Indoco Remedies: All segments deliver

Results Analysis from Equitymaster on 29-Oct-2010:

Indoco Remedies: All segments deliver

Indoco Remedies Limited has announced its 2QFY11 results. The company has reported 41% YoY and 65% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary

• Revenues grow by a robust 41% YoY during 2QFY11 owing to strong growth in sales from both the domestic and the exports formulations businesses.
• Operating margins improved by 1.8% due to lower staff costs and other expenditure (as percentage of sales).
• Led by the strong growth in sales and net profits, bottomline grows by 65% YoY.

Consolidated snapshot

(Rs m)	2QFY10	2QFY11	Change	1HFY10	1HFY11	Change
Net sales	961	1,354	41.0%	1,967	2,483	26.2%
Expenditure	830	1,146	38.1%	1,627	2,084	28.1%
Operating profit (EBIDTA)	131	208	59.3%	340	399	17.4%
Operating profit margin (%)	13.6%	15.4%		17.3%	16.1%
Other income	1	0		1	0	-92.9%
Depreciation	29	34	15.9%	57	66	15.5%
Interest	7	5	-19.7%	16	12	-25.8%
Profit before tax	96	170	76.9%	269	322	19.7%
Tax	3	17	400.0%	7	21	182.4%
Profit after tax/ (loss)	93	153	65.0%	261	301	15.1%
Net profit margin (%)	9.6%	11.3%		13.3%	12.1%
No. of shares (m)				12.3	12.3
Diluted earnings per share (Rs)*					37.5
P/E ratio (x)					12.7

* based on trailing 12 months earnings

What has driven performance in 2QFY11?

• Indoco’s 41% YoY growth in sales during the second quarter was driven by both the domestic and the exports formulations businesses. Sales from the domestic formulations business grew by a robust 37% YoY. The therapeutic areas which contributed to the growth of this business were ophthalmology, vitamins & minerals, respiratory and pain management.
  
  
• Performance on the exports formulations front was also healthy with sales growing by a robust 39% YoY during the quarter. While exports to the regulated markets grew by 20% YoY, those to the semi regulated markets registered a robust 140% YoY growth. Growth in the latter was mainly led by Africa, Asia and Latin America. Indoco, meanwhile, strengthened its relationship with US based Watson by expanding its product development and supply pipeline by four more products. The current market size of these four products has been pegged at US$ 765 m. The partnership with Watson now covers a total of 10 products and will be the key growth driver as far as the US is concerned.
  
  
• Indoco had also signed a contract with South Africa’s largest pharma company called Aspen Pharmacare in FY10. This deal encompasses 7 ophthalmic products covering 30 emerging markets. Indoco will offer these products for registration and supply the same from their US FDA approved plants. Aspen will market and distribute these products on receiving approval. This deal is expected to give a major boost to Indoco’s contract manufacturing business.
  
  
• As far as the emerging markets are concerned, Indoco registered 11 products across various markets during the quarter. These products are expected to be commercialized in the third quarter of this fiscal thereby giving a further boost to revenues from the emerging markets.
  
  Consolidated snapshot

  (Rs m)	2QFY10	2QFY11	Change	1HFY10	1HFY11	Change
  Domestic
  Formulations	645	884	37.2%	1,323	1,610	21.7%
  APIs	19	36	85.4%	43	65	51.6%
  Total domestic (i)	664	920	38.6%	1,366	1,675	22.7%
  Exports
  Formulations	260	353	35.4%	530	681	28.5%
  - Regulated	227	271	19.7%	451	522	15.6%
  - Semi-Regulated	34	82	140.4%	79	160	102.4%
  APIs	30	51	69.6%	42	81	93.1%
  Total exports (ii)	290	403	39.0%	572	762	33.2%
  Grand Total (i+ii)	954	1,323	38.7%	1,938	2,437	25.8%

  
  
• As far as the emerging markets are concerned, Indoco registered 11 products across various markets during the quarter. These products are expected to be commercialized in the third quarter of this fiscal thereby giving a further boost to revenues from the emerging markets.

What to expect?

At the current price of Rs 474 the stock is trading at a price to earnings multiple of 7.7 times our estimated FY12 earnings. Going forward, we expect Indoco’s revenues to be driven by its exports business. The US generics market will be the key catalyst in spurring growth and its focus on ophthalmology will augur well for the company since it is a niche area having relatively lesser competition as opposed to plain vanilla generics. The company is also making forays into the emerging markets through partnerships.

However, cut throat competition in the domestic market, pricing pressure in the global generics market, sharp fluctuations in currency movement and regulatory changes both in the domestic and international markets could dampen Indoco’s performance. Overall, we maintain our positive view on the stock from a long term perspective.