Pharmaceuticals

InstitutionalEquities
IndiaResearch

December05,2013

IndocoRemedies
Bloomberg:INDRIN
Reuters:INDR.BO

COMPANYUPDATE

BUY

USSterileProductDealtoDriveRevenuegrowth

Recommendation
CMP:

Domestic Formulations to Outperform: With minimum impact on the TargetPrice:

domestic formulations (DF) business for the current quarter despite the Upside(%)
NLEM, Indoco Remedies (Indoco) is set to achieve double digit growth in StockInformation
H2FY14. Focus on chronic segment, increasing productivity and stocking up MarketCap.(Rsbn/US$mn)
by the trade will enable the Company to grow by double digits. We have 52weekHigh/Low(Rs)
3mADV(Rsmn/US$mn)
factored11%&14%growthforFY14E&FY15E,respectively.
Beta
USSterileProductDealtoDriveGrowthMomentuminRegulatedMarkets: Sensex/Nifty
Indoco has an alliance with Watson for 23 ophthalmic filings. The recent Shareoutstanding(mn)
regulatoryinspectionwillpavethewayfortwoUSlaunchesinQ4FY14Eand StockPerformance(%)
3additionallaunchesinFY15E,whichwouldenabletheregulatedmarketsto
1M
3M
Absolute
24.3
69.9
growtoRs1.6bninFY15EfromRs.63mninFY14E.
Rel.toSensex

Outlook & Valuation: We downgrade our revenue estimates for FY14E

by7%toRs7,154mnduetodowngradeinrevenuesofWatson,semiregulated
marketsanddomesticformulationsforFY14Eandupgraderevenuesby8.6%
to Rs9,775mn for FY15E mainly on account of upgrade in Watson revenues
due to deferment of launches from FY14E and higher traction in domestic
space for FY15E. We maintain our EBDITAM for FY14E while increase our
EBDITAM from 13.1% to 19.2% despite factoring higher R & D in the books.
We downgrade our EPS for FY14E by 13.9% to Rs 5.9 and upgrade our EPS
estimates by 74% to Rs13.8 for FY15E. We upgrade the stock to BUY with a
pricetargetofRs152basedon11xFY15E.

52.4

Sensex(LHS)

IndocoRemedies(RHS)

Source:Bloomberg,KarvyInstitutionalResearch

EarningsRevision
(%)

FY14E

FY15E

Revenue

7.0

8.6

EBITDA

8.1

59.2

13.9

74.4

Source:Company

Y/EMar(RsMn)

FY11

FY12

FY13

FY14E

FY15E

NetRevenues

4,804

5,643

6,350

7,154

9,775

EBITDA

552

692

793

936

1,875

NetProfit

327

290

245

532

1,270

EPS(Rs)

3.6

3.1

2.7

5.8

13.8

EPSgrowth(%)

16.2

11.4

15.5

116.9

138.8

EBITDAmargin(%)

11.5

12.3

12.5

13.1

19.2

PER(x)

29.7

33.5

39.7

18.3

7.7

EV/EBITDA(x)

18.9

15.3

12.1

10.3

5.0

2.0

1.7

1.5

1.4

1.0

RoCE(%)

11.2

10.6

9.6

13.7

26.7

RoE(%)

10.2

8.5

6.4

12.2

25.3

P/BV(x)

3.0

2.7

2.3

2.1

1.8

Source:Company,KarvyInstitutionalResearch..IndianGAAPConsolidated

12M YTD
58.4 65.7
48.0 55.4

115
105
95
85
75
65
55

PAT

KeyFinancials

P/S(x)

27.5

10/157
114/55
12/0.2
0.7
20,709/6,161
92

Dec12
Jan13
Feb13
Apr13
May13
Jun13
Aug13
Sep13
Oct13
Nov13

CapitalizationofR&DExpenseBoostsMargins:OnaccountofsurgeinR&D
spendandsubsequentauditorsadvice,IndocoiscapitalizingitsR&Dspend Performance
andamortizing over 5 year timespan. We believe thisis not in line with the 23,500
practicefollowedbymostofthecompanies.Wehaveadoptedamoreprudent 21,500
practice of writing off the same from the P&L Account and removing 19,500
17,500
amortizationfromdepreciation.WehavealsoexcludedMATcreditinorderto 15,500
reflectnormalizedearnings.

Rs106
Rs152
43%

AnalystsContact
RahulSharma
02261844310
rahul.sharma@karvy.com

AmeyChalke
02261844325
amey.chalke@karvy.com

December05,2013

IndocoRemedies

India Operations Formulations Space to

Outperform
The Companys performance was good for Q2FY14 despite trade related issues.
WithhighermarginsgivenbytheCompanytothestockistsandretailers,thetrade
fillingwillriseto40daysfrom30days.Focusonchronicspacewhichislikelyto
growby20%andincreasedproductivitywillsetpaceforhighergrowth.Wehave
factored 15% growth in domestic formulations business in H2FY14E and 14%
growth in FY15E. Higher growth in domestic formulations will entail better
marginsfortheCompany.
Exhibit1: Therapywise
Therapy(RsMn)
Stomatologicals

Q2FY14

Q2FY13

Gwth%

204.6

187.4

9.2

GastroIntestinal

171.8

154.5

11.2

Pain/Analgesics

93.4

80.4

16.2

Vitamins/Minerals/Nutrients

76.6

55.7

37.5

Ophthalmic/Otologicals

64.7

57.2

13.1

Gyneac

57.5

50.7

13.4

AntiDiabetic

46.1

39.8

15.8

Source:Company

Exhibit2: Productwise
Product(RsMn)

Q2FY14

Q2FY13

Gwth%

CyclopamTab

75.7

66.2

14.4

CitalLiquid

33.4

28

19.3

CyclopamSusp/

29.8

27.6

ClobenG15Gms

33.8

31.4

7.6

Sensoform100gms

27.3

26.3

3.8

SensodentKF100gms

26.2

24.6

6.5

FebrexPlusTab10s

52.9

42.8

23.6

MCBM6910s

23.3

16.7

39.5

Vepan500Tab10s

22.4

20.5

9.3

GlychekMForte

17.5

13.7

27.7

Source:Company

Therapies like GastroIntestinal (11.2%YoY), Pain/Analgesic (16.2%), Vitamins

(37.5%)andOphthalmics(13.1%YoY)havegrownindoubledigitsduringQ2FY14.
Productwise,CyclopamTab,Cital,Febrexplustab,MCBM69andGlychekhave
showngrowthinexcessof10%YoYduringthequarter.
Our View: The key therapies have seen outperformance over last two quarters
mainly due to better focus imparted by way of therapyfocused divisions. We
believe that relatively smaller scale of the Company in the domestic market can
facilitateittooutperformtheIPMgrowth.

December05,2013

IndocoRemedies

OverseasOperationsExportstoGainTraction

US Sterile Product to drive growth momentum in Regulated markets:

Indoco finalized a generic product development alliance with Watson in
Feb10 for ophthalmic products. Currently, the Watson portfolio has 23
products with cumulative market size of US$4 bn in the US out of which 12
have been filed. The two products which are going to be launched in the
current year have a market size of US$200 mn (Glucoma category)and 6
competitorsi.e.Apotex,Sandoz,Teva,Ahlcon,HiTechPharmaandBausch&
Lomb. We expect Watson to garner 10% market share in FY14E & FY15E,
respectively. We estimate its revenues at Rs. 63 mn & Rs. 1.6 bn in FY14E &
FY15E,respectively.Wehaveassumed2launchesaddressingamarketsizeof
US$200mninQ4FY14Eandadditional3productlaunchesinFY15E(6mths
period).Thecumulativemarketsizeof5productsisatUS$600mn.

Partnership in Emerging Market: In Mar10, Indoco entered into a dossier

licensingandsupplydealwithAspenforsupplyofophthalmicproductsto30
EMs including BRICS. Over last 3 years the deal has been expanded to
include50products.Currently,Indocoisworkingon45projectsforAspenfor
South Africa, Venzuela, Mexico & Australia. Indoco reported Rs. 200 mn
revenuesinFY13,whichislikelytoscaleuptoRs.250mninFY14EandRs350
mninFY15.

RoW Markets: In the generic markets of South Africa, Australia & New
Zealand, the Company has already tied with front end partners while in the
branded promotion space of Africa, CIS, Latin America and SE Asia the
Companywillpromoteitsownbrands.IntheRoWregion,theCompanyhas
movedoutoflowmargintenderbusiness,whichwillenablethemtopromote
brands.

European Operations: In European space, with the EU inspecting the plant,

theCompanyisinnegotiationswithsomelargeplayersforCRAMssupplyin
theophthalmicsegment.TheCompanyisintheprocessoffiling56dossiers
beforeMar14.Theapprovaltimecouldbeanywherebetween1418months.

CapitalizationofR&DExpenseBoostsMargins
On account of surge in research expenses and auditors advice, the Company is
capitalizingresearchexpensesandamortizingoverfiveyearspan.Webelievethis
isnotinlinewiththepracticefollowedbymostcompaniesandwehaveadopteda
moreprudentpracticeofwritingoffthesamefromP&LAccount.Thetablebelow
givestheR&DexpensesthathavebeenaddedtoP&Laccount.
Exhibit3: R&DSchedule
(RsMn)

FY11

FY12

FY13

FY14E

FY15E

R&D(aspercompany)

93

108

125

171

233

%ofsales

1.9

1.9

2.4

2.4

AdditionalR&Dexpensesdeducted

111

109

181

200

200

TotalR&Dexpenses

204

217

306

371

433

%ofsales(%)

4.3

3.9

4.9

5.2

4.4

Source:Company,KarvyInstitutionalResearch

December05,2013

IndocoRemedies
Exhibit4: DepreciationSchedule
(RsMn)

FY11

FY12

FY13

FY14E

FY15E

Depreciation

135

192

237

311

332

AdjustedDepreciation

133

167

184

226

245

Source:Company,KarvyInstitutionalResearch

The Company doesnt include entire R&D spend including capitalized in

calculation of tax, as it is already in MAT. However, it does take the benefit of
depreciation/amortizationofintangibleassetsinitsbooks.WehavechargedR&D
inP&LaccountandremovedamortizationofR&Dexpensesfromdepreciation.

MATCreditEntitlementExcluded
WehavealsotakenthetaxratesgoingaheadatMATratesandnotfactoredinthe
MAT credit entitlement to get a prudent picture of EPS. The tax rates for FY11,
FY12&FY13reflecttaxexMATcreditentitlement.TheCompanyisnottakingtax
benefitinlieuofR&DasitisalreadyunderMAT.
Exhibit5: TaxSchedule
CurrentTax(RsMn)

FY11

FY12

FY13

FY14E

FY15E

PBT

565

513

484

673

1607

CurrentTax

113

103

97

141

337

15

37

54

73

90

97

Totaltax

55

49

57

141

337

Taxrate(asreported)(%)

9.7

9.6

11.8

21

21

NewPBT

455

429

400

673

1607

Adjustedtax

127

139

155

141

337

28

32.4

38

21

21

Add:DeferredTax
Less:MATcreditentitlement
EarlieryrAdj

AdjustedTaxRate(%)

Source:Company,KarvyInstitutionalResearch

Risks : Deferment of Opthalmic ANDA launches would impact revenue and

EPSofthecompanyasgrossmarginsoftheseproductsaremuchhigherthanthe
companysgrossmargins.

December05,2013

IndocoRemedies

ChangeinEstimates
Exhibit6: ChangeinEstimates
(RsMn)

FY14E

FY15E

Comment

New

Old%change

New

Old%change

DomesticForm

4315

4379

4919

4899

ExportForm

2,389

2,859

(16.5)

4,315

3,567

21.0

RegMarket

2,079

2,349

(11.5)

3,905

2,967

63

528

(88.1)

1608

880

31.6
lowerWatsontractionduetodelayinapproval,
82.7 fullimpactof5approvalsinFY15

SemiReg

310

510

(39.2)

410

600

(31.7)

AspenDeal

250

450

(44.4)

350

540

(35.2) lowertractioninAspen

APIDom

181

181

(0.2)

199

199

(0.2)

APIExport

234

234

281

281

(0.1)
8.6

Watson

NetRevenues

(1.5)

0.4 UpgradeFY15nosbasedonlowbaselastyear

7154

7696

(7.0)

9775

8999

Ebitda

936

1018

(8.1)

1875

1178

EbitdaMargins(%)

13.1

13.2 (10bps)

19.2

13.1

NetProfit

532

615

(13.6)

1,270

727

74.6

EPS(Rs)

5.8

6.7

(13.9)

13.8

7.9

74.4

59.2 HighermarginsonaccountofWatsondeal
610bps

Source:Company,KarvyInstitutionalResearch

Valuations

Exhibit7: FinancialsIndocoRemediesvs.Unichem&AlembicPharma
(RsMn)

IndocoRemedies

FY14E

FY15E

FY14E

FY15E

FY14E

FY15E

7,154

9,775

11,911

14,312

17,899

20,964

13.1

19.2

16.2

18.5

18.4

20.1

Totalrevenues
EBITDAMargins(%)
EPS(Rs)

Unichem

AlembicPharma

5.8

13.8

12.9

19.2

10.6

14.7

P/E(x)

18.3

7.7

15.0

10.1

19.6

14.1

P/S(x)

1.4

1.0

1.5

1.2

2.2

1.9

RoCE(%)

13.7

26.7

18.5

23.8

34.9

41.3

RoE(%)

12.2

25.3

15.3

20.3

34.2

37.5

CMP(Rs)

108

193

207

Target(Rs)

152

221

UnderReview

Reco

BUY

HOLD

UnderReview

Source:Company,KarvyInstitutionalResearch

December05,2013

IndocoRemedies

Financials
Exhibit8: Profit&LossStatement
Y/EMar(RsMn)
TotalRevenues
RawMaterial
Staff
R&DExps
OthersExps
TotalExpenditure
EBITDA
EBITDAmargin(%)
Otherincome
Interest
GrossProfit
Depreciation
ProfitBeforeTax
Tax
Effectivetaxrate(%)
NetProfit
%growth
Minorityinterest
Extraordinaries
ReportedNetProfit

FY11
4,804
2,131
670
205
1,245
4,252
552
11.5
60
24
588
133
455
127
28.0
327
16.2

1
328

FY12
5,643
2,450
819
217
1,465
4,951
692
12.3
67
163
596
167
429
139
32.4
290
11.4

290

FY13
6,350
2,620
1,004
310
1,622
5,557
793
12.5
9
92
583
184
400
155
38.7
245
15.5
0.4

245

FY14E
7,154
2,750
1,205
357
1,906
6,218
936
13.1
62
99
899
226
673
141
21.0
532
116.9

532

FY15E
9,775
3,562
1,446
433
2,458
7,900
1,875
19.2
102
125
1,852
245
1,607
337
21.0
1,270
138.8

1,270

FY14E
184
4,364
4,548
712
274
986
343
2
5,879
4,036
1,427
2,608
240
1,051
1,433
1,090
1
1,090
4,664
717
918
1,635
3,030
5,879

FY15E
184
5,310
5,494
971
274
1,245
343
2
7,084
4,366
1,672
2,694
259
1,434
1,956
1,515
1
1,458
6,362
928
1,304
2,232
4,130
7,084

Source:Company,KarvyInstitutionalResearch

Exhibit9: BalanceSheet
Y/EMar(RsMn)
Equity
Reserves
Networth
ShorttermLoans
LongtermLoans
TotalLoans
DeferredtaxLiability
MinorityInterest
Liabilities
GrossBlock
Depreciation
NetBlock
Capitalworkinprogress
Inventories
Debtors
Cash
Investments
OtherCurrentassets
TotalCurrentassets
Creditors
Othercurrentliabilities
Totalcurrentliabilities
Netcurrentassets
TotalAssets

FY11
123
3,173
3,296
163
836
999
257
0
4,552
2,949
831
2,117
625
804
918
270
0
691
2,684
459
415
874
1,810
4,552

FY12
123
3,433
3,556
415
560
974
294
0
4,824
3,876
994
2,882
169
1,019
1,137
105
1
959
3,220
765
684
1,448
1,772
4,824

FY13
184
3,957
4,142
648
274
922
348
2
5,414
3,705
1,201
2,504
220
932
1,271
1,009
1
982
4,194
683
822
1,505
2,689
5,414

Source:Company,KarvyInstitutionalResearch

December05,2013

IndocoRemedies
Exhibit10: CashFlowStatement
Y/EMar(RsMn)
EBIT
(Inc.)/Decinworkingcapital
Cashflowfromoperations

FY11

FY12

FY13

FY14E

FY15E

419

525

610

710

1,630

(187)

(127)

(13)

(260)

(676)

232

398

597

450

953

Otherincome

60

67

62

102

Depreciation

134

167

184

226

245

Interestpaid()

(24)

(163)

(219)

(99)

(125)

DeferredTaxliability

15

37

54

(5)

Taxpaid()

(127)

(139)

(152)

(141)

(337)

Dividendspaid()

(115)

(119)

(129)

(140)

(323)

MiscellaneousExp
Netcashfromoperations

174

248

344

352

515

CapitalExpenditure()

(596)

(476)

143

(350)

(350)

FreeCashFlow

(422)

(228)

487

165

Inc./(Dec.)inshorttermborrowing

(8)

251

234

63

260

Inc./(dec.)inlongtermborrowing

347

(276)

(286)

Inc./(dec.)inborrowings

339

(25)

(52)

63

260

(Inc.)/Dec.inInvestments

(0)

(0)

CashfromFinancialActivities

339

(24)

(51)

63

260

Others

(22)

86

468

15

Openingcash

375

270

105

1,009

1,090

Closingcash

270

105

1,009

1,090

1,515

(105)

(166)

905

81

424

FY13

FY14E

FY15E

Equityissue/(Buyback)

ChangeinCash

Source:Company,KarvyInstitutionalResearch

Exhibit11: KeyRatios
Y/EMar(RsMn)

FY11

FY12

PER(x)

29.7

33.5

39.7

18.3

7.7

EV/EBITDA(x)

18.9

15.3

12.1

10.3

5.0

2.0

1.7

1.5

1.4

1.0

RoCE(%)

11.2

10.6

9.6

13.7

26.7

RoE(%)

10.2

8.5

6.4

12.2

25.3

P/BV(x)

3.0

2.7

2.3

2.1

1.8

P/S(x)

Source:Company,KarvyInstitutionalResearch

December05,2013

IndocoRemedies

InstitutionalEquitiesTeam
RangachariMuralikrishnan

HeadInstitutionalEquities /
Research/Strategy

+912261844301

muralikrishnan@karvy.com

K.AnantRao

HeadSalesTrading&Derivatives

+912261844303

k.anantrao@karvy.com

Analysts

Industry/Sector

DeskPhone

EmailID

AmeyChalke

PharmaceuticalsAssociate

+912261844325

amey.chalke@karvy.com

AnkurLakhotia

DerivativesandQuantAssociate

+912261844327

ankur.lakhotia@karvy.com

HatimBroachwala,CFA

Banking

+912261844329

hatim.broachwala@karvy.com

KrutiShah,CFA

Economist

+912261844320

kruti.shah@karvy.com

ManojKumarManish

DerivativesandQuantAnalyst

+912261844343

manojkumar.m@karvy.com

MarutiKadam

ResearchAssociate

+912261844326

maruti.kadam@karvy.com

MitulShah

Automobiles

+912261844312

mitul.shah@karvy.com

ParikshitKandpal

Infra/RealEstate/Strategy

+912261844311

parikshit.kandpal@karvy.com

RahulSharma

Pharmaceuticals

+912261844310

rahul.sharma@karvy.com

RahulSingh

Textiles

+914044857911

rahulsingh@karvy.com

RajeshKumarRavi

Cement&Logistics

+912261844313

rajesh.ravi@karvy.com

RupeshSankhe

Power/CapitalGoods

+912261844315

rupesh.sankhe@karvy.com

SagarShah

Media&Entertainment

+912261844316

sagarshah@karvy.com

VarunChakri

ResearchAssociate

+912261844326

varun.chakri@karvy.com

CelineDsouza

Sales

+912261844341

celine.dsouza@karvy.com

EdelbertDcosta

Sales

+912261844344

edelbert.dcosta@karvy.com

INSTITUTIONALRESEARCH

INSTITUTIONALSALES

INSTITUTIONALSALESTRADING&DEALING
BhaveshGandhi

Dealer

+912261844368/69

bhavesh.gandhi@karvy.com

PrashantOza

Dealer

+912261844370/71

prashant.oza@karvy.com

GurdarshanSinghKharbanda

Dealer

+912261844368/69

gurdarshansingh.k@karvy.com

AsimKumarMohapatra

Editor

+912261844318

asim.mohapatra@karvy.com

VijayalaxmiL.Moolya

Production

+912261844328

vijayalaxmi.m@karvy.com

PRODUCTION

December05,2013

IndocoRemedies

StockRatings
Buy
Hold
Sell

:
:
:

AbsoluteReturns
>15%
515%
<5%

Forfurtherenquiriespleasecontact:

research@karvy.com
Tel:+912261844300

DisclosuresAppendix

Analystcertification
The following analyst(s), who is (are) primarily responsible for this report, certify (ies) that the views expressed herein
accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their)
compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this
researchreport.
Disclaimer
TheinformationandviewspresentedinthisreportarepreparedbyKarvyStockBrokingLimited.Theinformationcontained
hereinisbasedonouranalysisanduponsourcesthatweconsiderreliable.We,however,donotvouchfortheaccuracyorthe
completenessthereof.Thismaterialisforpersonalinformationandwearenotresponsibleforanylossincurredbaseduponit.
Theinvestmentsdiscussedorrecommendedinthisreportmaynotbesuitableforallinvestors.Investorsmustmaketheirown
investmentdecisionsbasedontheirspecificinvestmentobjectivesandfinancialpositionandusingsuchindependentadvice,as
theybelievenecessary.Whileactinguponanyinformationoranalysismentionedinthisreport,investorsmaypleasenotethat
neitherKarvynorKarvyStockBrokingnoranypersonconnectedwithanyassociatecompaniesofKarvyacceptsanyliability
arisingfromtheuseofthisinformationandviewsmentionedinthisdocument.
Theauthor,directorsandotheremployeesofKarvyanditsaffiliatesmayholdlongorshortpositionsintheabovementioned
companies from time to time. Every employee of Karvy and its associate companies are required to disclose their individual
stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment
recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has
either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only
throughKarvyStockBrokingLtd.Thisreportisintendedforarestrictedaudienceandwearenotsolicitinganyactionbasedon
it.Neithertheinformationnoranyopinionexpressedhereinconstitutesanofferoraninvitationtomakeanoffer,tobuyorsell
anysecurities,oranyoptions,futuresnorotherderivativesrelatedtosuchsecurities.

KarvyStockBrokingLimited
InstitutionalEquities
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KarvyStockBrokingResearchisalsoavailableon:BloombergKRVY<GO>,ThomsonPublisher&Reuters.