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Weak start to FY24; Q2 performance holds key

Result Synopsis

Indoco reported a tepid quarter as domestic growth at 6.5% YoY and decline in US led to a miss on ours and consensus expectation.

Domestic market witnessed delayed monsoon which had an impact on some segments of acute portfolio including anti-infective. New launches contributed Rs65mn to business driving bulk of the incremental growth YoY. Anti-infective and respiratory covered market fell 25% though the decline was not so much for Indoco. Company alluded to low double digit growth, about 11-12% in current year with lot of it riding on acute demand in Q2. US business disappointed with a sharp decline QoQ despite inclusion of a small 1-month contribution of acquired front end company. Due to the OAI on Plant 2/3, customers delayed purchases and also certain milestone payments were not received; some of the off take would be recouped in Q2 and beyond. Gross margin improved YoY as input costs declined though higher other expenses including remediation costs offset the improvement in gross margin. In our previous update, we had tempered growth expectation across US, India and other markets; barring some more optimism on API, we continue with those assumptions. Marginally higher costs lead to ~4-5% cut in FY24/25 estimates. We continue with Indoco as our preferred pick despite the weak start to FY24 and retain BUY based on 19x FY25 EPS with revised TP Rs430 (earlier Rs450).

Result Highlights

? Domestic business saw impact of delayed monsoon on few products and growth is in line with covered market but below our 12% estimate

? US saw lower profit share and ROW sales were lower YoY but company indicated it would cover up in Q2

? OAI impacted US customer offtake and led to delayed sales some of which would be recovered in Q2

? API business saw strong growth YoY

? Gross margin improved ~220bps YoY and 50bps QoQ as raw material costs have eased especially compared to last year

? R&D up 31% YoY coupled with 17% rise in other expenses (due to substantial increase in remediation costs) negating the healthy gross margin improvement YoY; staff costs up 11% YoY

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