Buy Indoco Remedies; target of Rs 330: Religare Capital

Religare Capital's report on Indoco Remedies

INDR’s Q2 PAT grew 40% YoY to Rs 224mn, but fell short of estimates due to a sharp increase in tax rates (33% vs. 21% RCMLe)/higher depreciation. EBITDA margins continued to surprise (21.3% vs. 19% RCMLe) even as revenues (Rs 2.3bn, +13% YoY) came in line. We raise our Dec’15 TP to Rs 330 (Rs 260 earlier), building in (a) a 1-7% upgrade to our FY15-FY17E EPS and (b) a target P/E of 16x (14x earlier) on a strong earnings outlook (40% EPS CAGR over FY15-17E) and improving return ratios.

INDR’s Q2 EBITDA margins at 21.3% surprised yet again, reflecting an improved product mix and cost control. We expect sterile product launches in the US to boost margins further, and raise our base margin assumptions following the Q2 beat. We now forecast EBITDA margins to improve from 15.6% in FY14 to 19.2% in FY15E and 21.1% in FY16E. Enhanced domestic field-force productivity and launches of high-margin ophthalmic products from H2FY15 are likely to be the key margin levers. We model for a 31% EBITDA CAGR driving a 40% EPS CAGR over FY15-FY17E.

Valuation re-rating justified: Sustained earnings execution (margin improvement, revenue build-up) along with improving return ratios/free cash flows would help sustain the P/E multiple closer to mid-sized peers. Our TP (Rs 330) is based on 16x Dec’16 EPS. Trigger: Scale-up in high-margin US ophthalmic products from Dec’14. Buy the stock", says Religare Capital research report.

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