PL Stock Report: Indoco Remedies (INDR IN) - Q2FY24 Result Update – Margins to improve - BUY

Indoco Remedies (INDR IN) - Param Desai - Research Analyst, Prabhudas Lilladher Pvt Ltd.

Rating: BUY | CMP: Rs350 | TP: Rs385

Q2FY24 Result Update – Margins to improve

Quick Pointers:

♦ One-off expenses related to remediation and consulting expenses.

♦ Guided for higher growth in H2 in domestic formulation.

We cut our FY24/FY25 EPS by ~17%/6% to factor in low margins. Indoco Remedies’ (INDR) Q2FY24 revenues at Rs4.8bn were largely in-line, while EBITDA was 4% below our estimates led by higher remediation cost. Adjusted for one offs, margins came in at ~17%. The recent OAI to its Goa unit-2 is negative and will restrict growth in US sales in FY24. However, we remain structurally positive on INDR’s growth prospects given steady domestic franchise (50% of total sales) and reasonable valuations. We expect 17% PAT CAGR over FY23-25E. At CMP, stock is trading at 17.5x FY25E EPS. We retain our ‘Buy’ rating with revised TP of Rs385 valuing at 18x Sept 2025E EPS, as we roll forward. Timely resolution of Goa facility unit-2 is a key for re-rating.

♦ Healthy sales aided by API and EM markets: Consolidated revenues ex-other operating income increased by 17% YoY to Rs 4.7bn (up 13.6% QoQ), above our estimates. Domestic formulations sales grew by 9.4% YoY to Rs 2.3bn. Key therapies like Stomatologicals, cardiology, Vitamins reported healthy growth, while anti-infectives and respiratory reported decline YoY. Regulated business was up by 1% YoY to Rs1.5bn, whereas EM business registered sharp growth of 72% YoY. EU sales were down 15% YoY, while US sales improved QoQ by 59%. API grew sharply by 96% YoY.

♦ Higher other expenses impacted EBITDA: INDR reported EBITDA of Rs714mn; down 19% YoY. Other operating income came at Rs82mn; down YoY as Q2FY23 had forex gain of Rs130mn. Reported OPM of 14.8%, up 50bps QoQ. We believe additional Rs100mn was incurred towards remediation costs and consultancy charges, which is likely to continue for next 1-2 quarter. Gross margins were flat QoQ at 69%. R&D cost stood at Rs 258mn; 5.4% of sales, up 37% YoY. Other income came in higher at Rs 44mn. Resultant PAT declined 29.5% YoY to Rs 351mn; in-line with our estimate.

♦ Key concall takeaways: (1) Other expenses remain elevated given higher remediation and consulting charges largely towards its Goa facility. (2) EU sales were impacted due to overstocking by one customer, however it should recover in coming quarters. Mgmt. reiterated its EU sales guidance of Rs3.7-3.8bn for FY24E (3) Goa facility 1 was inspected by USFDA from Oct 12-18, 2023. This was pre approval inspection for 2 product applications filed from this facility. The USFDA has issued four observations (4) Domestic Formulation: Delay in monsoon impacted growth in H1. Key brands like Febrex plus and Oxipod reported YoY decline, while brands like Sensodent and Methycal reported strong YoY growth. Guided for strong H2 growth to extent of 15% (5) Strong API sales in H1 are sustainable. Expects margin to improve as remediation cost starts coming off from Q4FY24 and should recover to 17-18% range. Also guided for overall capex of Rs 1,250mn in FY24. (6) Net debt increased by Rs1.1bn to Rs4.1bn as of H1FY24 end.

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