Indoco Remedies - Strong quarter, raising target price; Buy - Anand Rathi

Strong performance expected. We expect revenues to grow 16.9% yoy in 3QFY14, driven by strong growth in exports and domestic formulations. EBITDA margin is expected to improve 340bps yoy, to 16%, on lower raw materials cost. We expect its adjusted PAT to grow at a robust 63.3% yoy, higher than revenue, led by substantial margin improvement and lower effective tax rate.

Overall business growth. We expect India formulations business to grow at a modest 12% yoy due to general slowdown in the industry and new drug pricing policy; growth would be driven by new product launches and focus on chronic therapies. We estimate strong growth of 26.3% yoy in revenues from export formulations, largely driven by higher suppies to regulated as well as semi-regulated markets. API revenues are also expected to grow strong at 19.3% yoy on new product supplies.

Change in estimates. Considering upside from potential launch of sterile ophthalmic products through Watson from 4QFY14 and improving product portfolio with increased field force productivity, we raise our revenue and adjusted PAT estimate for FY15 by 6.8% and 15%, respectively. We also introduce FY16 estimates and expect 22.6% revenue and 39.2% adjusted PAT growth.

Our take. We expect Indoco Remedies to report 21.1% revenue and 34.6% adjusted PAT CAGR over FY13-16, with EBITDA margin improvement of 320bps. The stock currently trades at 13.1x FY15e and 9.4x FY16e earnings. We roll over our target price to FY16e earnings as the upside from Watson deal cannot be captured in FY15 earnings as ramp up would happen at a gradual pace. We maintain Buy on the stock, with price target of Rs. 172, based on 12x FY16e earnings (earlier Rs. 108, based on 12x FY15e earnings). Risks. Currency fluctuations, regulatory hurdles.

Source : Equity Bulls

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