Institutional Equities

Indoco Remedies
21 August 2017

Reuters: INRM.BO; Bloomberg: INDR:IN

We are participating in AsiaMoneys Brokers Poll
We had a meeting with the management of Indoco Remedies (IRL) recently to
2017. We would be pleased if you vote for us as
understand its business drivers and the companys progress in terms of solving its the feedback helps us align our equity research
manufacturing compliance-related problems. We believe the company is very close to offerings to meet your requirements. Click Here
completing the remediation exercise in respect of its sterile facility which has got a
warning letter from the US Food and Drug Administration or USFDA. An Establishment
Inspection Report (EIR) can potentially come by the end of FY18 if the USFDA is NOT RATED
satisfied with the companys implementation of Corrective and Preventive Action
(CAPA) plan. IRL has a couple of difficult-to-make products ANDA filings, which if Sector: Pharmaceuticals
Management Meet Update

approved can help it to post a quantum jump in revenues and earnings. CMP: Rs195
The key takeaways from the meeting are as follows:
Vishal Manchanda
1) IRL has made significant capital and research and development or R&D investment towards Research Analyst
creating a platform for its US business. The company has about 30 ANDA (Abbreviated New vishal.manchanda@nirmalbang.com
Drug Application) filings pending for approval in the US market. These filings include
ophthalmic and oral dosage forms which will unfold over the next four to five years. Most of
+919737437148
these filings are partnered, with the company getting a profit share. The products have been
cherry-picked and can potentially yield about 25% EBITDA margin post profit-sharing. Key Data

2) The monetization of these ANDA filings has been delayed as the company has received a Current Shares O/S (mn) 92.2
warning letter for its manufacturing facility. The warning letter has come as there were leakages Mkt Cap (Rsbn/US$mn) 18.0/280.2
that occurred in a product which was shipped to the US. The company has been able to identify 52 Wk H / L (Rs) 362/178
the cause for the same and is implementing corrective action. Besides corrective action, it is
Daily Vol. (3M NSE Avg.) 93,121
also implementing a preventive plan to ensure that such events do not recur. A comprehensive
update with regard to the implementation of CAPA plan has been submitted to the USFDA in
June 2017. A secondary and final update in this regard will also be submitted soon. The One-Year Indexed Stock Performance
company will subsequently invite the USFDA for a re-inspection. 130
120
3) About 18 out of pending ANDAs belong to ophthalmic dosage form which has relatively 110
higher entry barriers compared to most other dosage forms. These ophthalmic dosage forms 100

represent US$3bn in brand sales as reported by the IMS. As a consequence of the warning 90
80
letter, IRL has missed out on a few high-value launches which were scheduled for the current 70
financial year. Among the pending ANDAs, the company also has some complex opportunities, 60

one of which is a nano suspension where the innovator is sole player in the market even post 50
Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17
patent expiry. The company had received a CRL for the dossiers, which it has been able to INDOCO REMEDIES Nifty 50

address.
4) Europe business continues to be on a growth trajectory. IRL is looking to grow this business Price Performance (%)
and expand margins as it is filing new dossiers. Unlike in the past when the dossiers were
owned by its partners, going forward the company will own the dossiers which should allow it 1M 6M 1 Yr
better margins. Indoco Remedies (2.7) (28.5) (36.4)
5) India business was severely impacted by destocking on account of Goods and Services Tax Nifty Index (0.8) 10.4 13.5
or GST implementation, which is now recovering. For the current financial year, the company is Source: Bloomberg
expecting high single-digit growth. Overall, the company is also working around the productivity
of its medical representatives (MRs) by looking to launch some high-value products. A weak
presence in the chronic segment is adversely impacting its MR productivity, which it looks to
address on an ongoing basis.
6) For South African market, the company has a tie-up with Aspen under which it has filed for
about 35-40 products. The ramp up is slow as the approvals are taking longer. Currently they
are doing about INR 250mn from the collaboration.
7) With regard to the draft policy framed for regulating the pharmaceutical industry in India, the
company believes it is difficult to implement as it means a disruptive change. It intends to give
teeth to the generic mandate issued by the MCI in the recent past, but does not address the
core concern of ensuring sameness/reliability/consistency of drug quality across generic
companies.
 Institutional Equities
Exhibit 1: Revenue break-up Exhibit 2: Formulations break-up
1%
6%
7%
6%

12%

59%
16%

94%

Formulation API CRO Domestic Europe USA Others (SA, Australia, NZ) EM

Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 3: Key financials

Y/E March (Rsmn) FY14 FY15 FY16 FY17
Net sales 7,326 8,570 10,081 10,968
EBITDA 1,204 1,655 1,704 1,565
Net profit 580 828 819 771
EPS (Rs) 6.3 9.0 8.9 8.4
EPS growth (%) 35.7 42.7 (1.1) (6.0)
EBITDA margin (%) 16.4 19.3 16.9 14.3
PER (x) 31.9 22.3 22.6 24.0
P/BV (x) 4.0 3.6 3.2 2.8
EV/EBITDA (x) 15.9 11.6 11.4 13.0
RoCE (%) 20.3 25.1 21.6 14.0
RoE (%) 12.7 16.0 14.2 11.8
Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 4: Revenue & growth trend Exhibit 5: Gross profit & margin trend
(Rsmn) (Rsmn)
12,000 35% 8,000 65% 65% 65% 66%
31%
30% 7,000
10,000 63% 64%
6,000
25%
8,000 62%
5,000
17% 18% 20%
16%
6,000 4,000 60%
15%
3,000 58%
4,000 9% 58%
10% 2,000
2,000 56%
5% 1,000
6,308 7,326 8,570 10,081 10,968 3,682 4,606 5,565 6,581 7,135
- 0% - 54%
FY 13 FY 14 FY 15 FY 16 FY17 FY 13 FY 14 FY 15 FY 16 FY17
Revenue Growth Gross Profit Margin

Source: Company Reports, Nirmal Bang Institutional Equities Research Source: Company Reports, Nirmal Bang Institutional Equities Research

2 Indoco Remedies
 Institutional Equities
Exhibit 6: EBITDA & margin trend Exhibit 7: PAT & margin trend
(Rsmn) (Rsmn)
1,800 25% 900 12%
1,600 800 10%
19% 10%
1,400 20% 700
16% 17% 8% 8%
1,200 15% 14% 600 7% 7% 8%
15%
1,000 500
6%
800 400
10%
600 300 4%
400 5% 200
2%
200 100
926 1,204 1,655 1,704 1,565 428 580 828 819 771
- 0% - 0%
FY 13 FY 14 FY 15 FY 16 FY17 FY 13 FY 14 FY 15 FY 16 FY17
EBITDA Margin PAT Margin

Source: Company Reports, Nirmal Bang Institutional Equities Research Source: Company Reports, Nirmal Bang Institutional Equities Research

3 Indoco Remedies
 Institutional Equities
Financial statement
it 1: Exhibit 8: Income statement Exhibit 3: Exhibit 9: Cash flow
Y/E March (Rsmn) FY13 FY14 FY15 FY16 FY17 Y/E March (Rsmn) FY13 FY14 FY15 FY16 FY17
Net sales 6,308 7,326 8,570 10,081 10,968 EBIT 704 912 1,201 1,113 972
% growth 31.1 16.1 17.0 17.6 8.8 (Inc.)/dec. in working capital (139) (199) (362) (373) (239)
Raw material costs 2,626 2,720 3,004 3,500 3,833
Cash flow from operations 565 713 839 740 732
Staff costs 1,079 1,295 1,400 1,819 2,167
Other income (15) (18) (17) (16) (40)
R&D expenses 129.024 144 217 432 517
Other expenses 1,548 1,963 2,293 2,627 2,886 Depreciation 237 309 471 607 633
Total expenditure 5,382 6,122 6,914 8,377 9,403 Interest (219) (189) (106) (124) (62)
EBITDA 926 1,204 1,655 1,704 1,565 Tax paid (-) (58) (143) (267) (170) (139)
% growth 36.9 30.0 37.5 3.0 (8.2) Net cash from operations 510 673 920 1,037 1,124
EBITDA margin (%) 14.7 16.4 19.3 16.9 14.3 Capital expenditure (-) (364) (384) (476) (798) (1,562)
Other income 15 18 17 16 40 Net cash after capex 147 289 443 239 (438)
Interest costs 219 189 106 124 62
Other investment activities (97) 8 (331) (108) (359)
Gross profit 3,682 4,606 5,565 6,581 7,135
Cash from financial activities (14) (302) (92) (159) 1,296
% growth - 25.1 20.8 18.3 8.4
Depreciation 237 309 471 607 633 Change in cash balance 35 (6) 20 (28) 500
Profit before tax 486 723 1,095 989 909 Opening cash balance 105 140 134 154 126
% growth (14.2) 49.0 51.5 (9.7) (8.1) Source: Company, Nirmal Bang Institutional Equities Research
Tax 58 143 267 170 139
Effective tax rate (%) 11.9 19.7 24.4 17.2 15.3
Net profit 428 580 828
Exhibit771
819
4: Exhibit 11: Key ratios
% growth (16.3) 35.7 42.7 (1.1) (6.0) Y/E March FY13 FY14 FY15 FY16 FY17
EPS (Rs) 4.6 6.3 9.0 8.9 8.4 Profitability & Return ratios
% growth (16.3) 35.7 42.7 (1.1) (6.0) EBITDA margin (%) 14.7 16.4 19.3 16.9 14.3
Source: Company, Nirmal Bang Institutional Equities Research EBIT margin (%) 10.9 12.2 13.8 10.9 8.5
Net profit margin (%) 6.8 7.9 9.7 8.1 7.0
it 2: Exhibit 10: Balance sheet RoE (%) 10.3 12.7 16.0 14.2 11.8
Y/E March (Rsmn) FY13 FY14 FY15 FY16 FY17 RoCE (%) 16.3 20.3 25.1 21.6 14.0

Equity 184 184 184 184 184 Working capital & liquidity ratios

Reserves 3,957 4,387 5,004 5,581 6,331 Receivables (days) 73.5 66.1 62.5 62.3 67.3

Net worth 4,142 4,572 5,188 5,765 6,516 Inventory (days) 129.5 136.5 157.5 164.7 168.4

Deferred tax liabilities 348 305 271 - - Payables (days) 94.9 93.2 115.7 131.0 140.6

Provisions/ other LT liabilities 162 258 247 232 293 Working capital days 108.2 109.3 104.3 96.0 95.1

Total loans 922 718 882 1,251 2,507 Current ratio (x) 2.0 2.1 2.1 2.2 2.2
Liabilities 5,574 5,852 6,588 7,249 9,315 Quick ratio (x) 1.4 1.3 1.3 1.4 1.5
Net block 2,910 2,961 2,950 3,344 3,928 Valuation ratios
Capital work-in-progress 220 244 260 58 403 EV/Sales (x) 3.0 2.5 2.2 1.9 1.8
Intangible assets 306 293 448 393 473 EV/EBITDA (x) 20.2 15.4 11.3 11.1 12.7
LT loans & advances 569 551 575 13 14 P/E (x) 42.0 31.0 21.7 21.9 23.3
Other LT assets 159 199 369 953 1,427 P/BV (x) 4.3 3.9 3.5 3.1 2.8
Inventories 932 1,102 1,491 1,667 1,869 Source: Company, Nirmal Bang Institutional Equities Research
Debtors 1,271 1,381 1,554 1,888 2,157
Cash 140 134 154 126 626
Other current assets 413 428 655 964 1,073
Total current assets 2,755 3,046 3,854 4,646 5,725
Trade payables 683 707 1,199 1,313 1,640
Other current liabilities/provisions 662 735 669 844 1,014
Total current liabilities 1,344 1,442 1,867 2,157 2,654
Net current assets 1,411 1,604 1,986 2,488 3,070
Total assets 5,574 5,852 6,588 7,249 9,315
Source: Company, Nirmal Bang Institutional Equities Research

4 Indoco Remedies
 Institutional Equities
Disclaimer
Stock Ratings Absolute Returns
BUY > 15%
ACCUMULATE -5% to15%
SELL < -5%
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Team Details:
Name Email Id Direct Line

Rahul Arora CEO rahul.arora@nirmalbang.com -

Girish Pai Head of Research girish.pai@nirmalbang.com +91 22 3926 8017 / 18

Dealing

Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com +91 22 3926 8230, +91 22 6636 8833

Pradeep Kasat Dealing Desk pradeep.kasat@nirmalbang.com +91 22 3926 8100/8101, +91 22 6636 8831

Michael Pillai Dealing Desk michael.pillai@nirmalbang.com +91 22 3926 8102/8103, +91 22 6636 8830
Atul Vitha Dealing Desk atul.vitha@nirmalbang.com 022-3926 8071 / 022 -3926 8226

Nirmal Bang Equities Pvt. Ltd.

Correspondence Address
B-2, 301/302, Marathon Innova,
Nr. Peninsula Corporate Park,
Lower Parel (W), Mumbai-400013.
Board No. : 91 22 3926 8000/1; Fax. : 022 3926 8010

5 Indoco Remedies