Indoco Remedies (INDREM) | 197

May 29, 2017

ICICI Securities Ltd | Retail Equity Research

Result Update

Dismal domestic sales weigh on numbers…

Revenues grew 5% YoY to | 277 crore (I-direct estimate: | 293

crore). YoY growth of 10% in export formulations to | 122 crore (I-

direct estimate: | 119 crore) was partly offset by 2.2% decline in

domestic formulations to | 130 crore (I-direct estimate: | 153 crore)

EBITDA margins declined 373 bps YoY to 11.8% (I-direct estimate of

15.7%) mainly on account of higher raw material and employee

expenditure. EBITDA declined 20%YoY to | 33 crore (I-direct

estimate: | 46 crore)

Net profit declined 10% YoY to | 18 crore (I-direct estimate: | 21

crore), primarily due to lower operational performance

MNC deals, US filings core to overall growth

Exports formulations (~39% of overall sales) have grown at a CAGR of

18% in FY12-17 driven by 19% growth in regulated markets. The growth

in regulated markets was driven by growth in the US, Europe and South

Africa. German Metformin tenders also contributed to regulated markets

growth. It has filed 42 ANDAs with USFDA and received approval for 10

products. Of these, 18 were filed under the Actavis deal. The Aspen deal

for semi-regulated market is also likely to drive exports albeit slowly. We

expect exports to grow at 13% CAGR in FY17-19E to | 529 crore, driven

by growth in regulated markets.

Indian formulation growth slowly picking up

Domestic formulations (~55% of overall sales) have grown at 12% CAGR

in FY17-16. The subdued growth can be attributed to high concentration

of acute therapies, which account for ~90% of overall formulations. With

a market share of ~0.7% and overall rank of 31, the company is still a

marginal player with some top brands in smaller categories such as

stomatologicals. However, with positive outcome of restructuring

exercise and improvement in MR productivity we expect Indian

formulations to deliver growth of 11% in FY17-19E to | 719 crore.

Consistency in margin improvement to be crucial

After languishing at 13-15% for quite some time, EBITDA margins

improved from FY15. However, in FY17, margins once again saw a

slowdown due to higher R&D spend and staff costs. Margins are still

lumpy but operating leverage is expected to pan out by way of improved

capacity utilisation.

Margin improvement, warning letter resolution key for multiple

The Q4 numbers were affected on account of dent in domestic

formulations, which is the key segment, both for growth and margin

improvement. The growth scenario is unlikely to improve till H1FY18 due

to GST implementation blues. Secondly, the Goa plant warning letter is

likely to weigh deep as it is likely to cause a substantial dent in the

prospects of the evolving US business. Note that most pending ANDAs

are from unit 2. Secondly, the Watson deal, which is at the core of US

business prospects, is also likely to witness a slowdown as the

development may lead to a delay in approval for products that are part of

the deal. The deal covers 18 pending ANDAs. The US business has grown

at a CAGR of 53% in FY12-16 to | 125 crore. Although other segments

such as domestic formulations and exports (ex-US) are likely to maintain

growth continue growth tempo, US growth is likely to remain flat for want

of fresh approvals from the core unit 2. Our new target price is at | 180

based on 15x FY19E EPS of | 12.0.

Rating matrix

Rating : Hold

Target : | 180

Target Period : 12-15 months

Potential Upside : -9%

What’s Changed?

Target Changed from | 235 to | 180

EPS FY18E Changed from | 12.7 to | 8.3

EPS FY19E Changed from | 15.6 to | 12

Rating Unchanged

Quarterly Performance

Q4FY17 Q4FY16 YoY (%) Q3FY17 QoQ (%)

Revenue 276.9 263.4 5.1 278.2 -0.4

EBITDA 32.6 40.8 -20.2 39.5 -17.6

EBITDA (%) 11.8 15.5 -373.4 14.2 -244.9

Net Profit 17.9 20.0 -10.3 17.6 2.0

Key Financials

(| Crore) FY16 FY17E FY18E FY19E

Revenues 1007.3 1096.8 1193.7 1333.7

EBITDA 175.8 156.5 174.6 221.0

Adjusted PAT 86.5 77.1 76.6 110.8

EPS (Adjusted) 9.4 8.4 8.3 12.0

Valuation summary

a

FY16 FY16 FY18E FY19E

PE (x) 21.1 21.1 23.8 16.4

Target PE (x) 19.2 21.5 21.6 15.1

EV to EBITDA (x) 11.1 11.1 11.4 8.9

Price to book (x) 3.1 3.1 2.6 2.3

RoNW (%) 14.8 14.8 10.9 14.0

RoCE (%) 12.9 12.9 9.4 12.6

Stock data

Market Capitalisation

Debt (FY16)

Cash (FY16)

EV

52 week H/L (|) 362/186

Equity capital

Face value | 2

MF Holding (%) 10.9

FII Holding (%) 8.3

Amount

| 1821 crore

| 2009 crore

| 251 crore

| 62 crore

| 18.4 crore

Price performance (%)

1M 3M 6M 1Y

Indoco Remedies -13.3 -27.0 -27.0 -32.7

Unichem Labs -9.4 -1.9 -7.3 -6.0

Natco Pharma -2.5 10.8 49.9 93.4

Indoco Remedies (INDREM) | 197

Research Analyst

Siddhant Khandekar

[email protected]

Mitesh Shah

[email protected]

Harshal Mehta

[email protected]

ICICI Securities Ltd | Retail Equity Research Page 2

Company Analysis

The company was established in 1947. It is a small-sized pharma

company engaged in manufacture, marketing and distribution of

pharmaceutical products and services in the domestic and international

markets. The company, through its eight marketing divisions namely-

Indoco, Spade, Warren, Xtend, Excel, Eterna, Indoco CND and Spera

serves a range of doctor specialties. The company has signed supply

agreement with companies like Watson, Aspen and DSM to supply

formulations for advanced and emerging markets.

Domestic formulations account for ~59% of the revenues. Major

therapies and their respective contribution to the domestic formulations-

Respiratory- 19%, Anti-infectives- 17%, Stomatologicals- 16%,

Gastrointestinals (GI)- 14%. With a market share of 0.67% the company

ranks 31st in the domestic formulations. The Acute : Chronic ratio for the

company stands at 93 :07.

Formulation exports account for ~34% of the revunues. Of these, exports

to regulated markets constitute ~87% of the formulation exports while

the rest 13% come from emerging markets.

Watson (Actavis) deal- The company licenses out technology to US based

Watson (now Actavis). Under the terms of profit sharing agreement,

Indoco will develop, manufacture and supply a basket of sterile products

to Watson for the US market. Currently 9 products are under

development.

Aspen deal- Under the Aspen (South Africa) deal the company licenses

out dossier for marketing its products in emerging markets covering 30

countries, including South Africa, Brazil, Mexico, Venezuela, Russia &

Australia.

DSM deal – The company has also signed an agreement with Holland

based DSM for the commercialisation of eight APIs according to which

DSM will market the APIs manufactured by INDOCO.

Overall we expect revenues to grow at a CAGR of 23.7% in FY15-17E to |

1314 crore.

Exhibit 1: Revenues to grow at a CAGR of 23.7% in FY15-17E

354.6402.8

486.5

564.5

634.3

727.7

853.6

1099.7

1366.2

0

200

400

600

800

1000

1200

1400

1600

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E

(|

crore)

Revenues

Source: Company, ICICIdirect.com Research

Variance analysis

Q4FY17 Q4FY17E Q4FY16 Q3FY17 YoY (%) QoQ (%) Comments

Revenue 276.9 292.5 263.4 278.2 5.1 -0.4 Strong growth in the US and Europe was partly offset by a decline in India and

RoW markets. Miss vis-à-vis I-direct estimates was mainly due to longer-than-

expected demonetisation impact in India

Raw Material Expenses 97.2 102.4 82.4 98.3 17.9 -1.1 YoY increase due to adverse product mix

Employee Expenses 56.8 55.6 49.9 55.1 13.8 3.2

Other Expenditure 76.5 76.1 71.4 71.5 7.2 7.0

R&D 13.9 12.5 18.9 13.8 -26.7 0.3

EBITDA 32.6 46.0 40.8 39.5 -20.2 -17.6

EBITDA (%) 11.8 15.7 15.5 14.2 -373 bps -245 bps Lower EBITDA margins mainly due to higher raw material and employee

expenditure. Miss vis-à-vis I-direct estimates due to higher employee and other

expenditure

Interest -1.6 2.7 4.7 2.9 -133.3 -152.9

Depreciation 15.4 16.8 15.3 14.4 1.0 7.2

Other Income 1.7 1.0 0.5 1.1 209.3 46.5

PBT before EO & Forex 20.4 27.5 21.5 23.4 -5.0 -12.8

Forex & EO 0.0 0.0 0.0 0.0 NA NA

PBT 20.4 27.5 21.5 23.4 -5.0 -12.8

Tax 2.4 6.6 1.4 5.8 69.4 -57.7

Net Profit 17.9 20.9 20.0 17.6 -10.3 2.0 Decline and miss vis-a-vis I-direct estimates was mainly due to lower operational

performance

Key Metrics

Domestic Formulations 130.1 153.1 133.0 144.2 -2.2 -9.8 Slow YoY growth was mainly due to demonetisation impact. Miss vis-à-vis I-direct

estimates was mainly due to longer-than-expected demonetisation impact

Export formulations 121.5 118.9 110.5 108.0 9.9 12.5 YoY growth was mainly due to 22% growth in Europe to | 54 crore and 15.5%

gorwht in the US to | 33 crore. However, 28% decline in South Africa, Australia

and New Zealand to | 16.2 crore has partly offset overall growth

APIs 12.0 14.4 12.6 18.2 -4.7 -34.0


Change in estimates

(| Crore) Old New % Change Old New % Change Comments

Revenue 1,356.8 1,193.7 -12.0 1,569.4 1,333.7 -15.0 Cut down domestic growth mainly due to lower-than-expected sales in Q4FY17 and

expected GST impact in H1FY18. Also, reduced US sales on account of higher-than-

expected price erosion

EBITDA 245.5 174.6 -28.9 298.5 221.0 -26.0

EBITDA Margin (%) 18.1 14.6 -347 bps 19.0 16.6 -245 bps Changed mainly due to adverse product mix

PAT 131.1 76.6 -41.5 170.8 110.8 -35.1

EPS (|) 14.2 8.3 -41.5 18.5 12.0 -35.1 Changed mainly in sync with EBITDA and change in depreciation assumption

FY18E FY19E


Assumptions

(| crore) FY16 FY17E FY18E FY19E FY18E FY19E

Domestic Formulations 533.0 585.2 641.9 718.9

699.4 804.4 Declined mainly due to lower-than-expected sales in Q4FY17 and

expected GST impact in H1FY18

US Formulations 106.3 124.9 97.5 103.9 163.5 204.3 Trimmed US sales on account of higher-than-expected price erosion

Export Formulations(Ex US) 282.9 293.2 369.4 424.8 409.7 475.4

APIs 53.0 61.5 60.9 64.0 61.5 64.6

Current Earlier



Company Analysis

The company was established in 1947. Indoco is a small-sized pharma

company engaged in manufacture, marketing and distribution of

pharmaceutical products and services in the domestic & international

markets. Through its eight marketing divisions namely - Indoco, Spade,

Warren, Xtend, Excel, Eterna, Indoco CND and Spera, the company

serves a range of doctor specialties. The company has signed supply

agreements with companies like Watson, Aspen and DSM to supply

formulations to advanced and emerging markets.

Domestic formulations account for ~55% of revenues. Major therapies

and their respective contribution to domestic formulations are:

respiratory - 18%, anti-infectives - 18%, stomatologicals - 16%,

gastrointestinals (GI) - 14%. With a market share of 0.7%, the company is

ranked thirty-first in domestic formulations. The acute-chronic-sub

chronic ratio for the company is 82:6:12.

Formulation exports account for ~39% of revenues. Of these, exports to

regulated markets constitute ~84% of formulation exports while the

remaining 16% comes from emerging markets.

Watson (Actavis) deal - The company licenses out technology to US

based Watson (now Actavis). Under the terms of profit sharing

agreement, Indoco will develop, manufacture and supply a basket of

sterile products to Watson for the US market. Currently, nine products are

under development.

Aspen deal - Under the Aspen (South Africa) deal, the company licenses

out dossiers for marketing its products in emerging markets covering 30

countries, including South Africa, Brazil, Mexico, Venezuela, Russia and

Australia.

DSM deal – The company has also signed an agreement with Netherlands

based DSM for the commercialisation of eight APIs according to which

DSM will market the APIs manufactured by Indoco.

Overall, we expect revenues to grow at a CAGR of 10% in FY17-19E to

| 1334 crore.

Exhibit 1: Revenues to grow at CAGR of 10% in FY17-19E

564.2630.4

727.7

857.0

1007.3

1096.8

1193.7

1333.7

0

200

400

600

800

1000

1200

1400

1600

FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

(|

crore)

Revenues


14.2% CAGR

10.3% CAGR


Domestic formulations (~55% of overall sales) have grown at a CAGR of

11.6% in the last five years vis-à-vis overall sales growth of 14.2% during

the same period. The subdued growth can be attributed to high

concentration of acute therapies that account for 82% of overall

formulations. With a market share of 0.7% and overall rank of 31, the

company is still a marginal player with some top brands in smaller

categories such as stomatologicals. NLEM blues, distributor issues are

likely overhangs in the short-term. We expect Indian formulations to grow

at a CAGR of 11% in FY17-19E to | 719 crore on the back of new

launches.

Exhibit 2: Domestic formulations sales to grow at CAGR of 11% in FY17-19E

338.2

390.4

438.6

504.8533.0

585.2

641.9

718.9

0

200

400

600

800


(|

crore)

Domestic Formulations


Export formulations (~38% of overall sales) have grown at a CAGR of

18% in FY12-17 driven by 19% growth in regulated markets. The growth

in regulated markets was driven by growth in the US, UK and South

Africa. German Metformin tenders also contributed to regulated markets

growth. It has filed 42 ANDAs with the USFDA and received approval for

13 products (including three tentative approvals). Of these, 18 were filed

under the Actavis deal. The Aspen deal for the semi-regulated market is

also likely to drive exports. We expect exports to grow at a CAGR of 13%

to | 529 crore in FY17-19E, driven by 1) growth in regulated market base

business and 2) revenues under CRAMS deal with Watson (Allergan).

Exhibit 3: Watson deal, own filings to cause healthy exports growth

185.5200.9

231.1

290.3

389.2418.1

466.9

528.8

0

100

200

300

400

500

600

700


(|

crore)

Export formulations


17.7% CAGR

12.5% CAGR

11.6% CAGR

10.8% CAGR


Exhibit 4: APIs to grow at CAGR of 2% in FY17-19E

35.5 34.4

46.0

51.8 53.0

61.5 60.964.0

0

20

40

60

80


(|

crore)

APIs


Exhibit 5: EBITDA to grow at CAGR of 19% in FY17-19E

76.7

93.1

120.1

167.2175.8

156.5

174.6

221.0

13.6

14.8

16.5

19.5

17.5

14.3 14.6

16.6

0

50

100

150

200

250


(|

crore)

0

5

10

15

20

25

(%

)

EBITDA EBITDA Margins (%)


Exhibit 6: Adjusted net profit to grow at CAGR of 20% in FY17-19E

46.142.7

57.9

86.5

77.1 76.6

110.8

82.8

0

20

40

60

80

100

120


(|

crore)

Net Profit


17% CAGR

25.5% CAGR

11.6% CAGR

2.0% CAGR


Exhibit 7: Trends in return ratios

9.0

10.2

13.3

10.9

16.0

12.9

8.4

9.4

12.612.0

10.3

12.7 16.0

14.8

12.0 14.0

0

2

4

6

8

10

12

14

16

18


(%

)

RoCE (%) RoNW (%)


Exhibit 8: Trends in quarterly financials

(| Crore) Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 YoY (%) QoQ (%)

Net Sales 185.9 198.0 226.4 212.9 211.6 216.0 251.2 258.1 255.0 252.7 276.4 272.2 265.6 4.2 -2.4

Other Operating Income -2.2 4.0 2.0 3.7 -1.7 7.4 7.3 4.0 8.5 4.7 4.6 6.0 11.4 34.3 90.5

Revenues 183.6 202.0 228.4 216.7 209.9 223.4 258.4 262.1 263.4 257.4 281.0 278.2 276.9 5.1 -0.4

Raw Material Expenses 61.3 72.9 79.7 77.7 68.5 76.4 88.2 92.4 82.4 89.1 97.1 98.3 97.2 17.9 -1.1

% of Revenues 33.4 36.1 34.9 35.9 32.6 34.2 34.1 35.2 31.3 34.6 34.5 35.3 35.1 381 bps -23 bps

Gross Profit 122.3 129.1 148.7 139.0 141.4 147.0 170.3 169.8 181.0 168.3 183.9 179.9 179.7 -0.7 -0.1

Gross Profit Margin (%) 66.6 63.9 65.1 64.1 67.4 65.8 65.9 64.8 68.7 65.4 65.5 64.7 64.9 -381 bps 23 bps

Employee Expenses 34.6 33.7 36.0 34.7 35.0 41.5 46.1 45.4 49.9 50.7 53.4 55.1 56.8 13.8 3.2

% of Revenues 18.8 16.7 15.7 16.0 16.7 18.6 17.9 17.3 19.0 19.7 19.0 19.8 20.5 157 bps 72 bps

Research & Development 4.2 4.3 4.9 5.0 7.5 6.5 8.9 8.9 18.9 12.0 12.0 13.8 13.9 -26.7 0.3

% of Revenues 2.3 2.1 2.1 2.3 3.5 2.9 3.5 3.4 7.2 4.7 4.3 5.0 5.0 -217 bps 4 bps

Other Manufacturing Expenses 50.7 52.5 59.2 56.6 61.7 57.4 66.0 68.9 71.4 63.8 76.5 71.5 76.5 7.2 7.0


Total Expenditure 150.8 163.4 179.8 174.0 172.6 181.8 209.2 215.5 222.6 215.6 239.1 238.7 244.4 9.8 2.4


EBITDA 32.9 38.6 48.6 42.7 37.3 41.6 49.3 46.6 40.8 41.8 42.0 39.5 32.6 -20.2 -17.6

EBITDA Margin (%) 17.9 19.1 21.3 19.7 17.8 18.6 19.1 17.8 15.5 16.2 14.9 14.2 11.8 -373 bps -245 bps

Depreciation 7.9 11.5 13.2 12.0 12.5 15.0 14.9 15.2 15.3 16.8 16.7 14.4 15.4 1.0 7.2

Interest 3.5 2.7 2.7 2.7 2.2 2.2 2.6 2.8 4.7 2.4 1.6 2.9 -1.6 -133.3 -152.9

Other Income 1.0 0.6 0.6 0.2 0.4 0.2 0.3 0.2 0.5 0.3 1.0 1.1 1.7 209.3 46.5

PBT 22.6 25.0 33.4 28.2 22.9 24.7 32.0 28.8 21.5 22.9 24.7 23.4 20.4 -5.0 -12.8

Total Tax 4.0 5.0 11.0 6.6 4.2 5.4 5.9 4.9 1.4 3.1 2.6 5.8 2.4 69.4 -57.7

Tax Rate (%) 17.8 19.8 32.8 23.3 18.3 21.9 18.5 16.9 6.7 13.5 10.5 24.7 12.0 526 bps -1273 bps

Net Profit 18.6 20.0 22.4 21.6 18.8 19.3 26.1 23.9 20.0 19.8 22.1 17.6 17.9 -10.3 2.0

PAT Margin (%) 10.1 9.9 9.8 10.0 8.9 8.6 10.1 9.1 7.6 7.7 7.9 6.3 6.5 -112 bps 15 bps

EPS (|) 2.0 2.2 2.4 2.3 2.0 2.1 2.8 2.6 2.2 2.1 2.4 1.9 1.9 -10.3 2.0


SWOT Analysis

Strengths - Tie-ups with the MNCs. Leader in stomatologicals in the

domestic formulations

Weakness - Higher acute composition in domestic formulations and one

of the least productive sales force (MR productivity- | 18.0 lakh)

Opportunities - The US generics space in which the company intends to

launch products via Watson tie-up and on its own


Threats - Increased USFDA scrutiny across the globe regarding cGMP

issues, pricing pressure due to client consolidation in the US, pricing

probe by the Department of Justice (DoJ) in the US, proposed tightening

by the new regime by adapting to the bidding process and imposition of

border adjustment tax on imported drugs in the US. There is intense

competition in acute therapies in domestic formulations. Any alteration or

cancellation of Watson deal altogether could adversely impact earnings

as well as multiple.

Conference call highlights

During the quarter, the company launched four new products in

India. FY17 it launched 31 new products, 10 in Chronic, 12 in sub

chronic and nine in acute

Domestic business was impacted due to lag effect of

demonetisation

During the quarter, the company filed four ANDAs in the US, of

which three are in first to file (FTF) category. For FY17, the

company filed nine ANDAs. The company expects to file 12

ANDAs in FY18

USFDA warning letter related issues at Goa Plant II are being

resolved with the help of a US based consultant

The company received approval from UK-MHRA for its solid

dosage plant at Goa I, which was inspected in December 2016.

The plant contributes to 40% of the company’s international

business.

The company has received a couple of product approvals in

Australia and won a tender in New Zealand during Q4FY17

During the quarter, the company submitted/filed two active

substance master file (ASMF) in Europe

Anacipher CRO, Hyderabad was inspected by the USFDA twice

during the quarter, in January 2017 (bio-analytical department). In

the second week of February 2017 (clinical department), it had

zero 483 observation

During the quarter, the company received patent grant for

manufacturing process of Linezolid and Brinzolamide (FDFs).

Cumulatively, the company has filed total 24 patents for finished

dosages and 52 for APIs

The company will commence ophthalmology supplies to the US

from Q2FY18 onwards

The company has guided for R&D spend of 4.5% of overall

revenues in FY18

The company has guided for capex of | 90 crore in FY18


Exhibit 9: Major Facilities

Location Regulatory Approvals Type

Baddi Plant UKMHRA, WHO, Ministry of Health-Nepal,

Ministry of Health-Slovenia

Solid Orals(Tablets), Liquid Orals, External

Preparations (Creams, Ointments), Oral

Hygene Preparations

Baddi Plant

(Microlabs Ltd)

Solid Orals (Tablets)

Goa Plant 1 USFDA, UKMHRA, MCC-SA, TGA-Aus,

Darmstadt Germany

Solid Orals (Tablets Coated / Uncoated), Liquid

Orals, Creams & Ointments, Capsules (Hard

Gelatin)

Goa Plant 2 USFDA, MCC-SA, Ministry of health-Tanzania Ophthalmics and Injectables

Goa Plant 3 USFDA, TGA-Aus, Bavarian Health Authority-

Germany

Tablets

Waluj Plant WHO, national Drug Authority-Uganda, Ministry

of Health-ukraine, Drug Regulatory Unit-

Botswana

Solid Orals (Tablets), liquid Orals, External

Preparations



Valuation

The Q4 numbers were affected on account of the dent in domestic

formulations, which is the key segment, both for growth and margin

improvement. The growth scenario is unlikely to improve till H1FY18 due

to GST implementation blues. Secondly, the Goa plant warning letter is

likely to weigh deep as it is likely to cause a substantial dent in the

prospects of the evolving US business. Note that most of the pending

ANDAs are from unit 2. Secondly, the Watson deal, which is at the core of

US business prospects, is also likely to witness slowdown as the

development may lead to a delay in approval for products, which are part

of the deal. The deal covers 18 pending ANDAs. The US business has

grown at a CAGR of 53% in FY12-16 to | 125 crore. Although other

segments such as domestic formulations and exports (ex-US) are likely to

maintain growth continue growth tempo, US growth is likely to remain

flat for want of fresh approvals from the core unit 2. Our new target price

is | 180 based on 15x FY19E EPS of | 12.0.

Exhibit 10: One year forward PE

-20

20

60

100

140

180

220

260

300

340

380

420

460

500

May-1

1

Nov-1

1

May-1

2

Nov-1

2

May-1

3

Nov-1

3

May-1

4

Nov-1

4

May-1

5

Nov-1

5

May-1

6

Nov-1

6

May-1

7

|

Price 43.9x 26.5x 20.7x 9.1x 3.3x

[


Exhibit 11: One year forward PE of company vs. CNX Pharma

0

5

10

15

20

25

30

35

40

45

May-1

1

Nov-1

1

May-1

2

Nov-1

2

May-1

3

Nov-1

3

May-1

4

Nov-1

4

May-1

5

Nov-1

5

May-1

6

Nov-1

6

May-1

7

(x)

Indoco CNX Pharma

22% Premium


Exhibit 12: Valuation

Revenues Growth Adj. EPS Growth P/E EV/EBITDA RoNW RoCE

(| crore) (%) (|) (%) (x) (X) (%) (%)

FY16 1007 59.8 9.4 102.7 21.1 11.1 14.8 12.9

FY17E 1097 8.9 8.4 -10.9 23.6 12.8 12.0 8.4

FY18E 1194 8.8 8.3 -0.6 23.8 11.4 10.9 9.4

FY19E 1334 11.7 12.0 44.6 16.4 8.9 14.0 12.6



Recommendation history vs. Consensus

200

300

400

500

Apr-17Feb-17Dec-16Sep-16Jul-16Apr-16Feb-16Nov-15Sep-15Jul-15Apr-15

(|

)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

(%

)

Price Idirect target Consensus Target Mean % Consensus with BUY

Source: Bloomberg, Company, ICICIdirect.com Research

Key events

Date Event

Oct-05 Signs agreement with Watson Pharmaceuticals to manufacture and supply sterile products for the US market

Feb-11 Enters into a long term drug supply agreement with Aspen Pharmaceuticals for emerging markets

Aug-13 Enters into a strategic business alliance with DSM Pharmaceutical to supply eight active pharma ingredients to be marketed in Europe

Sep-13 Proposes stock split and bonus issue (1:2)

Oct-13 & Nov-13 Receives approval for its first ANDA of anti-diabetic product Glimepride tablets from the USFDA

Jul-14 Receives EIR from the USFDA for sterile manufacturing facility (plant II) and approval for solid dosage manufacturing facility (plant III) at Goa

Apr-15 Indoco buys Piramal's Clinical/Contract Research Organisation (CRO) business

Mar-16 Receives establishment inspection report (EIR) from USFDA for its sterile and solid dosages facility (Goa Plant I)

May-16 Receives establishment inspection report (EIR) from USFDA for its sterile and solid dosages facility (Goa Plant II)

Sep-16 Acquires solid dosage manufacturing facility located at Baddi of Microlabs Ltd.


Top 10 Shareholders Shareholding Pattern

Rank Investor Name Latest Filing Date % O/S Position Position Change

1 SPA Holdings Pvt. Ltd. 31-Mar-17 19.90 18.3 0.0

2 Shanteri Investment Pvt. Ltd. 31-Mar-17 17.12 15.8 0.0

3 Stewart Investors 31-Mar-17 6.09 5.6 0.0

4 Panandikar (Aditi Milind) 31-Mar-17 6.03 5.6 0.0

5 Ramani (Madhura Anup) 31-Mar-17 5.63 5.2 0.0

6 Kare (Aruna Suresh) 31-Mar-17 5.20 4.8 0.0

7 Kare (Suresh Govind) 31-Mar-17 4.41 4.1 0.0

8 DSP BlackRock Investment Managers Pvt. Ltd. 31-Mar-17 4.24 3.9 1.6

9 Barclays Mercantile Business Finance Limited 31-Mar-17 3.02 2.8 0.0

10 First State Investments (HK) Ltd. 31-Mar-17 2.79 2.6 0.8

(in %) Mar-16 Jun-16 Sep-16 Dec-16 Mar-17

Promoter 59.3 59.2 59.2 59.2 59.1

Others 40.8 40.8 40.8 40.9 40.9

Source: Reuters, ICICIdirect.com Research

Recent Activity

Investor name Value ($ mn) Shares Investor name Value ($ mn) Shares

DSP BlackRock Investment Managers Pvt. Ltd. 6.1 1.6 Reliance Nippon Life Asset Management Limited -3.2 -0.9

Kotak Mahindra Asset Management Company Ltd. 4.2 1.1 Birla Sun Life Asset Management Company Ltd. -0.3 -0.1

First State Investments (HK) Ltd. 3.0 0.8 BOI AXA Investment Managers Private Limited -0.2 0.0

First State Investments (Singapore) 1.4 0.4 - 0.0 0.0

BlackRock Institutional Trust Company, N.A. 0.0 0.0 - 0.0 0.0

Buys Sells

Source: Reuters, ICICIdirect.com Research


.

Financial summary

Profit and loss statement | Crore

(Year-end March) FY16 FY17E FY18E FY19E

Revenues 1,007.3 1,096.8 1,193.7 1,333.7

Growth (%) 59.8 8.9 8.8 11.7

Raw Material Expenses 341.4 383.3 411.7 456.2

Employee Expenses 182.6 216.7 229.6 248.1

Other Manufacturing Expenses 264.2 288.6 324.1 348.4

Total Operating Expenditure 831.4 940.3 1,019.1 1,112.8

EBITDA 175.8 156.5 174.6 221.0

Growth (%) 88.9 -11.0 11.6 26.6

Interest 12.5 6.2 10.0 10.0

Depreciation 60.4 63.3 72.2 78.2

Other Income 1.1 4.0 6.0 9.3

PBT 104.1 90.9 98.2 142.1

Total Tax 17.6 13.9 21.6 31.3

PAT 86.5 77.1 76.6 110.8

Adjusted PAT 86.5 77.1 76.6 110.8

Growth (%) 102.7 -10.9 -0.6 44.6

EPS 9.4 8.4 8.3 12.0

EPS (Adjusted) 9.4 8.4 8.3 12.0


Cash flow statement | Crore


Profit/(Loss) after taxation 73.2 77.1 76.6 110.8

Add: Depreciation & Amortization 60.4 63.3 72.2 78.2

Net Increase in Current Assets -69.7 -113.0 -29.5 -57.6

Net Increase in Current Liabilities 33.6 48.9 2.0 28.1

Other 15.9 0.0 0.0 0.0

CF from operating activities 113.3 76.2 121.4 159.5

(Inc)/dec in Investments -15.1 15.3 0.0 -20.0

(Inc)/dec in Fixed Assets -97.3 -163.8 -90.0 -80.0

Others -0.5 27.0 0.7 -1.7

CF from investing activities -112.9 -121.6 -89.3 -101.7

Inc / (Dec) in Equity Capital 0.0 0.0 0.0 0.0

Proceeds/(Repayment) Loan 44.4 110.5 -50.0 0.0

Others -45.9 -16.9 -16.8 -24.3

CF from financing activities -1.5 93.6 -66.8 -24.3

Net Cash flow -1.1 48.2 -34.7 33.5

Opening Cash 15.1 14.0 62.2 27.5

Closing Cash 14.0 62.2 27.5 61.0

Free Cash flow 16.0 -87.6 31.4 79.5


Balance sheet | Crore


Equity Capital 18.4 18.4 18.4 18.4

Reserve and Surplus 565.9 626.0 685.8 772.3

Total Shareholders funds 584.3 644.4 704.2 790.7

Total Debt 140.1 250.7 200.7 200.7

Deferred Tax Liability 24.1 39.7 44.5 49.3

Other Non Current Liabilities 9.7 9.9 10.1 10.3

Long term Provisions 17.2 18.2 19.2 20.2

Source of Funds 775.5 962.9 978.7 1,071.2

Gross Block - Fixed Assets 641.9 769.9 849.9 919.9

Accumulated Depreciation 267.1 330.4 402.6 480.8

Net Block 374.8 439.5 447.3 439.1

Capital WIP 54.8 90.6 100.6 110.6

Net Fixed Assets 429.6 530.2 547.9 549.7

Investments 15.3 0.0 0.0 20.0

Inventory 165.2 186.9 195.8 218.7

Cash 14.0 62.2 27.5 61.0

Debtors 188.8 215.7 223.8 250.0

Loans & Advances & Other CA 79.9 144.4 156.9 165.3

Total Current Assets 448.0 609.2 604.0 695.1

Creditors 131.3 164.0 155.6 173.9

Provisions & Other CL 56.9 73.1 83.6 93.4

Total Current Liabilities 188.2 237.2 239.2 267.2

Net Current Assets 259.7 372.1 364.8 427.8

LT L& A, Other Assets 70.6 60.3 65.7 73.4

Deferred Tax Assets 0.0 0.0 0.0 0.0

Application of Funds 775.5 962.9 978.7 1,071.2


Key ratios


Per share data (|)

EPS 9.4 8.4 8.3 12.0

BV per share 63.4 69.9 76.4 85.8

Dividend per share 1.9 1.8 1.8 2.6

Operating Ratios (%)

EBITDA margins 17.5 14.3 14.6 16.6

Net Profit margins 8.6 7.0 6.4 8.3

Inventory days 60 62 60 60

Debtor days 68 72 68 68

Creditor days 48 55 48 48

Asset Turnover 1.1 1.0 1.0 1.1

EBITDA conversion rate 64.5 48.7 69.6 72.2

Return Ratios (%)

RoE 14.8 12.0 10.9 14.0

RoCE 12.9 8.4 9.4 12.6

RoIC 18.2 12.4 13.0 17.3

Valuation Ratios (x)

P/E 21.1 23.6 23.8 16.4

EV / EBITDA 11.1 12.8 11.4 8.9

EV / Net Sales 1.9 1.8 1.7 1.5

Market Cap / Sales 1.8 1.7 1.5 1.4

Price to Book Value 3.1 2.8 2.6 2.3

Solvency Ratios

Debt / Equity 0.2 0.4 0.3 0.3

Debt / EBITDA 0.8 1.6 1.1 0.9

Current Ratio 2.3 2.3 2.4 2.4



ICICIdirect.com coverage universe (Healthcare)

Company I-Direct CMP TP Rating M Cap

Code (|) (|) (| Cr) FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E

Ajanta Pharma AJAPHA 1602 1,880 Buy 14099.7 45.4 58.5 61.7 72.4 35.3 27.4 26.0 22.1 42.9 40.6 33.8 31.7 34.2 32.6 27.0 25.2

Alembic Pharma ALEMPHA 558 615 Hold 10522.0 38.2 21.4 23.4 30.2 14.6 26.1 23.9 18.5 51.5 26.1 22.3 24.7 44.9 21.4 20.0 21.8

Apollo Hospitals APOHOS 1217 1,440 Buy 16936.4 26.7 20.9 24.2 35.6 45.6 58.3 50.4 34.2 9.2 7.5 8.4 11.4 10.8 7.9 8.4 11.2

Aurobindo Pharma AURPHA 533 965 Buy 31198.2 33.9 38.7 39.5 49.1 15.7 13.8 13.5 10.8 23.3 23.6 20.9 22.6 28.1 24.6 20.3 20.5

Biocon BIOCON 940 1,020 Hold 18792.0 23.1 31.0 25.5 40.8 40.6 30.3 36.8 23.0 9.1 11.4 10.4 15.3 11.4 13.5 10.2 14.5

Cadila Healthcare CADHEA 444 425 Hold 45449.1 15.0 12.2 16.9 21.5 29.7 36.3 26.2 20.7 26.7 15.2 20.1 23.0 28.6 19.9 22.9 23.8

Cipla CIPLA 489 470 Hold 39334.4 18.5 12.9 19.3 26.1 26.4 38.0 25.4 18.7 12.0 8.0 11.7 14.9 12.5 8.1 11.1 13.4

Divi's Lab DIVLAB 545 700 Hold 14476.0 41.5 39.7 42.8 47.8 13.1 13.7 12.8 11.4 30.5 26.6 24.6 23.9 25.7 21.0 19.4 18.7

Dr Reddy's Labs DRREDD 2414 2,610 Hold 40000.7 141.4 68.6 106.1 137.3 17.1 35.2 22.8 17.6 17.3 6.3 10.8 13.7 20.6 9.4 13.0 14.7

Glenmark Pharma GLEPHA 621 910 Buy 17514.2 32.2 46.9 47.2 50.5 19.3 13.2 13.1 12.3 16.2 19.2 18.6 18.0 21.2 25.9 20.9 18.4

Indoco Remedies INDREM 198 180 Hold 1820.9 9.4 8.4 8.3 12.0 21.1 23.6 23.8 16.4 12.9 8.4 9.4 12.6 14.8 12.0 10.9 14.0

Ipca Laboratories IPCLAB 502 560 Hold 6332.5 10.0 15.0 24.1 31.1 50.1 33.4 20.9 16.1 5.7 9.8 12.7 14.8 5.5 7.8 11.3 13.0

Jubilant Life JUBLIF 709 810 Buy 11294.6 26.0 36.1 48.8 66.0 27.3 19.7 14.5 10.7 12.0 13.3 15.1 18.4 14.2 16.8 18.7 20.4

Lupin LUPIN 1113 1,335 Buy 50250.7 50.4 56.6 56.2 66.8 22.1 19.6 19.8 16.7 18.6 17.2 16.7 19.0 20.7 19.1 16.4 16.8

Natco Pharma NATPHA 898 870 Buy 15644.1 8.5 25.3 14.8 18.2 105.8 35.5 60.8 49.4 16.0 33.0 17.6 19.2 11.9 27.2 14.0 15.0

Sun Pharma SUNPHA 568 765 Buy 136192.4 23.4 29.0 20.9 25.7 24.2 19.6 27.2 22.1 18.6 19.8 14.0 15.2 18.0 19.0 12.3 13.4

Syngene Int. SYNINT 463 515 Hold 9262.0 11.1 14.3 14.4 18.4 40.5 31.2 31.0 24.3 13.2 16.8 16.0 18.1 21.0 21.9 18.4 19.1

Torrent Pharma TORPHA 1224 1,475 Buy 20717.2 107.9 57.4 61.2 76.6 11.4 21.3 20.0 16.0 46.8 21.5 23.4 26.2 53.9 23.6 21.1 22.0

Unichem Lab UNILAB 246 285 Hold 2234.4 12.3 12.9 17.4 23.5 20.0 19.0 14.1 10.5 13.8 14.3 16.1 18.8 11.7 11.1 13.3 15.6

RoE (%)EPS (|) PE(x) RoCE (%)



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Documents

Indoco Remedies (INDREM) | 197