Indoco Remedies - Deferment of Ophthalmic Revenues; Maintain BUY - Karvy

We spoke to the Management of Indoco Remedies on the key revenue and business drivers, USFDA warning, Actavis and domestic formulations. The key takeaways are enumerated hereunder.

USFDA Issues: The Company's Goa plant was inspected by the US FDA in Aug'13, which observed several issues. The Company has replied to all queries/issues duly observed by the US FDA with required documents to prove its stance, and has been regularly interacting with the US drug regulator every month as per the directive. Actavis - Indoco Remedies' US partner - is also confident of the measures taken by the Company, and expects to get a clean chit anytime now.

Postponement of Watson Revenues: Due to the US FDA's 483 observations on its sterile facility, the approvals - which were expected in Mar'14 - will come in Q1FY15E. Our interaction with the Management suggests that the Company would launch one additional product - having market size of US$35 mn - in FY15E, while the remaining three products - having market size of US$350 mn - would be launched in FY16E. We reduce our revenues from Actavis deal from Rs. 1,422 mn to Rs. 617 mn, and factor in Rs. 2,457 mn revenues from the Actavis deal in our FY16 estimates.

Outlook & Valuation

We maintain our revenue estimates for FY14E, while we decrease the same for FY15E by 8.4% to Rs. 8.9 bn due to 57% decline in Actavis revenues to Rs. 617 mn in FY15E. We decrease our EDBITA margins for FY15E from 18.4% to 15.4% due to lower gross margins. We introduce FY16 EPS estimates at Rs. 16.7 which include the full impact of the launches in US$585 mn ophthalmic space in the US. Foray into ophthalmic segment and subsequent scale-up will enable the Company to increase EBDITAM in foreseeable future. As a matter of prudence, we continue to write-off R&D from P&L and remove amortization from depreciation. The Company is likely to come into 30% tax bracket in FY16E post utilization of MAT credit. We roll over to FY16E and maintain our "BUY" rating with a target price of Rs. 200 based on 12xFY16E.

Source : Equity Bulls

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