Anand Rathi maintains Buy on Indoco Remedies

Growth momentum to pick up; Buy

Following a management meet with Indoco Remedies, we believe that growth momentum would pick up from 3QFY13 on commencement of supplies to Watson for the US market and a rise in revenue from the Aspen contract for emerging markets. With no major capex in the near to mid term, we expect the RoCE to improve to 17.2% in FY15. We have a Buy on the stock with a price target of Rs.79 based on 10x one-yearforward earnings.

- International alliances to scale up growth. The alliance with Watson for the US market and with Aspen for emerging markets would be key growth drivers. Supplies of sterile ophthalmic products to Watson would start with two products from 2QFY13. Supplies to Aspen have already begun, in 4QFY12, and would scale up gradually. We expect these alliances to generate revenue of Rs.600m and Rs.1bn in respectively FY14 and FY15.

- Steady growth to continue in the home market. Management continues to guide to higher-than-industry growth in the home market led by product launches and a sharper focus on chronic segments. We estimate only a 14% CAGR in revenue over FY12-15 in domestic formulations considering its greater dependence on acute categories.

- Improving financials. We estimate CAGRs of 18.4% in revenue and 16.1% in adjusted PAT over FY12-15, with EBITDA-margin expansion of 100bps. The lower net profit growth would be due to our expectation of a gradually higher effective tax rate. With no major capex plans, we expect the RoE and RoCE in FY15 to improve to 19.3% and 17.2% respectively.

- Valuation. The stock trades at 9.5x FY13e and 7.7x FY14e earnings. We reiterate a Buy on it, with a price target of Rs.79, based on 10x one-year forward earnings. Risks: Implementation of the new pharma policy in the domestic market and currency fluctuations.

Source : Equity Bulls

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