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Indoco Remedies optimizing opportunities, says Nirmal Bang

Strong alliances with international pharma players and a sharp focus on the domestic markets will help the company to benefit from its past decisions, says Nirmal Bang research report.

August 31, 2013 / 04:19 PM IST
 
 
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Indoco Remedies Limited (IRL) is a vertically integrated company with a strong brand portfolio of 120 products across various therapeutic segments. Its top 10 brands contribute about 53 percent to its domestic sales. Exports contribute 35 percent of the total revenues. It has 5 brands in the top 500 brand category.


Investment Rationale


Alliance Power: meaningful revenues from alliances to start from FY14


Indoco remedies has signed up with global pharma companies like Watson for the US markets, Aspen (multi format deal) for emerging markets and DSM for API supply in emerging markets. Though no material revenues have come from these alliances yet (recorded Rs 20 crore from Aspen in FY13) due to its long gestation period and lengthy regulatory process. However, we believe IRL has reached a juncture where real benefits of the deal would start coming in. Such deals not only provide revenue visibility to the company but also show its scalable model as well as operational strength.


Watson Deal


Indoco remedies signed a deal with Watson in February '10 for eight sterile (ophthalmology) products (market size of USD 679 million). Since then, the scope of the deal has increased tremendously and currently it includes 22 products (market size of USD 3 billion).


Under the agreement, Indoco will develop and manufacture these products and Watson will file for regulatory approvals and has the sole right to market it in the United States. In return, Indoco and Watson would share 50 percent of profits after covering the manufacturing and marketing costs, respectively.


From the current year, sales from Watson products would become a recurring source of income for the company. The deal would drive overall margins as these are sterile products (difficult to manufacture) with better margins.


Domestic Business


Indoco is ranked 29th as per AWACs and is present in 18 therapies through 8 marketing divisions. IRL's domestic portfolio is skewed towards Acute, contributing 90 percent of the company's revenues. However, the company is making conscious efforts to reduce its dependence on the same and increase its chronic segment's sales. IRL launched 37 products in FY13 (9 in chronic) and henceforth expects to launch 25-30 products every year. The company recorded 14 percent growth in FY13 better than the industry growth of 11.9 percent (Acute growth was 11 percent).


International Markets


The company gets 35 percent of its revenues from the international markets. It is present both in regulated - US and Europe - and emerging markets - Africa, Asia, etc


The emerging markets were down in FY13 as one of its major tenders got completed. Hence, going forward, the company is going slow on tender business as it is a low margin opportunity.


Strong Balance Sheet/Financials


Despite having a healthy balance sheet, the company's return ratios have been lower than its peers because of flat margins year-on-year (y-o-y)and capex done in the past (spent Rs 110 crore on Goa III facility in the last two years). However, we expect the company's ROE and ROCE to improve in the coming years from 13.6 percent/11.4 percent in FY10 to 17.7 percent/17.6 percent in FY15 with improvement in margins as there is no major capex planned in these years.


We expect EBITDA margins to improve from the current band of 14 percent-15 percent to 16 percent-17 percent in the next two years on the back of increase in chronic contribution and commercialization of products of the Watson deal.


Valuation and Recommendation


We believe that the company has reached a turning point and arrived at a critical stage. This is the year from where all its past investments should start paying returns. During FY10-13, IRL's revenues have grown at a CAGR of 16.3 percent while PAT has remained muted and grew by mere 0.5 percent over the same period. However going forward, it would grow better and record improvement in margins. We expect sales to grow by 18.2 percent from FY13 to FY15E.


On the valuation front, the stock is trading at a PE of 5.9x on FY15E EPS. We believe FY14 can be a game changing year as it is the first year when the revenue from Watson may start kicking in. We have forecasted USD 17.7 million revenues from the deal in FY15E, while revenue from Aspen will be icing on the cake (as its first meaningful year would be FY16). We believe the stock is at an inflection point and should be looked from an 18 month view as it is when the full benefit of the deal would be reflected in numbers.


Source: Nirmal Bang's Beyond Market


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