Indoco Remedies is an attractive investment proposition. Buy for target price of Rs 469 (24% upside): SMIFS

Ophthalmology: In the spotlight

Indoco Remedies (INDR) is a domestic pharma company which has spread its wings into contract manufacturing and exports. The company derives 54% of its revenues from the branded generic markets of India which lend long term earnings visibility, while its US business is scaling up fast, driving operating leverage benefits. Strong business fundamentals such as diversified segments mix and strong product portfolio along with high return ratios make Indoco an attractive investment proposition. We expect Indoco Remedies (INDR) to register sales, EBITDA and PAT CAGR of 15%, 16% and 24%, respectively, over FY22-25E. The company’s growth will come from 1) Mid-to-high single digit growth in the India business (54% of revenue), 2) Robust growth in the US and Europe businesses by expanding the base portfolio where company plans to monetize its ANDA filings and strong growth from high margin opportunities in Europe. The Q2FY23 margins were the best as issues like elevated RM prices & high logistics costs have receded, the complete benefit will flow in FY24 and company should be on track to deliver steady margin uptick. We value Indoco at 16x Sep FY24E EPS and recommend a BUY rating on the stock, with a target price of Rs 469, translating into an upside of 24%.

Ophthalmic business is ready to take off – Indoco’s pending ANDA approval pipeline in the US is mainly focused on injectable and ophthalmic products. Given the niche launches, Indoco can expand its revenue base as these ANDA’s such as brinzolamide, brimonidine, Dorzolamide are complex generics where the company already has capacities through which it can leverage for ANDA commercialisation. Currently, 30 ANDAs have been approved for Indoco which will help company to expand its base in the US.

US business poised for higher growth – The company’s US business has witnessed a robust growth of 26% in FY22. High volume and new product launches were the major growth driver. The company has launched 11 products in the US through its partners which includes an ophthalmic suspension product brinzolamide partnered with Teva, which is the first and only generic approved. Due higher ANDA filings and increased revenue from partnered drugs we expect US revenue to deliver CAGR growth of 20% from FY22 to FY25E.

Europe business continues to grow on strong order book – In addition to its existing CRAMs and dossiers, Indoco is all set to introduce its own products in EU. It has started own filings into solid orals, liquid orals and creams and has expanded its portfolio to Europe specific injectables as well. Indoco’s focus is to explore more business opportunities through niche product development, direct to market approach and to explore the non-prescription segment to target a large number of pharmacies. Going ahead, we expect EU to deliver CAGR growth of 15% from FY22 to FY25E.

India business will grow by high single digit – New product launch execution improving, but base is high due to COVID In India, the company primarily focuses on acute areas, in which, some of its portfolio brands like ATM and Karvol Plus have benefited due to surge in COVID cases in FY22. With COVID tailwinds receding, we expect 9% growth in FY23. Growth could improve to high-single-to-double-digits, depending on the execution in FY24E. Lately, the company’s execution around new launches has improved. The new launch strategy aims to leverage existing prescriber base and target products early in segments with weak competition. New product launches contributed 1.8% to overall growth in FY22 versus historical average of 0.9%.

Emerging market: The company also has a branded business in emerging markets, which currently hovers at high single-digit percentage of revenue, and is poised to touch growth in the low-to-mid-teen range.

Valuation offers comfort and discounts execution risks We value Indoco at 16x Sep FY24E EPS and recommend a BUY rating on the stock, with a target price of Rs 469 offering 24% upside from CMP. At 16x Sep FY24E EPS, Indoco trades at a discount to peers. We estimate better RoE at high teens by FY24E, once operating leverage from capacity utilisation plays out.