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Azopt profit share yet to kick in; maintaining a Buy

Backed by good formulations growth in regulated markets (40% y/y) and in India (12% y/y), Indoco’s Q3 FY23 revenue grew 12% y/y to Rs4bn. The gross margin contracted 320bps q/q to 67%, which resulted in a weaker (only 15.6%) EBITDA margin. PAT fell 15% y/y to Rs282m. Excluding the Rs120m MtM losses included in the top-line, sales grew <15% y/y, the EBITDA margin was 18% and PAT grew 22% (Rs401m). The healthy contribution from India and the EU, and launches in the US, are the growth triggers and we expect 14%/21% revenue/PAT CAGRs over FY22-25. We maintain a Buy rating on the stock with a lower TP of Rs440, valuing it at 15x FY25e EPS.

FY23 revenue guidance for US lowered to Rs2.8bn-2.85bn. Q3 revenue declined 13% q/q to Rs603m on absence of the most awaited profit share from brinzolamide (gAzopt). Partner Teva launched gCombigan in mid-Oct and Q3 captures some revenues. US sales guidance has been reduced to Rs2.8bn2.85bn (earlier Rs3bn) due to delay in two products (one is a modified release in cardiac therapy).

Q4 India/non-US sales to be healthy. Q4 is usually a weak quarter for Indoco; launches, however, should aid healthy growth and help the company clock sales of Rs8.3bn (implying 3-4% growth vs the earlier guided to 5-6%). Indoco received regulatory approvals from New Zealand for Allopurinol; sales would kick in from Q4. EU sales growth guidance intact at 20%.

Valuation. At the CMP of Rs352, the stock trades at 15x/12x FY24e/FY25e earnings. We maintain a Buy rating on the stock with a lower TP of Rs440, valuing it at 15x FY25e EPS. Risks: Pricing risk in Indian markets; escalation of regulatory issues on plants; delay in approvals.

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