CMP 65.00

Target Price 71.00

ISIN: INE873D01024

SEP. 18th

, 2013

INDOCO REMEDIES LIMITED Result Update: Q1 FY14

HOLDHOLDHOLDHOLD

Index Details

Stock Data

Sector Pharmaceuticals

BSE Code 532612

Face Value 2.00

52wk. High / Low (Rs.) 74.50/55.05

Volume (2wk. Avg.) 6427

Market Cap (Rs. in mn.) 5989.75

Annual Estimated Results (A*: Actual / E*: Estimated)

Years FY13A FY14E FY15E

Net Sales 6304.00 6871.36 7352.36

EBITDA 939.70 1040.32 1127.75

Net Profit 426.60 454.17 477.98

EPS 4.63 4.93 5.19

P/E 14.04 13.19 12.53

Shareholding Pattern (%)

1 Year Comparative Graph

BSE SENSEX INDOCO REMEDIES LTD.

SYNOPSIS

We initiated coverage of Indoco Remedies Ltd

and set a target price of Rs. 71.00 for Medium

term Investment.

Indoco Remedies Ltd. develops, manufactures

and distributes wide range of pharmaceutical

products in various therapeutic segments in

the Indian and international markets.

The company’s net sales registered a 1.36%

decrease and stood at Rs. 1539.50 million

from Rs. 1560.80 million over the

corresponding quarter of the last year.

The company has plans to increase the share

of the chronic segment while continuing to

promote legacy brands.

Net Sales and Operating Profit of the company

are expected to grow at a CAGR of 9% each

over 2012 to 2015E respectively.

The company has 8 manufacturing facilities, 5

of which are for finished dosage forms and 3

for APIs, supported by a state-of-the-art R&D

centre.

The partnership of Indoco Remedies Ltd. with

Watson (Actavis) USA and Aspen South Africa

is progressing well with new products

continuously being added to the basket.

PEER GROUPS CMP MARKET CAP. EPS P/E (X) P/BV(X) DIVIDEND

Company Name (Rs.) Rs. in mn. (Rs.) Ratio Ratio (%)

Indoco Remedies Ltd 65.00 5989.75 4.63 14.04 1.45 55.00

Aurobindo Pharma Ltd 176.50 51544.40 23.68 7.47 1.75 100.93

Lupin Ltd 839.65 376285.00 29.33 28.64 7.76 200.00

Venus Remedies Ltd 198.65 2277.00 51.05 3.90 0.59 30.00

Quarterly Highlights (STANDALONE)

Results updates- Q1 FY14,

Indoco Remedies Limited, headquartered in

Mumbai, is a fully integrated, research – oriented

global pharmaceutical company with a strong

presence in over 80 countries including USA & UK.

Indoco develops, manufactures and distributes wide

range of pharmaceutical products in various

therapeutic segments in the Indian and international

markets.

Months JUNE-13 JUNE-12 % Change

Net Sales 1539.50 1560.80 (1.36)

PAT 91.80 103.50 (11.30)

EPS 1.00 5.62 (82.26)

EBITDA 245.20 257.20 (4.67)

Indoco Remedies Ltd. achieved a turnover of Rs. 1539.80 million for the 1st quarter of the current year 2013-14 as

against Rs. 1560.80 millions in the corresponding quarter of the previous year. The company has reported an

EBITDA of Rs. 245.20 millions and a net profit of Rs. 91.80 million and 103.50 million reported respectively in

the corresponding quarter of the previous year. The company has reported an EPS of Rs. 1.00 for the 1st quarter

as against an EPS of Rs. 5.62 in the corresponding quarter of the previous year. The change in the EPS is due to

the stock split (Face value) of the company from Rs. 10.00 to Rs.2.00.

Expenditure :

Break up of Expenditure Rs. In millions

Q1 FY14 Q1 FY13

Consumption of Raw Materials

527.90 609.60

Purchase of Stock-in-Trade 97.40 101.70

Employees Benefit Expenses 263.50 233.00

Depreciation & Amortization Expenses

73.30 58.10

Research & Development Expense

27.40 36.50

Other Expenditure 408.10 374.40

Latest Updates

Company Profile

Indoco Remedies is engaged in the manufacturing and marketing of Formulations (Finished Dosage Forms) and

Active Pharmaceutical Ingredients (APIs) in India. It has a strong international presence in the Regulated and

Emerging markets. The Company is striving to place itself on a strong promising path by expanding its business

strategically, strengthening its manufacturing facilities and enhancing capabilities across the organization. The

Company is looking at various opportunities in untapped markets and association with business partners in the

global markets to boost its revenues.

As a company, Indoco remains focused on APIs & Formulations business and will be looking to expand the same,

both in the domestic as well as international markets. Indoco today, has a well-built brand portfolio of 135

products in various therapeutic segments, including high growth life style segments such as Anti-Diabetics,

Cardiovascular, Central Nervous System, Musculo-Skeletal, Nutrition and Dental care.

Business Area

Indoco has a strong presence in Domestic (India) market, it also forayed in the International market a little late

and started with replicating its domestic business model in Kenya, Sri Lanka and Myanmar. Today Indoco's

products are sold in 35 countries and it has achieved a reputation of a reliable partner to generic pharmaceutical

companies across the globe.

Domestic Business :

Domestic business of Indoco is divided into two categories, they are

1. Marketing Divisions. 2. In-Licensing.

1. Marketing Divisions

Indoco has a strong presence in the Indian Pharma Market with rising prescriptions from various specialties

through its eight marketing divisions catering to both acute and chronic therapies. Each of the division has a

focused approach on Doctor specialties through a Product basket that meets the needs of the patients. Marketing

Divisions of Indoco are as follows:

• Indoco

• Spade

• Spera

• Warren

• Xtend

• Excel

• Eterna

2. In-Licensing

Indoco welcomes strategic partners to license-in products for the domestic market.

International Business :

International Business has occupied a position of prominence in Indoco’s strategy and it's long term vision. With

the introduction of patent regime in India, the prospects for International Business have boosted up.

Today, the company can boast of world class manufacturing facilities, which have been approved by US-FDA, UK-

MHRA, Darmstadt-Germany, ANVISA-Brazil & MCC South Africa.

The company have backward integrated into API synthesis & manufacturing by setting up a world-class, state-of-

the-art R & D centre for APIs at Rabale and by acquisition of LaNOVA Chem Pvt. Ltd. an API manufacturing

facility. This backward integration helps the company to control over consistent supply of the APIs for their

ongoing projects and future projects for Regulated markets.

The excellence, which the company has achieved in manufacturing of APIs (Active Pharmaceutical Ingredients) &

FDFs ( Finished Dosage Forms) and Contract Research activities has enabled them to expand their presence in 35

countries in Regulated & Emerging markets.

Global Footprint:

Indoco has built a visible presence across all it's markets in Europe, USA, Asia, Africa, Latin America and other CIS

countries. A number of its products have emerged as brand leaders in the Indian and in International markets.

Indoco has made significant investments to build capabilities in API manufacturing and R & D services to

enhance its visibility. As of today, the company operates in over 35 countries globally for Formulations and APIs.

With approval of its Finished Dosage facilities by the US - FDA, Darmstadt – Germany, TGA Australia, MCC-South

Africa and UK - MHRA, Indoco has emerged as the most suitable partner and provider of Contract Research and

Manufacturing Services (CRAMS) to its customers globally. With a sizeable basket of own Dossiers in CTD format,

Indoco is all set to offer the full range of services including APIs with DMFs/CoS and CTD Dossiers with supply of

Finished Dosages.

Research & Development

Specific areas in which Research and Development are carried out by the Company are:

Development of manufacturing processes and analytical methods for APIs, intermediates and finished dosages,

including development of non-infringing route of synthesis/formulations and Novel New Drug Delivery System

(NDDS). Development of Complex generics involving multi unit pellet systems (MUPS) and enteric coated pellets

for highly variable drugs are also undertaken. New developments for catering to the Dental range of products for

treatment of sensitive teeth are also in the pipeline.

Benefits of the above R & D is that an intellectual property of the company is created, which can be exploited

commercially and for preventing competitors from blocking ideas for design around manufacturing processes.

R&D efforts give an edge over the competitors in the market place in terms of early entry and better pricing. The

Company's patent portfolio consists of 7 granted formulation patents and 60 patent applications applied for.

Future plan of action

Development of non-infringing API manufacturing processes, patentable Novel Drug Delivery System (NDDS)

formulations, filing Para IV and 505(b)2 applications using new technology platforms. Developing an expertise in

the analytical methods development for offering value added services for Isolation and Characterization of

Impurities, extractables, leachables, polymorphism and lyophilization study.

Financial Highlight (STANDALONE) (A*- Actual, E* -Estimations & Rs. In Millions)

Balance Sheet as on 31st March 2012-15E

FY12 FY13 FY14E FY15E

EQUITY AND LIABILITIES:

Shareholders’ Funds:

Share Capital 122.90 184.30 184.30 184.30

Reserves and Surplus 3676.60 3956.10 4410.27 4888.25

a) Net worth 3799.50 4140.40 4594.57 5072.55

Non-Current Liabilities:

Long-term borrowings 462.40 273.90 279.38 287.76

Deferred Tax Liabilities [Net] 293.80 348.10 393.35 432.69

Other Long Term Liabilities 91.50 92.00 93.00 93.50

Long Term Provisions 45.60 68.20 84.57 98.94

b) Long term liabilities 893.30 782.20 850.30 912.89

Current Liabilities:

Short-term borrowings 414.60 628.40 791.78 965.98

Trade Payables 764.50 680.90 694.52 708.41

Other Current Liabilities 500.40 513.20 526.03 536.55

Short Term Provisions 143.30 148.40 153.59 158.20

c) Current Liabilities 1822.80 1970.90 2165.93 2369.14

Total (a+b+c) 6515.60 6893.50 7610.79 8354.58

ASSETS:

Non-Current Assets:

Tangible Assets 2834.38 2910.03 3055.53 3199.20

Intangible Assets 181.85 304.31 450.38 608.01

Capital work-in-progress 168.86 219.90 274.88 329.85

Intangible Asset under Development 157.20 158.00 160.21 162.45

Non Current Investments 1.21 3.96 7.21 12.18

Long Term Loans and Advances 552.00 566.50 585.76 603.33

d) Non-Current Assets 3895.50 4162.70 4533.97 4915.02

Current Assets:

Inventories 1018.90 927.60 969.50 1013.13

Trade Receivables 1137.10 1270.80 1461.42 1651.40

Cash and Bank Balances 104.80 118.10 140.54 168.65

Short Term Loans and Advances 354.90 413.90 504.96 605.95

Other Current Assets 4.40 0.40 0.41 0.42

e) Current Assets 2620.10 2730.80 3076.83 3439.55

Total (d+e+f) 6515.60 6893.50 7610.79 8354.58

Annual Profit & Loss Statement for the period of 2012 to 2015E

Value(Rs.in.mn) FY12 FY13 FY14E FY15E

Description 12m 12m 12m 12m

Net Sales 5687.70 6304.00 6871.36 7352.36

Other Income 22.60 8.90 9.61 10.19

Total Income 5710.30 6312.90 6880.97 7362.54

Expenditure -4841.90 -5373.20 -5840.66 -6234.80

Operating Profit 868.40 939.70 1040.32 1127.75

Interest -163.30 -218.80 -253.81 -281.73

Gross profit 705.10 720.90 786.51 846.02

Depreciation -192.50 -237.20 -270.41 -302.86

Profit Before Tax 512.60 483.70 516.10 543.16

Tax -49.10 -57.10 -61.93 -65.18

Net Profit 463.50 426.60 454.17 477.98

Equity capital 122.87 184.30 184.30 184.30

Reserves 3742.70 3956.10 4410.27 4888.25

Face value 10.00 2.00 2.00 2.00

EPS 37.72 4.63 4.93 5.19

Quarterly Profit & Loss Statement for the period of 31 DEC, 2012 to 30 SEP, 2013E

Value(Rs.in.mn) 31-Dec-12 31-Mar-13 30-June-13E 30-Sep-13E

Description 3m 3m 3m 3m

Net sales 1533.10 1590.30 1539.50 1607.24

Other income 4.20 1.70 1.50 1.56

Total Income 1537.30 1592.00 1541.00 1608.80

Expenditure -1340.70 -1336.00 -1295.80 -1361.97

Operating profit 196.60 256.00 245.20 246.82

Interest -49.70 -50.90 -62.00 -68.20

Gross profit 146.90 205.10 183.20 178.62

Depreciation -57.20 -62.50 -73.30 -79.16

Profit Before Tax 89.70 142.60 109.90 99.46

Tax -15.90 -14.10 -18.10 -14.42

Net Profit 73.80 128.50 91.80 85.04

Equity capital 184.30 184.30 184.30 184.30

Face value 2.00 2.00 2.00 2.00

EPS 0.80 1.39 1.00 0.92

Ratio Analysis

Particulars FY12 FY13 FY14E FY15E

EPS (Rs.) 37.72 4.63 4.93 5.19

EBITDA Margin (%) 15.27% 14.91% 15.14% 15.34%

PBT Margin (%) 9.01% 7.67% 7.51% 7.39%

PAT Margin (%) 8.15% 6.77% 6.61% 6.50%

P/E Ratio (x) 1.72 14.04 13.19 12.53

ROE (%) 11.99% 10.30% 9.88% 9.42%

ROCE (%) 22.37% 23.34% 23.13% 22.61%

Debt Equity Ratio 0.23 0.22 0.23 0.25

EV/EBITDA (x) 0.92 6.37 5.76 5.31

Book Value (Rs.) 314.61 44.93 49.86 55.05

P/BV 0.21 1.45 1.30 1.18

Charts

Outlook and Conclusion

� At the current market price of Rs.65.00, the stock P/E ratio is at 13.19 x FY14E and 12.53 x FY15E

respectively.

� Earning per share (EPS) of the company for the earnings for FY14E and FY15E is seen at Rs.4.93 and Rs.5.19

respectively.

� Net Sales and Operating Profit of the company are expected to grow at a CAGR of 9% and 9% over 2012 to

2015E respectively.

� On the basis of EV/EBITDA, the stock trades at 5.76 x for FY14E and 5.31 x for FY15E.

� Price to Book Value of the stock is expected to be at 1.30 x and 1.18 x respectively for FY14E and FY15E.

� We recommend ‘HOLD’ in this particular scrip with a target price of Rs.71.00 for Medium to Long term

investment.

Industry Overview

India is now among the top five pharmaceutical emerging markets globally and is a front runner in a wide range

of specialties involving complex drugs' manufacture, development, and technology. The Indian pharmaceutical

industry is a highly knowledge based industry which is growing steadily and plays a major role in the Indian

economy. As a highly organised sector, the numbers of pharmaceutical companies are increasing their operations

in India. The industry is expected to touch US$ 35.9 billion by 2016.

The Department of Pharmaceuticals has prepared a 'Pharma Vision 2020' document for making India one of the

leading destinations for end-to-end drug discovery and innovation. The department provides requisite support

by way of world class infrastructure, internationally competitive scientific manpower for pharma research and

development (R&D), venture fund for research in the public and private domain and such other measures.

Sector Structure/ Market Size

The domestic pharma market has reported total sales of Rs 6,370 crore (US$ 1.03 billion) in the month of May

2013, registering a growth of 6.8 per cent, as per IMS Health. The major factors responsible are increasing sales

of generic medicines, continued growth in chronic therapies and a greater penetration in rural markets.

The cumulative drugs and pharmaceuticals sector has attracted foreign direct investments (FDI) worth US$

11,304.91 million during April 2000 to April 2013, according to the latest data published by Department of

Industrial Policy and Promotion (DIPP).

Growth

The Indian pharmaceutical industry would continue to experience strong growth as structural growth drivers

continue to remain impervious. The industry is expected to revert a growth of 10-12 percent in 2013-14,

according to a study by ICRA. It is also expected that in-organic investments will gain momentum in the medium-

term as companies plan to create stronger presence in emerging markets and build expertise in select therapy

areas.

Among the top 10 companies, Cipla with total sales of Rs 302 crore (US$ 49.13 million), Sun Rs 297 crore (US$

48.32 miliion), Alkem Rs 222 crore (US$ 36.12 million) and Sanofi Rs 186 crore (US$ 30.26 million) were the

fastest growing corporations for the month of May 2013.

Exports

Pharmaceutical exports from the country during 2012-13 stood at US$14.6 billion, up from US$13.2 billion the

previous year, as per P V Appaji, Director General, Pharmexcil.

The Ministry of Commerce has targeted Indian pharma sector exports at US$ 25 billion by 2016. The Government

has also planned a ‘Pharma India’ brand promotion action plan spanning over a three-year period to give an

impetus to generic exports.

In order to boost the export capability, Export-Import Bank of India (Exim Bank), has decided to expand the

scope of its finance to pharmaceutical companies for extended repayment periods. Eligible export oriented

companies can avail finance from Exim Bank for a maximum repayment period of 10 years with a moratorium of

up to 36 months.

“Of the export markets, Indian pharma will focus on the US market which presents significant opportunities for

the next two years for generics, due to patent cliffs and recent changes in healthcare policies,” said the India

Ratings report on outlook for Indian pharmaceuticals for 2013.

Generics

Generics will continue to dominate the market while patent-protected products are likely to constitute 10 per

cent of the pie till 2015, according to McKinsey report 'India Pharma 2015- Unlocking the potential of Indian

Pharmaceuticals market'.

Global demand for generic drugs from Indian companies is booming as developed nations battle rising healthcare

costs. As a result, generics companies are increasingly focusing on expanding presence in relatively under-

penetrated markets (i.e. France, Spain & Italy), branded generic markets of East Europe and niche areas like

complex generics, OTCs etc.

Diagnostics Outsourcing/ Clinical Trials

India is fast becoming the preferred destination for high-end pathology and diagnostic services. The highly

fragmented diagnostics and pathology labs market in India is pegged at US$ 3.4 billion, according to a report by

PricewaterhouseCoopers.

An increasing number of hospitals from the UK, US, Middle East and neighboring countries are tying up with

Indian diagnostic centres to conduct laboratory tests. The Indian diagnostic services market is expected to grow

at a compound annual growth rate (CAGR) of around 26 per cent during 2012-2015 on back of huge investments,

fast expansion into tier II & III cities, and strong government support strengthening the healthcare infrastructure

in the country.

According to RNCOs research report “Booming Clinical Trials Market in India”, the number of clinical studies by

domestic and global players has sharply risen. India, over the last decade, has developed significant capabilities

in clinical trials, along with certain capabilities in project management and data management.According to

RNCOs research report “Booming Clinical Trials Market in India”, the number of clinical studies by domestic and

global players has sharply risen. India, over the last decade, has developed significant capabilities in clinical

trials, along with certain capabilities in project management and data management.

Investments

Some of the investments in the sector are:

• Piramal’s healthcare vertical plans to invest US$ 2.5 million to upgrade their antibody drug conjugate (ADC)

manufacturing suites. The upgrade will give Piramal two commercial grade ADC suites at the Grangemouth

facility, while retaining clinical phase manufacturing capacity in other suites on-site

• Dr Reddy's Laboratories (DRL) has launched Donepezil Hydrochloride tablets in the US market following the

approval by the United States Food and Drug Administration (USFDA)

• US-based drug maker MSD has tied up with Mumbai-based Lupin to market MSD's 23-valent Pneumococcal

Polysaccharide Vaccine in India. Lupin would have a non-exclusive licence to market, promote and distribute

the vaccine under a different brand name

• Aurobindo Pharma, Natco Pharma and Glenmark have received approvals from the US Food and Drug

Administration (USFDA) to launch their migraine drugs in the US market

• Elder Pharmaceuticals has acquired UK-based Max Healthcare. The acquisition is through Elder's fully-owned

UK subsidiary, NutraHealth, and will mark the re-entry of Elder Pharma into the over-the-counter (OTC)

pharmaceutical category

• Zydus Group has launched LipaglynTM (Saroglitazar), a novel drug targeted for treating diabetic

dyslipidemia or hypertriglyceridemia in Type II diabetes. The drug has been approved for launch in India by

the Drug Controller General of India (DCGI)

Government Initiatives

The Foreign Investment Promotion Board (FIPB) has cleared seven FDI proposals for investment in the Indian

pharmaceutical companies. Currently, 100 per cent FDI in pharma sector is permitted through automatic

approval route in the new projects but the foreign investment in the existing pharma companies requires FIPB

approval.

In the Union Budget 2013-14, investment allowance of 15 per cent on new plant and machinery has been

allowed. The allowance is expected to increase investments in new projects while simultaneously providing tax

benefit to the industry.

In order to provide relief to the common man in the area of healthcare, a countrywide campaign in the name of

‘Jan Aushadhi Campaign’ has been initiated by the Department of Pharmaceuticals, Government of India, in

collaboration with the State Governments, by way of opening up of Jan Aushadhi Generic Stores in the

Government Hospitals by way of supply of generic medicines through Central Pharma Public Sector

Undertakings, to make available quality generic medicines at affordable prices to all.

Road Ahead

In spite of some recent adverse developments, with the support of Pharmexcil and the Government in the form of

Brand India Pharma project iPHEX, the sector would continue to grow and meet the healthcare requirements of

the developing world.

The country will see the largest number of merger and acquisitions (M&A) in the pharmaceutical and healthcare

sector, according to consulting firm Grant Thornton. A survey conducted across 100 companies has revealed that

one-fourth of the respondents were optimistic about acquisitions in the pharmaceutical sector.

The pharma companies such as Cipla, Ranbaxy, Dr Reddy's Labs and Lupin might soon be part of the

government's ambitious 'Jan Aushadhi' project. In an attempt to commercialise the project, the Government is

likely to rope in the private sector to bulk-procure generic drugs from them.

Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale

of any financial instrument or as an official confirmation of any transaction. The information contained herein is

from publicly available data or other sources believed to be reliable but do not represent that it is accurate or

complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s affiliates shall

not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the

information contained in this report. This document is provide for assistance only and is not intended to be and must

not alone be taken as the basis for an investment decision.

Firstcall India Equity Research: Email – info@firstcallindia.com

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