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Stellar numbers, margins in Q1…

About the stock: Indoco manufactures and markets branded formulations and APIs for the domestic and export markets. In domestic formulations, through its nine marketing divisions the company serves a range of specialties.

* Domestic formulations accounted for 51% of revenues. Major therapies are: respiratory, anti-infectives, stomatologicals, gastrointestinals & vitamins

* Formulation exports accounted for 40% (regulated markets:81%) of revenues while APIs contributed 8% with remaining coming from CRAMS

Q1FY22 Results: Indoco reported robust Q1FY22 results.

* Sales were up 40.2% YoY to | 386.8 crore  EBITDA in Q1FY22 was at | 86.9 crore, up 78% YoY with margins at 22%

* Consequent adjusted PAT was at | 39.7 crore (up 132.7% YoY)

What should investors do?

Indoco’s share price has grown by ~1.4x over the past five years (from ~| 307 in July 2016 to ~| 449 levels in July 2021).

* We retain BUY rating on this stock.

Target Price and Valuation: We value Indoco at | 575 i.e. 24x P/E on FY23E EPS

Key triggers for future price performance:

* Restructuring exercise for improvement in MR productivity & therapy calibration is likely to yield productive growth in Indian formulations

* Clearance from UK-MHRA & lifting of USFDA warning letters for Goa plant II and III is likely to improve operating leverage for export formulations

* Indoco will benefit as domestic sales normalise while export formulations are likely to grow with a strong pipeline and visible launch schedule

Alternate Stock Idea: Apart from Indoco, in healthcare coverage we like Ajanta.

* It is mainly into domestic as well as exports formulations with focus on launching maximum number of first time launches

* BUY with a target price of | 2695

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