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Strong management guidance, execution remains key

Q4FY21 revenues grew 12.2% YoY to | 305 crore. Export formulations grew 65.6% YoY to | 132 crore driven by strong growth in regulated and emerging markets. Domestic formulations de-grew 13.0% YoY to | 139 crore due to continued impact on anti-infective and respiratory segment.

API segment remained subdued at | 20 crore, down 1.5% YoY. EBITDA margins expanded 569 bps YoY to 17.9% on account of lower staff, travel & promotional spend partly offset by decline in gross margin performance. Subsequent EBITDA grew 64.4% YoY to | 55 crore. PAT for the quarter came in at | 25 crore (~4.7x YoY) vs. | 5.4 crore in Q4FY20.

India formulations growth core to overall growth

Domestic formulations (~51% of FY21 revenues) grew at 3% CAGR in FY16- 21. The subdued growth can be attributed to high concentration of acute therapies impacted by the pandemic and one of the lowest MR productivity. With a market share of ~0.61% and overall rank of 29, the company is still a marginal player with some top brands in smaller categories like stomatologicals. However, with a positive outcome of restructuring exercise and likely improvement in MR productivity besides therapy calibration, we expect Indian formulations to deliver 21% growth in FY21-23E to | 900 crore.

Exports formulations slowly coming back on track

Exports formulations (~40% of overall FY21 sales) have grown at 4.8% CAGR in FY16-21, undone by regulatory hurdles in developed markets. However, recent clearance from the UK-MHRA and lifting of warning letters from the USFDA for Goa plant II and III (plant I is still under warning letter) is likely to improve operating leverage for export formulations. We expect the export business to grow at ~29% CAGR in FY21-23E to | 813 crore, mainly tracking new product launches.

Valuation & Outlook

Q4 growth was led by strong growth in export markets (albeit on lower base) and lower staff, travel & promotional costs. The management expects 80-90 bps margin improvement in FY22 to ~19%. After going through rough patches in FY18-20, where Indoco faced headwinds on the domestic front (structural issues, pandemic) and exports front (regulatory setbacks), the situation is returning to normalcy. Indoco is expected to post strong FY22 topline growth as domestic sales normalise and grow amid opportunities arising out of post-Covid complications.

Export formulations are also expected to post robust growth on the back of a strong pipeline and visible launch schedule. With better visibility, we expect the company to maintain consistency and generate strong FCF. We maintain BUY and arrive at a target price of | 390 (earlier | 380) based on ~20x FY23E EPS of | 19.6.

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