Pick of the Week

Indoco Remedies Ltd (INDREM)
By Santosh

Indoco Remedies is set to witness high revenue and earnings visibility going forward on the back of emerging opportunities such as CRAMS and its foray into the US generics space. Planned acquisitions would also help it achieve its export target of Rs 500 crore by FY2010. We believe the stock offers a significant upside potential and is currently undervalued compared to its peers.
Company Background

Indoco Remedies (Indoco) is a Mumbai-based pharmaceutical company that focuses on formulations and has a significant presence in contract manufacturing and research. The company also operates in the therapeutic segments including anti-infective, anti-cold preparation, ophthalmic, anti-spasmodic, stomatology, anti-inflammatory and anti-fungal. In the pharma industry, Indoco is ranked 34th in the AC Nielsen ORG-MARG Retail Audit. However, it is ranked 23rd in terms of prescription generation indicating the strength of its marketing network. Its manufacturing facilities are located at Goa, Andheri, Tarapur and Waluj. In the contract research segment, it has executed two projects, one for a UK player and another for a US major. Indoco’s Goa plant received US FDA approval recently. The plant already has the approval of UK MHRA and South African MCC. The company’s R&D centre at Andheri caters to formulation development and analytical method development. The company is setting up another R&D centre that will be dedicated for activities in formulation for regulated markets from 1st quarter of CY 2006.
Investment Highlights
Industry outlook

The domestic pharma industry is currently through a transformation phase and the regulatory environment is likely to crystallize in 2006. Most players are augmenting R&D capacities and exploring new avenues to face the challenges of product patent era and to take advantage of the low-cost advantage in India. Indian companies are likely to become outsourcing hubs (from research to API through CRAMS or contract manufacturing) for pharma multinationals. CRAMS is a high margin business that offers immense opportunities. The companies are in the expansion mode to achieve global scales to handle bulk orders from MNCs. These expansions are likely to start yielding results 2006 onwards. We believe that companies like Indoco, which is gearing to seize this emerging opportunity, are likely to outperform the sector going forward.
CRAMS -- The New Business Driver

Contract manufacturing is one of the key focus areas of Indoco. Revenue from CRAMS is likely to see exponential growth over the next two years to Rs 31 crore in FY06E and Rs 51 crore in FY07E. The recent US FDA approval for its ophthalmic plant at Goa has important bearing on its growth agenda, as it is third plant in the country after Cipla and FDC to have such approval. The company is currently working on six contracts of European companies and is likely to start exporting ophthalmic product to its US client, Nexus Ophthalmics, from April 2006. It is also developing dossiers for two companies each in the US and UK. Indoco is developing a contract formulation for one company each in the US & UK. Similarly, it is working on four to five contracts in the growing therapeutic segments such as cardiovascular, anti-diabetic, analgesic and anti-pyretic. It is also in talks with companies in New Zealand and Canada for contract manufacturing.

Exports

The company has set an ambitious export target of Rs 500 crore for the year ending June 2010, at a CAGR of 77% over 5 years. In the medium-term, the exports are likely to grow through its foray into the US generics space, which has higher margins in the region of 30%. It filed for two ANDAs in the ophthalmic segment in April 05 through its UK partner, each of which has a market size of above $150 million. It is working on three more molecules in the ophthalmic and anti-diabetic segment and would file ANDA on its own in the coming 9-10 months. We expect exports revenues would surge to Rs 50 crore and Rs 64 crore in FY06 and FY07 respectively.

R&D Centre

Indoco is setting up an R&D centre at Navi Mumbai at a capex of Rs 18 crore that is expected to complement its regulated market strategy. This centre is likely to go on stream in couple of months and would generate revenue through dossier formation in the complete technical data (CTD) format and finding new processes (ANDAs filings) for its clients for the drugs going off patents. The company is likely to generate additional revenues to the tune of Rs 25 crore per annum through the support of this centre.

Do mestic growth on a good trajectory

Indoco’s domestic revenues have grown at a CAGR of about 11% during the last three years. It has a strong presence in the expanding therapeutic segments, which it caters through its four divisions -- Indoco, Spade, Warren and Radius. The company has a strong 1,200-member sales force covering about 88% of the prescribing population. The company plans to launch a new division, Surge, in order to look after the needs of surgeons. We expect domestic sales will clock a CAGR of 42% over the next two years on the back of higher contribution from existing divisions and addition of new revenue streams.
Investment Risks
Highly dependent on domestic markets

The company generates over 85% of its revenues from the domestic markets that is witnessing cutthroat competition with the implementation of product patents. The company faces greater threat due to erosion of margins as against other players in the industry, as it is yet to become an integrated player. However, the company has mitigated this risk to some extent through its foray into the international markets where margins are robust.

Financials:

The company is likely to post a sales growth at a CAGR of over 33% in the period of FY 05-07 to Rs 387.70 crore while the net profit is likely to grow at a CAGR of over 42% in FY 05-07 to Rs 51.03 crore in FY 07. We believe Indoco’s strategy to focus on exports to regulated markets and other initiatives would be margin accretive. Accelerated debt repayment will also push up its net profit margins. In the first six month of FY 06, the company reported sales of Rs 127.34 crore, while the net profit stood at Rs 14.21 crore. This translates into an EPS of Rs 12.04 for the first 6 months of FY 06.

Valuations

Indoco is on the path to exponential growth over the next two years. The current market price of Rs 344 to 350 discounts its FY06E earnings of Rs 32 by 10.75x and FY07E of Rs 43.17 by 7.97x. Given the high revenue and earnings visibility, we believe that the stock is undervalued compared to its peers. A discounting in the range of 13x gives us a target price of Rs 455 to 472 over the next 12-18 months. We rate the stock an Outperformer.


PIVOT POINTS OF INDOCO REMEDIES LTD

PIVOT POINT : 348.35
RESISTANCE : 352.65 / 357.30 / 361.60
SUPPORT : 343.70 / 339.40 / 334.75
regards,
IF Markets
(Happy Trading)

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Yes, it's a good long term pick from icicidirect.com...
Alok.

Any SL/Targets?

thanks for telling and i am one of technical analysis member in icici bank.

regards,
k.n.v.santosh