Published on 15/09/2020 10:41:30 AM | Source: HDFC Securities Ltd

Buy Indoco Remedies Ltd For Target Rs.303 - HDFC Securities

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Buy Indoco Remedies Ltd For Target Rs.303 HDFC Securities

Our Take:

Indoco Remedies is a small sized pharma player having presence mainly in India, Europe and US markets. The Company’s domestic business continues to focus on brand building, new product launches, thrust on chronic/sub-chronic segment. US business is expected to grow at robust pace as ANDAs (13 approved products and 5-6 to be filed in FY21) will be commercialized at regular intervals as US FDA’s warning letter has been lifted. In US, the company expects 4-5 ANDA approvals per year going forward through partners as well as self-fillings. About 4 launches in US markets are also expected in the medium term, which should gain critical mass in volume by Q3 FY21. Company’s US revenues more than doubled at Rs 57cr in FY20 and management has guided for around Rs 150cr revenues for FY21. Recently, the company received US FDA approval for Apixaban tablets. Apixaban is anticoagulant (blood thinner) and used to treat health problems caused by blood clot. US market size is ~US$ 1.1bn as per IMS MAT Jun-2020 data. The launch of this drug would further boost US revenues for the company.


Business from EU will also witness impressive growth as additional capacities are created with UK MHRA approval of Baddi Plant-III and reinstatement of full GMP status of Goa Plant-I would boost the EU business. We expect the EU business togrow well on a relatively subdued base. Europe business recorded strong 47% yoy rise at Rs 154cr in FY20 and management guided for around Rs 225cr revenues for FY21. Indoco is also consolidating its position in the Emerging Markets through active brand promotion. During FY20, the company launched seven new products in chronic segment and one in sub-chronic in India. Company offers medicines in multiple therapeutic areas such as stomatology, respiratory, women’s health, anti-infectives, pain and ophthalmology. The company hopes to deliver low double digit growth in the domestic business in the next two years. Growth drivers will be improved productivity for its chronic and sub-chronic therapy business and new product launches. Management commented that they have enough capacity and don’t need to do expansion; they have guided for capex of Rs 50-60cr each for FY21E and FY22E. We expect regulated market business to register robust 44% CAGR over FY20-22E to Rs 444cr, mainly due to lower base and new products launches. As regulated market revenues grow, contribution from domestic revenues would come down to ~52% in FY22 vs. 62% in FY20. Expertise in R&D, backward integration in select products, its own CRO set-up, partnership model in Europe and a strong customer base are some of the key positives for the company


View & Valuation:

With regulatory issues largely corrected, the company’s regulated market revenues should see strong growth from FY21E, led by strong recovery in Europe, which is now back to its base run rate of Rs 45-50cr per quarter. The EU revenue growth will sustain, and the US and other regulated markets should also start meaningfully contributing from FY21 onwards. We feel the US business can incrementally add Rs 80-90cr to FY21 sales. We estimate 17% revenue CAGR led by healthy ~8% growth from domestic business and 44% CAGR from regulated markets over FY20-22E. On the back of stronger revenue growth, operating leverage would also play a part and we project 580bps margin surge over the next two years. Healthy revenues coupled with better operational performance would drive robust PAT growth over the same period. At CMP, the stock trades at ~18x FY22E earnings. Robust export revenue growth, strong margin expansion, lower capex outlay and improvement in return ratios are key triggers. We feel investors can buy the stock at CMP and add on declines to Rs 218-222 band (16x FY22E EPS) for a base case target of Rs.275 (20x FY22E EPS) and a bull case target price of Rs.303 (22x FY22E EPS) over the next two quarters


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