Indoco Remedies LTD - Initiating Coverage - Escorts

Escorts Securities Ltd.
JULY 26, 2012
INDOCO REMEDIES LTD. - BUY

Target: INR 115
CMP (INR)
63
Target (INR)
115
Nominal Value (INR)
CNX Pharma
7,158
Market Cap (Crore)
BUY WITH A TARGET PRICE OF INR 115

Indoco Remedies Ltd. (Indoco), with its strong manufacturing facilities and
couple with its ambitious management team is all set to transform itself to an
explosive growth path. We expect tie-up with Watson, Aspen and DSM to be the
game changer for the company. Thus, on our DCF valuation, by discounting the
upcoming ANDA approval and new sales coming from USA, Regulated and
Emerging market, our target price for 18 months holding is around INR 115.
INR. 580 ($ 100 m)
52 Wk High/Low (Rs.)
75 / 53
Avg Daily Vol (30 days)
91,000
Shareholding Pattern
30-Jun-13
Promoters
59
DIIs
13.88
FIIs
2.81
Indian Public
24.12
NRIs/OCBs/Custodians/ Others
Stock Performance
1m
3m
6m
Absolute
1%
0%
1%
Relative
-10%
-10%
-20%
Tie-up with Watson, Aspen and DSM to drive its revenue growth
Indoco has tie-up with Watson /Actavis, USA to filed for 21 products (cumulative
market size of $3 billion), with 10 already filed since the last 3 years. And further to
ramp up its business in the Emerging markets, South Africa, Africa, New Zealand,
Australia, etc, Indoco has partner with Aspen Pharmacare Ltd. (Ninth largest
generic company in world) to market more than 50 products in 30 geographies.
With DSM- Austria, Indoco has signed to manufactured 8 APIs, which could
witness order flow at any time now. Till now, Indoco is growing from its own
capacities. In the last 3 years, Indoco has invested in infrastructure and R&D in
expectation on big over flow. We expect results would start coming, as 4
products launches has started in USA with Watson and also approval would start
getting on its 10 ANDA. Thus, FY14 is going to the year, where result will start to
flow in for Indoco, but from FY15 onwards, visibility will be higher, as results flow
would start getting better and bigger.
Aggressive products launches and marketing to help Indoco to beat industry
growth rate in the domestic market Indoco markets and distributes finished
dosages in 18 therapeutic segments through its 8 marketing divisions. In FY13,
Indoco launched 37 products, out of which 9 products cater to chronic ailments.
In the future, Indoco aims to launch around 30 products every year, with more
from chronic segments. The Company enjoys a good position in the domestic
market with 26 brands ranking amongst the top 5 positions in their respective
segments. We feel that, Indoco is aggressively ramping up its product launches in
the domestic market and this would help in growing its revenue higher than the
industry level of 12% and also would witness margin expansion as more products
is sale from its own brand.
Management Strong, Young and ambitious, is looking for high growth phase
In the last 3 years, many developments had happen, which ranges from new
strategic alliances, investing in R&D and manufacturing infrastructure, to
launching new products, either domestic or in international markets. All this
happening is a sign of the company management willingness to scale up its
operation on a global platform. Indoco strength lies in its large manufacturing
capabilities with strong R&D facilities, supported by large marketing network for
domestic market and international market. We believe that Indoco has the
capabilities to growth faster and bigger and with strong management willing to
take the wheel of growth, we expect more tie-ups with global pharma players,
aggressive products launches and filing of ANDA, ramping up the R&D, which in
all, could transform Indoco to a more integrated global pharma player in future.
Financial Summary (INR in mn)
FY11
FY12
FY13
FY14E
FY15E
Total Revenue
484
571
632
742
901
1,056
20.19
18.00
10.61
17.36
21.52
17.15
68
85
93
119
157
192
Growth (%)
EBITDA
FY16E
51
47
43
67
93
122
Growth (%)
21.77
-9.24
-7.80
55.10
39.83
31.39
Margin (%)
10.59
8.14
6.79
8.97
10.32
11.58
EPS (Rs.)
8.34
5.05
4.65
7.22
10.09
13.26
PER (x)
7.55
12.48
13.53
8.73
6.24
4.75
EV/EBIDTA (x)
10.82
8.66
7.86
6.16
4.67
3.83
P/B (x)
1.66
1.66
1.40
1.01
1.40
1.21
PAT

(COME, GROW WITH US)
Institutional Research
Indoco Remedies Ltd.
DCF VALUATION
Free Cash Flow (Rs. crore)
FY13
FY14E
FY15E
FY16E
FY17E
FY18E
43
67
93
122
149
178
42
Net Profit
Depreciation
24
25
28
33
38
Change in Working Capital
(19)
(59)
(21)
(53)
(14)
Capex
(43)
(40)
(65)
(72)
(60)
(50)
Free Cash Flow to Firm
(7)
35
30
114
174
Discounted Value
(5)
20
15
99
152
DCF Calculation Inputs
FY18E
Terminal Phase
Discounted value till FY18E
286
Discounted Terminal Value
1,380
Total Value
1,666
153
Net Debt
Total Shareholders Value
1,513
Number of Shares (cr)
9.22
Value per share (Rs.)
164
Our 18 months forward target price (Rs.)
115
Visible Upside (%)
82%
Assumptions
Risk Free rate
10.00
Risk Premium
15
Adjusted Beta
0.62
Cost of Equity (%)
19.3
Cost of Debt (%)
16%
WACC (%)
Execution Risk Premium (%)
Discount rate (%)
Terminal growth rate (%)
14.391
0.5
14.89
2.0
Our keys Concerns

Impact of Drugs from Price Control Order, 2013
The new Drug (Price control) Order announced by the Government of India affects 8 Indoco products, the overall impact
of which will be marginal on our domestic formulations sales. The long term impact of the new pricing policy on the
company as well as the industry overall remains positive.
Tie- up with Watson and Aspen
Though the management is trying very hard to bring results as soon as possible, but it is as good as anyone guess on when
the ANDA filing will get approval from USFDA. Since, it is filed from the last 3 years, so chances are high to start getting the
approval from FY14 onwards. However, any delay in getting the approval or launches can have negative impact on its
revenue.

INVESTMENT RATIONALE
Watson, Aspen and DSM: Strategic Alliance - Game Changer for Indoco
Tie-up with Watson, is going to gain its pace from FY14 onwards
Indoco has tie-up with Watson /Actavis, USA (Watson) to file for 21
products (cumulative market size of $3 billion). At present, 10 products are
already filed since the last 3 years. Additionally, Indoco has 37 ANDAs at
various stages of development, out of which 13 will be filed in Indoco's
name and the rest through partners in the US market.
Initially, the alliance with Watson was for 8 sterile (ophthalmology)

products, having a market share of around $ 700 million annually. As per
the agreement, the two companies will share the development costs,
including the bio- study, clinical trials costs, legal fees and net profits from
the sale of these products, in the agreed proportion. Thus, Indoco will
develop, manufacture and supply the products to Watson for the US
market, and in return, there will be 50% profit sharing, after covering the
manufacturing and marketing costs on the products.
After the initial tie-up of 8 products, it has gone up to 21 products. Once

the flow of approval and launches start on a successful note, the visibility
for propelling the Indoco international business to higher level is a big
possibility and would be the game changer in terms of revenue growth.
The market size for the 21 products is likely to be around $ 3 billion and is
expected to corner market size of around 10% - 15%, which would provide
a strong growth rate to the company. In FY14, we are expecting sales of
around $ 5 mn and around $20 mn in FY15 from the Watson alliance.
However, important part will not just be the revenue, but the clarity on
where the alliance with Watson is leading into the future for Indoco.
Aspen Alliance growing synergistically

Indoco started working with Aspen with a simple contract manufacturing
deal for supplying APIs. In the last 2 years, the relationship was extended
by signing off a number of additional deals, which range from validation
to products development. Under the New Product Development
agreement, Indoco will develop a range of products for Aspen, for a
wider territory. At present, Aspens alliance has reach product
developments of 50 products, which will be marketed in 30 geographies
and under 5 different business models. We believe that, due to Indoco's
large manufacturing facilities couple with its R&D skills and touch with
Aspen's regulatory and marketing expertise, this partnership is a win-win
one.
Thus, along with Aspen, the potential to tap the emerging market, South
Africa, New Zealand and Australia has already started on appositive note.
We expect this relationship would start yielding big results from FY15
onwards, as more and more products are launched as confidence level
became higher in the partnership. We expect revenues of somewhere
around INR 30 crore in FY14 and reaching to around INR 50 crore in FY15.
DSM to drive its revenue growth

Indoco has signed an agreement with DSM, Austria, a 9 billion Company
in revenues, to form a strategic alliance in the marketing and distributing
of 8 APIs, which will be manufactured by Indoco. At present, no revenue is
being book or any order flow has started, as it will take some time to
channelize the work flow from high cost to lower base manufacturing.
However, in future, if any order flow started happening, then, the flow will
be substantial in value and would act as a trigger to the stock price.


Domestic revenues to grow at the average of around 14% on aggressive
products launches and marketing by Indoco
Top 5 Brands of Indoco

Rank
Amt. in Crores
Febrex Plus
110
66
Cyclopam
347
56
Sensodent-K
419
30
ATM
494
26
Cital
486
26
Brands
Indoco is ranked 29th as per AWACs and 26th as per the CMARC Prescription
Ranking (Rxs). Indoco markets and distributes finished dosages in 18
therapeutic segments through its 8 marketing divisions. In FY13, Indoco
launched 37 products, out of which 9 products cater to chronic ailments. In
FY3, Indoco's domestic business witness a healthy growth of around 14%,
better that the industry growth of 12%. Also, during the year, two brands
moved up the ranks, making the total number of brands to five in the top 500
brand category. Indoco has a strong position in the domestic market with its
26 brands ranking amongst the top 5 positions in their respective segments.
In FY13, a number of strategic initiatives were taken by the Company, which
focus on brand building, aggressive product launches, selective therapies,
which are majorly in the chronic segment and training & development of the
field force.
Future Outlook
In the future, Indoco aims to launch around 30 products every
year, with more from chronic segments, which will increase its share
to around 20-25% within the next 3-4 years. We believe that, the
company legacy brands will continue to do well and thus the base
revenue of the company will remain intact, while new launches
could act as the growth drivers.
Thus, we feel that, aggressively product launches in the domestic
market and support with higher marketing people would surely
help in growing its revenue higher than the industry level of 11%12% and this also would result in some margin expansion as more
products will sell from its own brand.
Major therapies of the domestic branded formulations
Therapy (INR In Crores)
Contribution %
FY13
FY12
Respiratory
18.2
73
68
Growth %
7.9
Stomatologicals
17.4
70
60
17.2
Anti - Infectives
15.5
62
56
11.6
Gastro Intestinal
13.7
55
45
21.3
Pain / Analgesics
7.5
30
22
37.9
Ophthalmic / Otologicals
5.6
23
19
21.6
Gynaec.
5.5
22
19
15.6
Vitamins / Minerals / Nutrients
5.2
21
17
24.2

INDOCO - INTERNATIONAL BUSINESS

In international business, Indoco offers a complete solution to generic companies
world-wide, which includes product development, manufacturing and supply of
Finished Dosages, APIs and Intermediates and CRAMS. Indoco has regulatory
approvals from over 25 countries which include USA, UK, Germany, and South Africa.
In the regulated markets, Indoco has a large basket of products backed by eCTD
dossiers, ANDAs, DMFs, CoS and has a strong product pipeline covering NDDS, Para
IV filings and 505(b)2 applications. Whereas in the countries of emerging markets,
Indoco offers branded generics with promotional support and has established itself
by brand loyalty in some of these markets.
Indoco has rich experience and is an established player in providing (CRAMS)
Contract Research & Manufacturing Services. UK & Germany contributes around
70% of the regulated market, which consisted of mainly CRAMS, dossier licensing
and tender business, which are all of low margins business. At present, Indoco is
looking to move higher in the value chain through filing dossiers and ANDAs in its
own name and is working to start filing of 3 dossiers from FY14.
In FY13, Indoco international business contributed around 35% to the total revenues,
which have around INR 20 crores contribution from Aspen partnership. The
international business grew by 8.4% at INR 218.7 crores as against INR 201.7 crores in
FY12. The regulated markets registered a growth of 21.3% at INR 181.4 crores as
compare to INR 149.5 crores in FY12, while the emerging markets recorded
revenues of INR 19.5 crores as against INR 36.0 crores during FY12.
North America Market

Four of Indocos products are already available in the US market against the
ANDAs filed and approved through partners. Indoco has 37 ANDAs filing, which are
at various stages of process. 13 will be in the Companys name and the rest through
partners in the US market. Health-Canada has also approved ANDS for two
ophthalmic solutions and the shipment for one of the products was effected from
Q413. The ramp up in the US business is starting to look up with first ANDA approval
of Glimepiride, which has a market size of $90 mn, growing at the rate of 12.2%. USA
market is a very large market and alliance with Watson will provide the necessary
impetus for Indoco.
Indoco international business is set for a high growth phase from FY14, on account
of strategic alliance and infrastructure investment, which started from the last 3
years. We expect export business to grow to contributing higher from around 35% to
36% in FY14, 41% in FY15 and to 42% in FY16.

Indoco Manufacturing Capacities

Dosage Forms
COMPANY STRENGTH
Annual capacities
Tablets
Strong manufacturing facilities to support all its growth drivers

In the past 3 years, Indoco has invested in ramping up its
manufacturing capacities to a world class standard. Indoco
has 9 manufacturing plants, which consists of 5 formulation
and 4 APIs. One formulation plant and 2 APIs are USFDA
compliance, plus its analytical facility AnaCipher also.
10 billion
Capsules
60 million
Liquid Orals
50 million bottles
External Preparations
15 million tubes
Ampoules
30 million
Vials
60 million
Indoco Finished dosage facilities (FDFs) are located in Goa,

Maharashtra and Himachal Pradesh. The company
manufactures different dosage forms, which are of tablets,
capsules, liquid orals, cream & ointments, toothpastes,
injectables and ophthalmic solutions.
Indoco Mfg. Facilities for FDFs
LOCATION
DOSAGE Form
APPROVALS
GOA I
TABLETS, CREAMS & OINTMENTS
EU - GMP, Australia, South Africa
GOA II
STERILE PRODUCTS
EU - GMP, USA, South Africa
GOA III
TABLETS
Under process
WALUJ, Maharashtra
TABLETS
Emerging Markets
BADDI, Himachal Pradesh
TABLETS, LIQUID ORALS & TOOTHPASTES
EU GMP
GOA III Approval Status

Goa facility has been inspected by Regulatory Authorities from Australia
(TGA) and Germany (Bayern). The state-of-the-art facility is in the process
of getting approval by the regulatory authorities from UK-MHRA, TGA
Australia & MCC South Africa, which will further enhance the existing
capacity. GOA III has successfully faced GMP Audit by Pharmacy and
Poisons Board, Republic of Kenya. At present, the facility has received
Certificate of GMP compliance from German Regulatory Authority.
Future Outlook
Manufacturing excellence is Indocos core strength. The companys
innate need to constantly evolve and consistently excel has propelled it to
create world class manufacturing facilities to meet the requirements of its
customers. Indoco has been consistently expanding and upgrading its
manufacturing capacities by building newer facilities to meet the
chanlleges of the global markets.
Thus, as one of the leading player in Indian pharma manufacturing space,
we believe that, more tie-ups with global pharma players can happen in
the future, where it can form a strong partnership between manufacturer
and product player. This could lead to acquiring new capabilities in the
field of product development and filling, which could transform it to a
more integrated global pharma player in future.
GOA II Plant

Location

Indoco API Facilities
Capabilities
Reaction Systems: 16 to 500 L
Kilo Scale: Navi Mumbai
Total Reactor Volume: 1 cubic meters

Temperatures range: 55 to + 150 celsius
Multi ton : Patalganga (I)
Reactor Capacity: 500 to 5000 L
Mid Volume Patalganga (II)
Intermediates : Rabale

Total Reactor Volume: 50 cubic meters
API Business
The API division provides a strong support to the Company's efforts of
backward integration by using own APIs in the ANDAs and Dossiers
developed for regulated markets. At the same time, the available
capacities are being used for manufacturing APIs for catering to domestic
as well as international markets.
Indoco is exporting APIs and intermediates to more than 30 countries
including USA, United Kingdom, Italy, Egypt, Argentina, U.A.E, Guatemala,
Taiwan and Pakistan. Indoco's new initiative - 'AnaCipher' will provide
analytical services and meet customers' analytical research needs, utilizing
its state-of-art infrastructure and highly experienced human resource. The
analytical facility of AnaCipher has been approved by USFDA.
Future outlook
The API business is expected to grow at a much faster pace and will
contribute to the Company's formulation business in regulated markets
through backward integration in selected APIs. Part of the API production
will be marketed in domestic and international markets with higher
penetration in the emerging markets. Indoco has tie up with DSM
Pharmaceutical Products, Austria for marketing 8 APIs and any order from
this tie-up will be a big boost to the API business.
INDOCOs BRANDED PRODUCTS

Indocos R&D skills & facilities

Indoco has 2 R&D centres, which are located in Mumbai and Verna, Goa. Indoco
has invested $ 12 million in setting up a world class R&D centre in Mumbai. Spread
over an area of 100,000 square feet, Indoco's ultra modern and multi disciplinary
R&D centre houses state-of-the-art equipments, analytical instruments and latest
databases. The R&D centre has capabilities in synthetic chemistry, formulations
development, analytical methods development, intellectual property rights and
regulatory services. A team of 200 experienced scientists - doctorates, post
graduates and graduates in pharmacy & chemistry are working in three areas:
API development
Formulation development
Analytical services
In FY13, an amount of INR 17.25 crores was incurred on R&D activities as

compared to INR 17.32 crores in FY12.
New initiatives in R&D for API

Indoco API division had initiated a project proposal for a pilot plant facility with
The Department of Scientific and Industrial Research (DSIR), Ministry of Science
and Technology, Govt. of India. DSIR has sanctioned partial funding of INR 11
crore under the prestigious scheme named Technology Development and
Demonstration Program (TDDP). Indoco plans to develop commercially viable
API processes pertaining to certain niche molecules going off patent in the next 5
to 7 years. This scheme will also support duty free import of analytical
instrumentation. The project is expected to produce commercial APIs by March
2016.
Intellectual Property Rights

The total number of patent applications filed as on date is 55, out of which 37
pertain to API processes and 18 pertain to finished dosages.
Indoco Patent Applications of FDFs & APIs
Location
India
FDFs
18
PCT applications
Total
API
24
13
18
37

CAPEX TRENDS & ESTIMATE

In the last 4 years, Indoco is aiming to develop from strong
manufacturing pharma company in domestic market to an integrated
pharma company, which has strong presence in both domestic and
international. Indoco has tie-up with Watson, Aspen and DSM and all
this is going to become a big growth driver to the revenue in the future.
And for this tie-up to be successful, Indoco need to invest in its
infrastructure and R&D facilities to global standard level to meet the
demand of its global partners.
Thus in the last 4 years, Indoco has spend more than INR 250 crore in
building up its R&D facilities in Mumbai, plus also has set up another
plant in Goa for formulation and another one for APIs at Rabale, which
is a USFDA compliant. The Goa III plant is in the process of getting
approval by the regulatory authorities from UK-MHRA, TGA Australia &
MCC South Africa. At present, the facility has received Certificate of
GMP compliance from German Regulatory Authority.
Thus, much of this spending are done looking into the expectation of
inflow of order from the international business with Watson and Aspen.
We expect, most of capex is done in the form of ramping up the
formulation business and going ahead, majority of the spending would
be focus on boosting R&D and APIs. The company maintenance spend
is around INR 20 crore.

FINANCIAL SITUTAION & CAPABILITIES

Indoco is a conservative company where for the last 60 years from its beginning,
it has expanded in a very cautiously manner. Company focus on strong cash
flow generation with minimum cash leakage has set the debt/equity ratio at a
lower level of around 0.40x, even after its huge capex in the last 3 years. We
believe that from FY14, strong order flow could further improve the cash flow, as
most of the planed capex for the venture with Watson and Aspen is almost done
now.
Revenue Analysis
In FY13, Indoco total revenue grew by 12.4% to INR 631 crores as compared to
INR 569 in FY12. Domestic business contributes 65% of the revenues and
International business contributes 35% of the revenues. In FY13, the international
business grew by 8.4% at INR 218.7 crores as compared to INR 201.7 crores in
FY12. The regulated markets registered a growth of 21.3% at INR 181.4 crores as
compared to INR 149.5 crores and the emerging markets revenues is down to INR
19.5 crores as compared to INR 36.0 crores in FY12.
In Q1FY14, Indoco is starting for selling its first ANDA approval of Glimepiride,
which has market potential of $ 90 million annually and the API consumption is
around 2000 kgs growing at 11%. Besides this Health-Canada approved of 2
ANDS for ophthalmic solutions will also be incremental growth from FY13.
Whereas we expect domestic market to growth above industry level, supported
by sale from its legacy brands and from its new launches and aggressive
marketing. In the international business, we believe that sales from its partnership
with Watson and Aspen are going to be the big growth driver, which can
provide substantial revenue from FY14 onwards.
From FY10-FY13, Indoco revenue grew at CAGR of 17%. We believe that, due to
Indoco initiative in the tie-up in the international business and from its new focus
APIs business strategy, we would witness high growth phase in export from FY14
onwards. Thus we are expecting a growth for FY13 FY16E period at a CAGR of
18% and for FY13 FY18 period at a CAGR of 17%. Our estimate is taken on a
conservative basis and can easily be surpassed, if order from DSM started flowing
and ANDA approval start ticking as per the estimated timeline of the
management.
Indocos Revenue Growth Projection
Domestic Business
40%
Internation Business
35%
30%
25%
20%
15%
10%
5%
0%
FY11
FY12
FY13
FY14E
FY15E
FY16E


Profitability Analysis
Indoco from the last 4 years has evolved a lot with large investment done on
expectation of order flow from Watson and Aspen and also on willing to
boost its revenue from international market. Thus, cost in depreciation,
interest and R&D has rose, which has lower the margin in net profit. While, on
back of higher revenues and improve manufacturing and logistics process,
EBITDA witness an improvement at a marginal level.
In FY13, EBITDA grew by 8.34% to INR 93 crore as compared to INR 84 crore in

FY12. EBITDA margin also improve by 10bps. In FY13, employee cost increase
by 23%, which is due to additional field force recruitments and on annual
increments. From FY14 onwards, expenses are going to be normalized and
revenue is expected to grow at higher level, which is more of higher margins
in nature.
For the period of FY10 FY13, Indoco net profit grew at a CAGR of just 1%.
However looking into better outlook of the company, we expect the net
profit to grow at a CAGR of 41% for the period from FY13 FY16E and for the
period from FY13 FY18E, the CAGR is 33%. We believe that, Indoco
investment in the last 4 years will start to yield from FY14 onwards and if
successful, will provide a strong visibility from FY15 onwards. We have not
incurred any order inflow from its alliance with DSM, as the visibility of inflow is
not clear at this time, however, if that happen, then the profitability growth
would be much higher than our estimate.
EBITDA & PAT Margin Projections

20%
EBITDA
18%
PAT
16%
14%
12%
10%
8%
6%
4%
2%
0%
FY11
FY12
FY13
FY14E
FY15E
FY16E
PAT Growth Projection

60%
50%
50%
44%
40%
31%
30%
20%
22%
10%
0%
-10%
FY11
FY12-9%
FY13-8%
FY14E
FY15E
FY16E
-20%


Debt & Liquidity Analysis
Total loan, which consist of short and long term loan is around INR 153 crore in
FY13, which is a growth of 4% from INR 147 crore in FY12. Indoco, in order to
meet its expansion has taken a USD loan of around $19.6 mn and $9.6mn is
still left to be paid within the next 3 years. Out of the total USD loan amount,
$1.1mn is taken from Watson Pharmaceuticals Inc., payable in FY16 & FY7,
which shows the confidence in the company growth plans. Since, Indoco
export around $50 mn worth of products a year, so foreign exchange
repayment of loan will not be a problem.
Indoco has invested around INR 250 crore in greenfield expansion, improving
its manufacturing facilities and setting up a new R&D facilities. However, the
growth of loan intake remains considerately low compared to the spending
on its expansions.
Due to its conservative financing and strong cash generation capabilities,
even after its large capex, debt equity ratio is still around 0.4x in FY13, which
would remain around this level in the next two years also, on account of
higher working capital financing and also on increase spending in R&D
assets. The interest coverage ratio is also comfortable at 3x for FY13 and is
expected to go up to around 5x in FY15E. Thus, we believe that, the
company is comfortably position financially and if need arises can also
leverage out its balance sheet to take on any big deals if opportunity comes
in its hand in future.


Working Capital Analysis
In FY13, the growth in sales was around 13%, whereas the growth in the
current asset minus cash is 4.2% while trades payable witness a decline
of 10.7%. However, in FY12, when sales grew by average of 18%,
current asset grew by 24.6% and Trade Payable grew by 64%, which
means that, in FY12, on better growth visibility, the working capital
requirement also expanded.
In FY14E, we expect working capital requirement would grow by

around 20%, however from FY15E, the growth will be lesser to around
18%, as products demand and supply start to streamline. We feel that,
Indoco will not face much problems in finding funds for its higher
working capital, much of this higher working capital is the results of
demand from Watson.
Working Capital ratios Vs Sales
Growth Comparision: Sales, Current Asset, Trade Payable

70.0%
60.0%
50.0%
Current Asset
Trade Payable
40.0%
Sales
30.0%
20.0%
10.0%
0.0%
-10.0%
FY11
FY12
FY13
FY14E
FY15E
FY16E
FY17E
-20.0%

EQUITY VALUATION
Indoco is a mid-size pharma company, which has one of the large manufacturing
facilities in India. Company is there from the last 60 years in the business of selling
pharmaceutical products in the domestic market and lately is trying to enter the big
league of branded products and generic products in the International markets. In the
last 4 years, the company is preparing for this big event, by investing in infrastructure
and R&D setup, and also plan well on the initial market penetration through tie-up
with global giants. For marketing its products, Indoco has slowly build-up a
relationship with Watson for USA and Aspen for emerging market, Austrialia, New
Zealand & South Africa. We believe that Indoco is at its inflection point where visibility
for higher level of growth phase is starting to show, with first ANDA approval coming
in Q1FY14.
Indoco is currently available at the PER of 13.5x on FY13 earnings and on FY14E and
FY15E earnings, it is trading at 8.7x and 6.2x respectively. The trigger point for Indoco
will be the ANDA approval from USA and new launches of products with Watson and
Aspen. We expect the revenue for the period of FY13 FY18E to growth at CAGR of
17% and the Net profit to grow at the CAGR of 33% for the same period. The higher
rate in net profit is due to lower base for FY13 in net profit.
We have done a DCF valuation on the company and the fair value comes to around
INR 164, which would happen if all the events unfold somewhere near to our
projection and estimate in the future. We believe in the company new management
and feel that they has done their homework well. However, if the event does not
happen fully and thus we are discounting the fair value by 30% as a kind of step
target, which comes to a desired value of INR 115, which is achievable in the next 18
months. However, looking at the long term prospect of 3-4 years, than, our projection
would look valid.
Thus, looking to the high growth of the company earning and its future prospect, we
are giving a recommendation for a BUY at a target price of INR 115, which is around
our DCF desired value and on discounted PER of 11x earnings on FY15E.
CORPORATE GOVERNANCE
Indoco is a 60 years old company with business focus primarily on pharma business,
and true to its main objective, have remained so till now. Indoco boards consist of 8
directors, having 5 Independent Non- Executive. None of the Directors on the Board is
a member on more than 10 Committees. In FY13, 6 Board Meetings were held and
the gap between two Board Meetings did not exceed four months. The Company
has resolved all the complaints as at the end of FY13 to the satisfaction of the
shareholders and no complaints were pending for redressal.
Before its IPO, in 1999, Indoco acquired Warren Pharmaceuticals Ltd. and Warren
Laboratories Pvt. Ltd. thereby adding the product portfolios of Ophthalmic and Oral
Hygiene products into the product basket. This was a strategic acquisition and
complemented the product range and the organizational capabilities. Indoco also
has acquired Karvol, a brand of Solvay Pharma India Ltd, a Multinational Group.
Indocos strategy for growth includes both organic as well as inorganic means.
In 2007, Indoco has approved the amalgamation of M/s. La Nova Chem (India) Pvt
Ltd, a 100% subsidiary of the Company, with the Company and also has acquired the
pharmaceutical business of M/s. SPA Pharmaceuticals Pvt Ltd, Mumbai.
We feel that, in both the accounts, company management has rightly done to
maximize the wealth of the shareholders, which show management applying good
corporate governance to the company. Company from the past 4 years, has done a
sea changes in the terms of annual report filing and disclosures, announcement of
corporate events, management complete focus on growing its core pharma
business, etc, which should bring comfort to the investors from this undue attention by
management on their effort to grow the company core business at the higher level.

KEY MANAGEMENT PROFILE

Following are keys management profile, which will shape the face of the company
Mr. Suresh G. Kare is the Chairman of Indoco from 1963. Mr. Kare has vast
experience of more than four decades in the pharmaceutical industry. Mr. Kare
received a Life time Achievement Award from Pharma Business & Technology
which is Indias Premier Magazine on the Pharmaceutical Industry.
Ms. Aditi Kare Panandikar, Managing Director of Indoco is a Graduate in Pharmacy

from University of Bombay and holds a Masters Degree in Pharmaceutical
Management and an MS in Pharmaceutical Science from Ohio State University,
USA. Ms. Aditi has more than 20 years of experience in the multiple field of
pharmaceutical business. Ms. Aditi has work up the ladder of Indoco and has
hands on experience by working in Quality, R&D, operation & Logistics, HRD and
business development for API and domestic formulations in india. Ms. Aditi join the
board in 2004 as Executive Director and in FY12 is appointed the Managing
Director of Indoco. The last 4 years show a great changes in the company, which is
mostly credited to the new management building up in Indoco.
Mr. Sundeep V Bambolkar, Jt. Managing Director, of Indoco is a science graduate

and holds a Masters degree in Business Administration from the Mumbai University.
He has also trained in the field of management at the Indian School of Business,
Hyderabad and the Kellogg School of Business, Chicago, USA. Mr. Sundeep joined
the group in 1982 and has over 30 years of experience in the industry, working
across various functions such as Finance, Operations, Purchase, Projects and
International Business. He joined the board on March 27, 2004 and then on
February, 2012, is appointed as Jt. MD of Indoco.
CREDIT RATING
The Companys working capital facilities are rated as A1+ and long term
borrowings are rated as A+ by ICRA. A1 + rating indicate highest credit quality
rating and A+ rating indicates adequate credit quality rating.
COMPANY PROFILE
Indoco Remedies Ltd (Indoco), headquartered in Mumbai, is a fully integrated,
research-oriented global pharmaceutical company with a strong presence in 80
countries including USA & UK. Indoco, a USD 140 million company, employs over
5,500 people including 200 skilled scientists.
The company has 9 manufacturing facilities, 5 for Finished Dosages and 4 for APIs,
supported by a state-of-the-art R&D centre at Rabale, Navi Mumbai. The facilities
have been approved by various regulatory authorities such as UK-MHRA, USFDA,
TGA-Australia, JAZMP- Slovenia, MCC-South Africa, Darmstadt Germany, NDAUganda, TFDA-Tanzania, SBD-Yemen, MOH-Ukraine, PPB-Kenya and FDB-Ghana.
Indoco manufactures a wide range of pharmaceutical products for the Indian and
international markets. It generates more than 50 million prescriptions annually from
over 200,000 doctors in India. Indocos 8 domestic marketing divisions cater to
different therapeutic segments including Respiratory, Anti-Infectives, Dental Care,
Pain Management, Gastroenterology, Opthalmics, Cardiovascular, Anti-Diabetics
etc. Top Indoco brands include Febrex Plus, Cyclopam, Sensodent-K, ATM, Vepan,
Cital, Oxipod, Sensoform, Cloben-G, Karvol Plus and Tuspel Plus. Some of the
recently launched products like MCBM-69, Glychek, Methycal, Rosuchek-D and
Omegachek have become sizeable brands. On the international front, the
Company has tie-ups with large reputed generic companies like Watson- USA,
ASPEN-South Africa and DSM-Austria.

KEYS MILESTONES
2012: Indoco announced the signing of an agreement with DSM, a 9 billion Company, for commercial cooperation for
Active Pharmaceutical Ingredients (APIs). Indoco and DSM have formed a strategic alliance, wherein DSM shall be
marketing and selling the APIs manufactured by INDOCO.
2011: Indoco received the Silver Quality Excellence Award for Sterile Manufacturing Facility in Goa and Solid Dosages
Facility in Baddi (Himachal\Pradesh) at IDMA's Golden Jubilee celebrations.
2010: Indoco Remedies teams up with ASPEN, South Africa by licensing out intellectual property (dossiers) for marketing
its products in emerging markets covering 30 countries, including SA, Brazil, Mexico, Venezuela, Russia & Australia.
2010: Indoco Remedies licenses out technology to Watson Pharmaceuticals Inc. USA. Under the terms of profit sharing
agreement, Indoco will develop, manufacture and supply a basket of sterile products to Watson for the US market.
2009
UK-MHRA approval for the Solid Oral Dosage forms at Baddi Plant.
Export sales exceeded Rs. 1 Billion in the FY 08-09.
Successfully faced Slovenia audit for the Sterile Facility at Goa Plant II for the Injections Area.
2008
IDMA Quality Excellence Awards 2008 - The Sterile Facility at Goa Plant II received the Gold Award and the Solid
Dosage Forms and Externals Facility at Goa Plant I received the Silver Award.
TGA (Australia) approval for the Solid Dosage, Liquid Orals and Creams & Ointments Dosage forms at Goa Plant
I.
First shipment of Diclofenac Ophthalmic solution shipped to USA against an approved ANDA.
Successfully faced Slovenia audit for the Solid Oral Dosage forms at Baddi Plant.
MCC (South Africa) approval for the Solid Dosage facility at GOA Plant I and for the Sterile facility at Goa Plant
II.
2007
ANVISA (Brazil) approval for the Solid Dosage facility at GOA Plant I.
Commencement of exports to the US markets.
Launch of Warren-Excel and Spera - two specialty marketing divisions.
2006
US-FDA approval for Ophthalmic facility, Plant-II in GOA.

Contract signed for supply of 18 generic products to German Market.
2 ANDAs filed with USFDA.
Commencement of liquid manufacturing facility at Baddi, Himachal Pradesh.
New R&D Centre at Rabale, near Mumbai becomes functional.
Solid Dosage facility at Goa Plant I re-inspected & approved by UK-MHRA.
UK-MHRA approval for Creams & Ointments facility.
Darmstadt-Germany approves our Goa facility for Solid Dosage manufacturing.
Acquisition of LaNOVA Chem Pvt. Ltd. with its brand new API manufacturing facility of international standards.
Launch of Surge - a specialty marketing division.
2005
First ANDA filed on the basis of Exhibit batches manufactured in our sterile facility in Goa.
Development Contracts for injectable products signed with a US Company.
Tablet capacity doubled by commissioning an extended facility in the existing UK-MHRA approved plant.
Shares of the Company listed on BSE and NSE.
2004
First Contract for Development services with US Company.

Karvol brand acquisition from Solvay Pharmaceuticals Pvt. Ltd.
Four Patent applications filed.
Company jumps five ranks in two yrs in the ORG-IMS Retail Audit.

FINANCIAL SUMMARY
INCOME STATEMENT
Year ended 31 Mar (INR in Cr)
Revenue from operations
Growth (%)
Other Operating Income
FY13
FY14E
FY15E
FY16E
FY17E
FY18E
627
734
892
1,045
1,224
1,428
10.44
17.15
21.53
17.13
17.09
16.67
12
Total Revenue
631
740
895
1,047
1,233
1,440
Total Expenses
538
621
738
856
1,001
1,168
Operating Profit
89
113
155
189
223
260
EBITDA
93
119
157
192
232
271
Growth (%)
8.34
27.7
31.8
21.9
21.1
16.9
Dividend & Other Income
0.89
1.39
6.06
8.18
11.05
14.92
Depreciation
24
25
28
33
38
42
EBIT
71
96
135
167
205
244
Interest Expenses
22
20
27
24
26
27
Pre-Tax Profit ( before non-recurring

item)
49
75
108
142
179
217
Add/(less): Exceptional items
Pre-tax Profit (after non-recurring item)
49
75
108
142
179
217
Tax (Current +Deferred+FBT)
15
20
29
39
Net Profit
43
67
93
122
149
178
Adjusted Net Profit
43
67
93
122
149
178
Growth (%)
-7.8
55
39.83
31.39
22.29
19.40
FY13
FY14E
FY15E
FY16E
FY17E
FY18E
Current Assets
276
366
491
583
813
1,089
Investments
0.12
0.12
0.12
0.12
0.12
0.12
Net Assets + WIP (Tangible &

Intangible)
Other Non-current Assets
359
368
397
424
431
422
57
57
57
57
57
57
Total Assets
692
791
945
1,064
1,301
1,567
Current Liabilities
199
206
256
272
367
463
Long Term Debt
43
69
80
61
53
45
BALANCE SHEET
Other non-current liabilities
35
35
35
35
35
36
Total Liabilities
278
310
372
368
455
544
Share Capital
18
18
18
18
18
18
Reserve & Surplus
396
462
555
677
827
1,005
Warrants
Shareholders Funds
Less: Misc. expenditure
414
481
574
696
845
1,023
Total Equity & Liabilities
692
791
945
1,064
1,301
1,567
Capital employed
493
585
689
792
933
1,103


CASH FLOW STATEMENT
FY13
FY14E
FY15E
FY16E
FY17E
FY18E
EBT & Exceptional items
49
75
108
142
179
217
Depreciation
24
25
28
33
38
42
Net Chg in working capital
(19)
(59)
(21)
(53)
(14)
Total tax paid
(8)
(9)
(15)
(20)
(29)
(39)
Cash Flow from operation (a)
69
74
146
150
228
283
Capital Expenditure
(43)
(40)
(65)
(72)
(60)
(50)
Chg in Investments
0.25
0.25
0.25
0.25
0.25
0.25
Interest & Dividend Received
0.50
1.39
6.06
8.18
11.05
14.92
Cash Flow from Investing (b)
-43
-38
-59
-64
-49
-35
Free Cash Flow (a+b)
26
36
87
87
180
248
Dividend paid including tax
(12)
(14)
(17)
(20)
(24)
(29)
Debt raised / (repaid)
26
11
(19)
(8)
(8)
Interest Paid
(20)
(27)
(24)
(26)
(27)
Cash flow from financing
-24
-8
-33
-64
-59
-64
Net Chg in cash flow (a+b+c)
27
54
23
121
183
Opening cash Balance
10
11
39
92
116
236
Closing Balance
11
39
92
116
236
420
KEY RATIOS
Year ended 31 Mar
FY13
FY14E
FY15E
FY16E
FY17E
FY18E
EPS (INR)
4.65
7.22
10.09
13.26
16.22
19.37
EPS growth (%)
-7.8
55
39.8
31.4
22.3
19
EBITDA margin (%)
14.8
16.1
17.6
18.3
18.8
18.9
EBIT margin (%)
11.2
12.9
15.0
15.8
16.5
16.8
ROCE (%)
8.7
11.4
13.5
15.4
16.0
16.2
Total Debt / Equity (x)
0.4
0.3
0.4
0.2
0.3
0.3
VALUATIONS
Year ended 31 Mar
FY13
FY14E
FY15E
FY16E
FY17E
FY18E
PER (x)
13.5
8.7
6.2
4.8
3.9
3.3
Price/Book (x)
1.4
1.2
1.0
0.8
0.7
0.6
EV / Net sales (x)
1.1
0.9
0.8
0.7
0.6
0.5
EV / EBITDA (x)
7.4
5.8
4.4
3.6
3.0
2.6
EV / EBIT (x)
9.8
7.3
5.1
4.2
3.4
2.8
Du Pont Analysis - ROE

Year ended 31 Mar
FY13
FY14E
FY15E
FY16E
FY17E
FY18E
Net margin (%)
6.8
9.0
10.3
11.6
12.0
12.3
Asset Turnover (x)
0.9
0.9
0.9
1.0
0.9
0.9
Equity Multiplier (x)
1.0
1.0
1.0
1.0
1.0
1.0
Return on Equity (%)
6.2
8.4
9.8
11.4
11.4
11.3

RK Suranjoy Singh - Manager- Inst. Relationship
suranjoy@escortssecurities.com
(91) 9167391577
Pranav Datar Institutional Sales
(91) 9819054746
VIPUL KUMAR Technical Analyst
011 - 43587416
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JULY 26, 2012

INDOCO REMEDIES LTD. - BUY

Nominal Value (INR)

Market Cap (Crore)

BUY WITH A TARGET PRICE OF INR 115

INR. 580 ($ 100 m)

Avg Daily Vol (30 days)

Financial Summary (INR in mn)

Escorts Securities Ltd.