PL Stock Report - Indoco Remedies (INDR IN) - Q1FY24 Result Update - Another quarter of weak margins - BUY

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

Rating: BUY | CMP: Rs324 | TP: Rs380

Q1FY24 Result Update - Another quarter of weak margins

Quick Pointers:

♦ Rs 80mn one-off expenses related to remediation and certain staff expenses

♦ Lowered its FY24E margin guidance to 17-18% vs 18-19% earlier.

We cut our FY24/FY25 EPS by ~11%/6% to factor in low margins and US sales. Indoco Remedies’ (INDR) Q1FY24 revenues at Rs4.2bn were largely in-line, while EBITDA was 20% below our estimates led by Rs80mn one offs and higher other expenses. Adjusted for one offs, margins came in at 16.2%. 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 15x FY25E EPS. We retain our ‘Buy’ rating with revised TP of Rs380 valuing at 18x FY25E EPS. Timely resolution of Goa facility unit-2 is a key for re-rating.

♦ Lower regulated market sales: Consolidated revenues ex-other operating income increased by 5% YoY to Rs 4.2bn (down 3% QoQ), largely in-line with our estimates. Domestic formulations sales grew by 6.5% YoY to Rs 2.1bn. Key therapies like Stomatologicals reported healthy growth, while anti-infectives and respiratory reported decline YoY. Regulated business declined by 9% YoY to Rs1.3bn, whereas EM business registered decline of 15% YoY. EU sales were Rs 794mn, up 2% YoY, while US sales came in lower at Rs512mn down 28% QoQ. API grew strongly by 169% YoY; above our estimate.

♦ EBIDTA miss due to higher other expenses and one-offs: INDR reported EBITDA of Rs612mn; down 14% YoY. Other operating income came in higher at Rs96mn. Reported OPM of 14.3%, down 80bps QoQ. There were Rs80mn one offs related to remediation cost and certain expenses in staff cost. Gross margins (ad for other operating income) were largely flat QoQ to 69.1%. R&D cost came in higher at 5.7% of sales, up 30% YoY. Resultant PAT declined 37% YoY to Rs 244mn sharply below our estimates of Rs 360mn.

♦ Key concall takeaways: (1) During the quarter; company has got OAI for its Goa plant II facility. This is critical facility from US growth perspective. Mgnt. cited that it is likely to incur Rs40mn/quarter towards remediation cost. (2) US sales were impacted in Q1, as certain milestone income got postponed with delay in supply due to OAI. Guided for Rs2.8-3bn of US sales in FY24. (3) Domestic Formulation: Delay in monsoon impacted growth in Q1. Key brands like Cyclopam and Febrex plus reported YoY decline while brands like Sensodent and Cital reported strong YoY growth. Guided for 11-12% growth in FY24 (4) The recent acquisition of FPP (Florida Pharmaceutical Products) got consolidated for 1 month and will strengthen its front end position in US market. Company intends to transfer products got back from its Teva partnership to FPP entity. Will be incurring $2mn as opex towards running operations of FPP (5) Strong API sales in Q1 are sustainable, while sales from EM markets to recover from Q2. Guided for Rs 3.8bn sales from EU market in FY24. Expects margin within 17-18% range in FY24 vs its earlier guidance of 18-19%. Also guided for overall capex of Rs 1,250mn in FY24.

(Click on the Link for Detailed Report)