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Our Take:

Indoco Remedies has presence across domestic market, US and EU markets and Emerging Markets. Company has strong brands in the domestic formulations business across acute, chronic/sub-chronic segment. Indoco launched nine new products during FY21. Management has guided for robust growth in FY22; the company has already registered strong revenue in Q1FY22. US business is expected to grow at robust pace as ANDAs will be commercialized at regular intervals.

US revenue in FY21 had surged by 162% YoY at Rs 148cr on a low base in FY20. Management has guided for around Rs 250cr revenue from US market for FY22. Indoco is expected to post strong growth in India business due to opportunities arising from Covid portfolio and led by new launches in FY22. Company offers medicines in therapeutic areas such as stomatology, respiratory, ophthalmology, Gastro-Intestinal, Vitamins, women’s health and anti-infectives.

The company has guided for 30-35% growth in the domestic business in FY22. Growth drivers will be improved productivity for its chronic and sub-chronic area, Covid related boost and new product launches. Export of formulations is also expected to post a robust growth on the back of strong pipeline and visible launch schedule in FY22. Business from Europe will also witness strong 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 business.

Europe business recorded strong 47% yoy rise in FY20 and 55% increase at Rs 239cr in FY21. Company has guided for around Rs 300cr revenue from Europe for FY22. Management commented that they have enough capacity and don’t need to do expansion; they have guided for capex of ~Rs 80cr for FY22E. We expect regulated market business to register robust 26% CAGR over FY21-23E to Rs 631cr led by new limited competition products launches. 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.

Valuation & Recommendation:

We have revised upwards revenue/EBITDA/PAT estimates by 1%/19%/14% for FY22 and introduced FY23 estimates. We estimate 20% revenue CAGR led by strong ~18% growth from domestic business and 26% CAGR from regulated markets over FY21-23E. On the back of stronger revenue growth, operating leverage would also play a part and we estimate 280bps margin expansion over the next two years.

Strong revenue across geographies along with better operational performance would drive robust 49% PAT growth over the same period resulting in strong cash flows with net debt free status and sharp improvement in RoEs. Indoco’s 60%+ current gross block is invested for regulated markets which is likely to witness a sharp uptick in utilisations over next 2 years. At CMP, the stock trades at ~21x FY23E earnings.

Robust export revenue growth, healthy margin expansion, lower capex outlay and improvement in return ratios are key triggers. We feel investors can buy the stock in Rs 457-462 band and add more on dips at Rs 413-419 band (18.5x FY23E EPS) for base case target of Rs 506 (22.5x FY23E EPS) and bull case target price of Rs 540 (24x FY22E EPS) over the next two quarters.

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