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Margin weakness to persist in Q4; D/G to Reduce

Result Synopsis

Indoco continues to be impacted by higher remediation costs and tepid domestic sales YoY as it weeds out slower performing brands. We await outcome of execution efforts of past few quarters as new launches in domestic business have been offset by a weak acute seasonality in current year. International exports have been driven by US which continues to gain on back of strong generic tailwinds amidst benign pricing environment. Europe business has been a stark disappointment as company would miss FY24 guidance. A subpar domestic performance, big European miss and one-off expense Rs82mn results in a rather sharp earnings downgrade of ~30% for FY24 which has a cascading effect on FY25 estimates too. We bake in margin recovery next fiscal on back of 10-11% domestic growth and notably lower other expenses as remediation costs decline YoY. With domestic business weaker QoQ in Q4 and Q1 FY25 expected to be anyways better YoY, surprises appear limited in the near term. We introduce FY26 estimates; continue to value stock at 19x FY25 EPS for a revised TP Rs350 (earlier Rs405) and downgrade to Reduce from ADD.

Result Highlights

? Sharp disappointment as revenue/EBIDTA misses estimates

? Disappointment driven by weak domestic growth as sales rise 4% YoY, below IPM growth rate for the quarter

? US sales sustain at Rs856mn, up 5% QoQ and would probably include profit share and reinstated Combigan supplies from Nov’23

? Margin came in at 13.7%, down 185bps YoY as better gross margin (+170bps YoY) was offset by higher other expenses (+31% YoY)

? PAT impacted by Rs82mn of one-off provision for staff costs

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