Indoco Remedies Ltd. Investment Update
Indoco Remedies Limited’s (Indoco) Q2 FY07 results were in line with expectations. Sales recorded a growth of 27.9% to Rs794mn driven by a 14% growth in the domestic market to Rs623mn and 136% growth in the export regulated market to Rs125mn. Operating profit margin (OPM) declined by 90bps to 17.5% as new R&D facility at Rabale, Baddi and La Nova are yet to operate at full capacity leading to higher overheads. Higher depreciation and interest outgo resulted in lower earnings growth of 23.1% to Rs96mn, translating into an annualized EPS of Rs32.5. For H1 FY07, Indoco has witnessed a PAT growth of 26.1% to Rs179mn, translating into an EPS of Rs30.3. With Q4 being the strongest quarter for the company (contribution of 40% to profitability), we are confident that Indoco would achieve our EPS estimate of Rs36.9 for FY07.We estimate Indoco to witness earnings CAGR of 41.6% to Rs633mn over FY06-08. At Rs280, the stock is trading at 8-9x FY07E EPS of Rs36.9 and 5-6x FY08E EPS of Rs51.5 after factoring in the dilution emerging from the merger of SPA Pharma with Indoco. We believe the stock is undervalued and deserves higher multiple considering contribution from high margin US market, increased traction in contract manufacturing as well as clarity on strong domestic market growth. We maintain BUY with a target price of Rs391 from a 12-month perspective.