infective, stomatology, ophthalmic, antispasmodic, anti- cold preparation, anti- inflammatory and antifungal segments etc. Product introduction of 25-30 products every year coupled with systematic market penetration in hitherto low presence in North and Eastern markets would enable the company to show strong growth. We believe the company is all set to clock 23% and 18% growth in domestic formulations business for FY2007E and FY2008E respectively.

API to open higher vistas for growth: As a part of its growth strategy, Indoco has increased its presence in the API business. Indoco's strategy is to gradually move up its value chain and integrate backward into API business. This would enable the company to migrate from a "Contract Manufacturer of Finished Dosage Forms" to one offering complete solutions.

The company had acquired 100% stake in La Novachem Pvt. Ltd (a capacity of 50KL) at a cost of Rs187.5million. La Nova currently sells APIs to 15 non-regulated countries and derives Rs90-100million revenues. Indoco is confident of scaling up the revenues with more value added products on back of La Nova acquisition. We expect the API revenues to grow at a CAGR of 85% to Rs 200 million in FY08E.

Valuation

Indoco Remedies is set on a strong growth track with increase in revenue growth of 23% in FY07E and 18% in FY08E in the domestic formulations space (80% of revenues), greater revenue traction in the CRAMS and ANDA space in regulated markets and scale up in API space due to La Nova acquisition. On account of MAT credit entitlement, the company would not have to pay current tax for the next couple of years. We are upgrading our earnings by 11.9% to Rs32.7 in FY07E and to Rs47.2 in FY08E respectively. We however maintain our price target of Rs355 and our BUY recommendation based on 7.93x FY08E and P/S of 1.03x FY08E.