Indoco Remedies

Initiating Coverage
March 26, 2010
Indoco Remedies (INDREM)
Rating Matrix
Rating
Reduce
Target
Rs. 389
Target Period
12 months
Potential Upside
-3%
Fairly Valued
Growth (YoY %)
Net Sales
EBITDA
Net Profit
EPS
FY09
33.5
8.1
4.5
-1.5
FY10E
9.7
17.0
32.7
32.7
FY11E
16.7
24.4
14.2
14.2
FY12E
13.9
14.3
14.0
14.0
FY10E
11.8
11.5
9.1
8.9
1.5
FY11E
10.3
10.0
7.6
7.4
1.4
FY12E
9.0
8.8
6.6
6.4
1.2
Current & target multiples (x)

PE (x)
Target PE (x)
EV/EBITDA
Target EV/EBITD
Price/ BV (x)
FY09
15.6
15.2
11.2
10.9
1.8
Stock Metrics
Bllomberg/ Reuters Code
Equity (Rs Cr)
Face Value (Rs)
Market Cap (Rs Cr)
Promoter Holding (%)
52 Week H/L
Sensex
Average Volume
INRM.BO/ INDR.IN
12.3
10
490.6
61.0
406/115
17558.9
4370
Comparative return matrix (%)

1M
10
-2
7
2
5
Unichem
Indoco Remedies
FDC
Natco
Ipca Labs
3M
25
-2
23
9
22
6M
50
56
70
25
65
12M
157
168
171
202
258
6000
500
400
4000
300
200
2000
100
0
0
Jun-09
Sep-09
NIFTY (LHS)
Indoco Remedies (IRL) is a mid-sized pharma player with a robust

presence in domestic mass therapies. We believe smooth order
execution (current order size of ~Rs 65 crore over two years) will
complement the base business growth over FY09-12E. We estimate the
base business will grow at FY09-12E CAGR of 10.5% on the back of 11%
CAGR in the domestic formulation business. With new order execution,
we believe IRL would be able to grow its sales and net profit at a CAGR
of 13% and 20% over FY09-12E, respectively.
Base business remains key to drive the overall performance

We believe IRLs base business will remain key to its growth over FY0912E. We estimate Indocos base business will grow at 10.5% CAGR over
FY09-12E to Rs 473 crore (92% of revenue) on 11% organic growth in
domestic formulation and regulated markets revenue each. We believe
the base semi-regulated market will remain flat on account of payment
issues in some of the CIS countries.
Domestic market set to grow at double digits

We expect IRLs domestic formulation sales will grow at a FY09-12E
CAGR of 10% to Rs 337 crore on continued focus on power brands (top
10 brands contribute ~60% to the formulation sales) and new launches. It
has grown steadily in the domestic market with a robust portfolio of
power brands and new product introductions.
Order build-up on improved visibility in exports

Supplies on Rs 18 crore Kenyan contracts (for two years) and US$3
million Metformin South African contract (for two years) are likely to start
from Q1FY11E. Moreover, IRL has Rs 3 crore worth order from Sudan for
two years for Lidocaine Injections. We expect IRLs exports to grow at
1.7x over FY09-12E to Rs 174 crore.
Valuations
Price movement (stock v/s Nifty)
Mar-09
Rs. 399
Dec-09
Indoco (RHS)
Analysts name
Raghvendra Kumar
kumar.raghvendra@icicisecurities.com
Ashish Thavkar
ashish.thavkar@icicisecurities.com
ICICIdirect.com | Equity Research
Mar-10
Indoco Remedies at Rs 399 trades at 10x FY11E and 9x FY12E EPS of Rs

38.8 and Rs 44.2, respectively. On an EV/EBITDA basis the stock is
trading at 6.6x FY12E estimates. Historically, the company has traded at
a one-year forward P/E of ~8.8x over last five years. We value the stock
at 8.8x FY12E EPS of Rs 44.2, which gives us a target price of Rs 389. We
are initiating coverage on Indoco Remedies with a REDUCE rating for an
investment horizon of 12 months.
Exhibit 1: Key Financials
Net Sales
EBITDA
Net Profit
EPS
PE (x)
PBV (x)
EV/ EBITDA
ROCE (%)
RONW (%)
(Rs Crore)
FY08
262.7
42.8
30.1
26.0
15.4
1.9
11.9
12.1
12.6
Source: Company, ICICIdirect.com Research
FY09
350.6
46.2
31.4
25.6
15.6
1.8
11.2
10.9
11.3
FY10E
384.6
54.1
41.7
34.0
11.8
1.5
9.1
11.1
13.2
FY11E
448.9
67.3
47.6
38.8
10.3
1.4
7.6
12.5
13.2
FY12E
511.5
76.9
54.3
44.2
9.0
1.2
6.6
12.8
13.2
Company Background
Shareholding pattern (Q3FY10)
Shareholder
Promoters
Institutional Investors
Other Investors
General Public
% holding
61.0
11.9
2.6
24.5
Promoter and institutional holding trend (%)

70
60
61.0
59.1
61.0
61.0
50
40
30
20
11.2
11.2
11.3
11.9
10
0
Q4FY09
Q1FY10
Promoters (%)
Q2FY10
Q3FY10
Institutional Investors (%)
Indoco Remedies (IRL) was incorporated in the 1947. It is a mid-sized

pharma company engaged in manufacture, marketing and distribution of
pharmaceutical products and services in the domestic and international
markets. Indoco got listed on bourses in FY05.
The company has a well built brand portfolio of 135 products across
various therapy areas including high growth lifestyle segments. IRLs
some of the known brands are Cyclopam, Febrex Plus, Vepan and Karvol
Plus. The top 6 brands of the company are growing at 15% in the
domestic market.
IRLs key focus therapy areas are anti-cold, anti-spasmodics, antiinfectives, topical, anti-fungal, anti-inflammatory, cough & cold, CVS and
multi-vitamins. The company, through its six marketing divisions namelyIndoco, Spade, Warren, Warren-Excel, Radius- Surge and Spera serves a
range of doctor specialties, offering over 100 branded formulations in
various therapeutic groups.
Indoco exports products to the regulated markets of Europe and US and
to a number of semi-regulated markets of Asia, Africa, South America and
the CIS countries. In the regulated markets, Indoco offers off patent, large
volume generic products in various therapeutic segments. Indocos focus
is on mid-sized generic players in the regulated markets and well known
distributors in the lesser regulated markets. From the lesser regulated
markets, Indoco is particularly strong in Africa and South East Asia,
prominent markets in these regions being Kenya, Sri Lanka, Myanmar,
Yemen and Uganda.
Its excellence in the manufacturing and contract research activities has
helped Indoco to expand its presence in more than 35 countries in the
regulated and the semi-regulated markets. Indocos formulations
manufacturing facilities include (solid dosages, liquid orals, injectibles,
ointments and creams, toothpaste) at Goa, Baddi (Himachal Pradesh) and
Waluj. It has forayed into the active pharmaceutical ingredients (APIs)
segment by acquiring LaNOVA Chem Ltd, an API manufacturing facility of
international standard at Patalganga. In the regulated markets Indoco
operates on CRAMS model and currently caters to generic companies in
Europe, US, Australia, New Zealand and South Africa. It has moved up the
value chain by offering dossier development services.
Page 2
Exhibit 2: Event Chart

Multiple de-rating due to earnings decline
470
PAT expands
1300% YoY
370
PAT
declines
80% YoY
PAT declines
95% YoY
11x
PAT declines
59% YoY
8x
270
Outlicenses
technology to
Watson Pharma
170
5x
Market Price (Rs), LHS
Feb-10
Dec-09
Oct-09
Aug-09
Jun-09
Apr-09
Feb-09
Dec-08
Oct-08
Aug-08
Jun-08
Apr-08
Feb-08
Dec-07
Oct-07
Aug-07
Jun-07
70
P/E (x), RHS
Page 3
Exhibit 3: Business Model for FY09
(Rs Crore)
Net Sales
(Rs Crore)
FY09
350.6
Domestic
Exports
250.6
71%
100.0
29%
Formulations
(Ranked
23rd )
Formulations
239.8
68%
94.8
27%
Acute
(AI, Respiratory &
Alimentary Systems)
160.7
46%
Regulated Markets
(UK, Germany, Spain,etc,.)
75.8
22%
Chronic
Semi-Regulated Markets
79.1
23%
19.1
5%
API
API
10.8
3%
5.2
1%
Page 4
Investment Rationale
Indoco Remedies (IRL) is a good bet on domestic consumption of
pharma products in mass therapies. We believe smooth order execution
on exports front will compliment the robust domestic growth.
Companys exports to semi-regulated markets are expected to grow at
~15% CAGR over FY09-12E on execution of new order flows
(organically the semi regulated business is likely to show flat growth).
Regulated markets are estimated to grow at ~20% CAGR to Rs 131
crore over the same period. We estimate 3-year CAGR of 13% and 20%
on revenues and net profits, respectively. Higher contribution from the
domestic business is expected to improve margins by ~185 bps.
Currently, Indoco trades at a P/E of 10x its FY11E and 9x its FY12E
earnings. On an EV/EBITDA basis the stock is trading at 6.6x FY12E
estimates. We believe the recent run up in its stock price has factored
in most of the positives. We initiate coverage on IRL with a Reduce
rating.
IRLs overall sales to grow at 13% CAGR on 20% growth in
regulated market exports and 11% growth in domestic
formulation revenues over FY09-12E
Exhibit 4: Geography-wise revenue break-up
(Rs Crore)
FY09
350.6
FY10E
384.6
9.7
FY11E
448.9
16.7
FY12E FY09-12ECAGR
511.5
13.4%
13.9
239.8
68.4
264.2
68.7
10.2
295.5
65.8
11.8
328.1
64.1
11.0
11.0%
Domestic API
% of Sales
YoY Gr. (%)
10.8
3.1
8.0
2.1
-25.5
8.4
1.9
5.0
9.1
1.8
8.0
-5.5%
Exports Formulations
% of Sales
YoY Gr. (%)
94.8
27.0
103.1
26.8
8.7
132.5
29.5
28.5
160.5
31.4
21.1
19.2%
75.8
21.6
86.4
22.5
14.1
106.0
23.6
22.7
131.4
25.7
24.0
20.2%
75.8
21.6
86.4
22.5
91.6
20.4
102.6
20.1
10.6%
0.0
0.0
0.0
0.0
14.4
3.2
28.8
5.6
19.1
5.4
16.7
4.3
-12.5
26.5
5.9
59.0
29.1
5.7
9.7
15.1%
19.1
5.4
16.7
4.3
17.5
3.9
19.1
3.7
0.0%
0.0
0.0
0.0
0.0
9.0
2.0
10.0
2.0
5.2
1.5
9.2
2.4
77.4
12.4
2.8
34.8
13.8
2.7
11.2
38.5%
Total Domestic
% to total sales
250.6
71.5
272.3
70.8
304.0
67.7
337.2
65.9
10.4%
Total Exports
% to total sales
100.0
28.5
112.3
29.2
145.0
32.3
174.3
34.1
20.3%
Net Sales
YoY Gr. (%)
Domestic Formulations
% of Sales
YoY Gr. (%)
Regulated Markets
% of Sales
YoY Gr. (%)
Base regulated markets
% of Sales
Metformin orders
% of Sales
Semi-regulated Markets
% of Sales
YoY Gr. (%)
Base semi-regulated markets
% of Sales
Kenya, Sudan orders
% of Sales
API Exports
% of Sales
YoY Gr. (%)
Page 5
Base business remains key to drive the overall performance

We believe IRLs base business will remain key to its growth over FY0912E. We estimate its base business to grow at 10.5% CAGR over FY0912E to Rs 473 crore (92% of revenue) on the back of 11% growth in
domestic formulations and 10.7% growth in base regulated markets. We
believe the base business of semi-regulated market to remain flat on
account of payment issues in some of the CIS countries.
Exhibit 5: Base business to drive the overall performance
337
350
275
(Rs Crore)
304
272
251
200
125
100
112
76
50
-25
122
86
19
FY09
Exports
103
19
17
17
FY10E
Domestic
136
92
FY11E
Regulated markets
FY12E
Semi-reg markets
Domestic market set to grow at double digit
Indoco's domestic business is expected to register a

CAGR of ~10% to Rs 337 crore during FY09-12E mainly
driven by the formulation business.
IRLs domestic business, which contributed around 71% of overall sales in

FY09, is expected to register a CAGR of ~10% to Rs 337 crore during
FY09-12E mainly driven by the formulation business. We expect
formulation sales to grow at a 3-year CAGR of 11% to Rs 328 crore in
FY12E, contributing 97% to the total domestic sales in FY12E. We believe
majority of the growth would come on the back of focus on power brands
& new product introductions.
Indoco has a strong presence in mass therapies such as respiratory, antiinfective, ophthalmic, antispasmodic, anti-cold and anti-inflammatory. The
company's biggest domestic formulations brand is Febrex Plus, which
along with Cyclopam and Vepan feature falls in the list of top 300 most
prescribed pharmaceutical brands in India. The top 10 brands account for
~61% of domestic revenues in FY09.
In the last three years, the company accelerated growth momentum in the
domestic formulation market through new product launches in the
lifestyle segment.
Page 6
Exhibit 6: Contribution of key therapies to grow substantially by FY12E
(Rs Crore)
100%
80%
60%
40%
20%
31.0%
33.4%
32.7%
32.9%
33.4%
12.1%
12.3%
12.3%
12.0%
11.9%
21.2%
18.2%
17.3%
16.3%
15.4%
13.7%
15.5%
16.2%
16.7%
16.4%
21.9%
20.6%
21.5%
22.1%
22.9%
FY08
FY09
FY10E
FY11E
FY12E
0%
Anti-infective
Dental
Respiratory & Anti-Allergy
Alimentary Systems
Others
. . . leading to double digit growth in domestic formulations

400
80
77.2
71.5
325
70.8
67.7
65.9
60
250
175
100
22.8
28.5
29.2
34.1
32.3
40
20
25
-50
FY08
FY09
Domestic Sales (Rs Cr)
FY10E
Exports (Rs Cr)
FY11E
FY12E
Domestic (% )
Exports (%)
Exhibit 7: New products launched during FY08-09

Brand
Cef-Vepan
Fevorit
Duochek
Aloha-XT
Sensoform-HK
Kidodent Mouth Wash
Irimist
Alerchek
Category
Anti-Infective
Anti-Infective
Anti-Infective
Haematinic
Dental
Dental
Opthal (Tear substitute)
Opthal (Ocular anti-allergic)
Division
Indoco
Spade
Spade
Spade
Warren
Warren
Warren-Excel
Warren-Excel
In case of prescription medicines, Indoco is ranked 23rd among the

pharma companies (ORG-IMS March'2009) and robust rankings in some
of the doctor categories.
Page 7
Exhibit 8: Robust rankings in doctor categories to drive formulations sales

Doctor Categories
General Practitioners (MBBS)
General Practitioners (Non-MBBS)
Gynaecologists
Pediatricians
Opthalmologists
Dentists
Current Rankings (FY09)

15th
21st
18th
16th
8th
12th
Exhibit 9: Robust market share in existing brands
We expect robust market share in existing brands to result

in top 10 brands continuing to contribute in excess of 60%
for the company going ahead.
Brands
Febrex Plus
Cyclopam
Vepan
Sensodent - k
ATM
Cloben-G
Cital
Karvol Plus
Carmicide
Scabex
Renolen
Homide
Dexoren-S
Lignox-ADR
Tobaren-D
Therapeutic Category
Anti-Cold
Anti-Spasmodics
Anti-Infectives
Dental
Anti-Infectives
Topical Anti-fungal, Anti-Infective
Urinary Alkalizer
Respiratory
Anti-flatulent
Anti-Scabies
Saline
Mydriatic & Cyclopegic
Opthal Anti-biotic with steriod
Anaesthetic Injectible
Opthal Anti-biotic with steriod
Rank
2
1
1
1
5
2
1
4
2
3
1
1
3
2
4
Market Share (%)

10.1
52.4
17.6
7.1
4.3
12.9
18.3
7.5
17.5
18.8
40.7
92.2
10.9
27.1
11.6
leading to top 10 brands contributing in excess of 60% to the formulation sales in FY09
Brands
Febrex Plus
Cyclopam
Vepan
Sensodent - k
ATM
Sensoform
Cloben-G
Cital
Glychek/M
Oxipod
Total
% of Domestic Formulation Sales

13.3
10.2
8.4
5.4
5.8
4.1
3.8
3.3
3.2
3.2
60.7
Sales (Rs Cr)

31.9
24.5
20.1
13.0
13.9
9.8
9.1
7.9
7.7
7.7
145.6
Page 8
Regulated markets to drive formulation exports

We expect stronger traction in the regulated markets to
drive exports at a rate of ~20% CAGR over FY09-12E to
Rs 174 crore. Enhanced pricing pressure in UK & Germany
pose downside risk to our estimates.
We expect regulated markets to grow at a CAGR of 20% to Rs 131 crore

on account of order execution from Germany and South Africa. The
company has an order worth USD3mn for supply of Metformin from
South Africa over 2 years time frame and a supply under the AoK contract
from its partner in Germany. Enhanced pricing pressure in UK and
Germany pose downside risk to our estimates.
Indoco's export strategy is focused on the CRAMS model, which caters to
the development of product dossiers to supply of finished dosages.
During FY07-09, export business contributed 29% to the overall sales and
clocked sales of Rs 100 crore at 20% CAGR. Indoco's main focus is on the
regulated markets of Europe, US and South Africa.
We expect SRM to witness a 15% CAGR in revenues

over FY09-12E to Rs 29 crore on account of i) Rs 18 crore
flowing from the contract won in Kenya and ii) Rs 3 crore
from Sudan, over FY10E-12E
In the semi-regulated markets (SRM), continuing issues with payment

from distributors, kept the growth subdued over 9MFY10. Going ahead,
we expect SRM to witness a 15 % CAGR in revenues over FY09-12E to Rs
29 crore on account of i) Rs 18 crore flowing from the contract won in
Kenya and ii) Rs 3 crore from Sudan, over FY10E-12E. However, base
business is expected to remain subdued and exhibit a flat growth over
FY09-12E to Rs 19 crore.
Exhibit 10: Regulated markets set to drive exports growth
180
78.9
79.9
83.8
80.0
81.9
90
150
(Rs Cr)
120
60
90
60
21.1
28.9
25.1
28.3
19.3
30
30
0
0
FY08
FY09
FY10E
FY11E
FY12E
Formulation Exports, LHS
Regulated markets, LHS
Semi-reg markets, LHS
Regulated markets (% to Sales), RHS
Semi-reg markets,( % to Sales), RHS

During last year, Indoco received approvals for its dossiers from regulated
markets like Australia, New Zealand, Bulgaria, etc. It won a tender from
AOK, Germany and Medsafe, New Zealand. The AOK tender for
Metformin, an anti-diabetic drug covers 3 strengths, viz., 500mg, 850mg
and 1000mg. Metformin supplies would be 100 crore tablets. The
management has guided for Rs 50 crore in revenues from this tender over
the next 2 years, whereas the tender won in Kenya would garner Rs 18
crore in revenues by FY12E.
Page 9
Exhibit 11: Opportunity matrix for Indoco Remedies over FY10E-12E

Market
Germany
Opportunity
Rs 50 crore
Comments
Indoco has won a tender for Metformin in South Africa. The opportunity is worth
Rs 50 crore for Indoco spread over FY10E-12E. However, due to lack of clarity on
this deal from the management, we have accounted for partial revenue accretion
over FY10E-12E.
Others
Rs 12-13 crore
We expect Rs 25 crore to flow-in over FY10E-FY12E from new contracts. We

have not modelled this in our projections
South Africa
USD 3mn
Kenya
Rs 18 crore
Sudan
Rs 3 crore
Indoco's partner won AOK tender for metformin supplies worth US$ 6mn over
the next 2 years. Indoco has committed to supply 50% of the requirement. We
expect US$ 3mn to flow-in over FY10E-12E
Indoco bagged a tender for a couple of products which will be supplied over the
next 2 years
Indoco won a tender in Sudan for Lidocaine injections, which is a local
anesthetic. Revenues to flow-in over FY10E-12E
Cost optimization may lead to improved performance

Higher raw material, power & fuel cost and rise in employee expenses
due to VRS, led the EBITDA margin to decline by 310bps during FY08-09.
However the company has taken several measures to rationalize
operating cost, on account of which EBITDA improved by 206bps during
9MFY10 on YoY basis. It has also implemented credit policy measures to
optimize the receivables.
Higher raw material, power & fuel cost and rise in employee
expenses due to VRS, led the EBITDA margin to decline by
310bps during FY08-09. However, going ahead, fast
growing EBITDA on the back of lower expenditure coupled
with lower interest cost would lead the PAT margin to
expand by 165bps over FY09-12E
The companys EBITDA margin is set to increase by 185 bps in FY12E to

15% from 13.2% in FY09. Fast growing EBITDA on the back of lower
expenditure coupled with lower interest cost would lead the PAT margin
to expand by 165 bps over FY09-12E.
Exhibit 12: Cost optimization to improve operational performance
(Rs Crore)
Net Sales
FY08
100
FY09
100
FY10E
100
FY11E
100
FY12E
100
Chg over FY09-12E

-
Total expenditure
Raw Material
Emp Expenses
R&D Expenditure
Selling, General and other expenses
83.7
42.9
12.3
2.7
25.8
86.8
42.7
13.7
2.6
27.9
85.9
42.0
14.7
2.6
26.7
85.0
41.0
14.5
2.6
27.0
85.0
40.5
14.0
3.5
27.0
-1.9
-2.2
0.3
0.9
-0.9
EBITDA
16.3
13.2
14.1
15.0
15.0
1.9
however still a long way to get into the league of front-line mid cap stock
Exhibit 13: Comparative cost structure of Indoco vis--vis its peer group (FY09)
Raw Material %
Gross contribution %
Employee cost %
R&D cost %
Other expenses %
EBITDA Margin %
Alembic
49.4
50.6
11.8
3.6
24.0
Indoco
42.7
57.3
13.7
2.6
27.9
Unichem
38.5
61.5
14.1
3.7
24.4
IPCA
39.5
60.5
14.7
2.5
23.3
11.2
13.2
19.3
20.0
Page 10
Risks and Concerns

High fluctuation in EBITDA margin
Historically, the EBITDA margin of IRL has been volatile over the past few
quarters. The EBITDA margin has come down by ~500bps over FY07-09
to 13.18% in FY09. The major reason for the same has been increase in
marketing and employee expenses. However there has been significant
improvement in the same during 9MFY10 to 14.6%.
Exhibit 14: EBITDA margins over the past 8 quarters
30%
25.8%
25%
18.9%
20%
13.0%
15%
10%
7.4%
6.3%
Q2FY09
Q3FY09
11.7%
12.5%
Q3FY10
Q3FY10
7.6%
5%
0%
Q1FY09
Q4FY09
Q1FY10
Q2FY10
EBITDA margin
Likely risk to failure of partnership model with Watson Pharma

In FY07, Indoco inked a JV deal with Amneal Pharma to develop and
market generic ophthalmic products. The deal was initially signed for 10
products with an addressable market size of US$ 1bn. However, this deal
has been trimmed down to a couple of products. We believe if similar risk
gets associated with Watson deal, Indoco may face potential risk to its
earnings, post FY12E.
Page 11
Financials
Domestic and export formulations to lead the majority of growth
We expect IRL to register FY09-12E sales CAGR of 13% to Rs 511 crore on
account of 11% growth in domestic formulation revenue, which is likely
to contribute 64% to the overall revenue. The regulated market revenue
(22% of FY09 revenue) is likely to grow at 20% CAGR to Rs 131 crore over
FY09-12E while semi-regulated market revenue (5% of FY09 revenue) is
likely to grow at 15% CAGR to Rs 29 crore.
We expect IRL to clock sales of Rs 511 crore in FY12E
driven by 11% CAGR in domestic formulation sales to Rs
328 crore and 20% CAGR in regulated market growth to
Rs 131 crore over FY09-12E
Exhibit 15: Market wise contribution (% to net sales)

100
90
80
70
60
50
40
30
20
10
0
3.2
4.6
4.6
4.5
4.7
4.5
5.4
4.3
5.9
5.7
17.2
21.6
22.5
23.6
25.7
74.9
68.4
68.7
65.8
64.1
FY08
FY09
FY10E
FY11E
FY12E
Domestic market
Regulated market
Semi-reg market
Total API
Continued growth in key therapies such as anti-infectives (~15%), dental

(~13%), respiratory (~5%) and alimentary systems (~10%) will lead the
domestic formulations segment to clock FY09-12E CAGR of ~11%. Export
formulations will be driven by regulated markets (key markets being the
UK and Germany) growing at FY09-12E CAGR of ~20%. Overall, the
formulation segment is expected to register ~13% CAGR over FY09-12E
to Rs 489 crore, contributing ~96% to the top line. API contribution will
continue to remain subdued over FY09-12E to Rs 23 crore.
Exhibit 16: Formulation segment to drive overall sales growth
600
74.9
68.7
68.4
65.8
450
300
334.6
254.2
21.8
27.0
367.3
60
488.6
428.0
26.8
80
64.1
29.5
31.4
150
0
40
20
8.5
FY08
16.0
FY09
17.3
FY10E
20.9
FY11E
23.0
FY12E
Formulations (Rs Cr), LHS
API's (Rs Cr), LHS
Export - Form. % to sales, RHS
Domestic - Form. % to sales, RHS
Page 12
Margins to expand on business scale-up
We estimate Indocos EBITDA margin to expand 185bps

to 15% by FY12E, led by better product-mix i.e. higher
proportion of domestic formulation business and
increasing share of high margin regulated market sales.
We estimate Indocos EBITDA margin to expand 185bps to 15% by

FY12E, led by better product-mix i.e. higher proportion of domestic
formulation business and increasing share of regulated market sales.
Contribution from regulated markets to total sales is estimated to increase
to 26% in FY12E vis--vis 22% in FY09 (17% in FY08 & 15% in FY07). In
addition, excise benefits from the Baddi plant would also have a positive
impact on EBITDA margins. However higher tax rates on account on
account of rise in MAT from 15% to 18% would restrict earnings CAGR to
~20% over FY09-12E.
Exhibit 17: Margins set to improve over FY09-12E
600
16.3
13.2
450
15.0
15.0
14.1
18
12
11.5
300
9.0
10.6
10.6
10.9
150
0
0
FY08
FY09
FY10E
Net Sales (Rs Cr), LHS
FY11E
EBITDA (%), RHS
FY12E
PAT (%), RHS
Source: Company, ICICIdirect.com Research Research
Return ratios to hover around 12-13% in FY12E

We expect the RoNW to improve from 11.3% in FY09 to 13.2% in FY12E.
Moreover, a better operating performance and higher profit generation
will likely keep the RoCE high. We expect the RoCE to increase from
10.9% in FY09 to 12.8% in FY12E.
We expect the RoNW to improve from 11.3% in FY09 to
13.2% in FY12E. RoCE is expected to improve from 10.9%
to 12.8% over FY09-12E.
Exhibit 18: Return ratios to hover around 12-13% in FY12E

14%
13%
13.2%
13.2%
12.6%
12%
12%
13.2%
12.1%
11%
12.5%
11.3%
10.9%
12.8%
11.1%
10%
FY08
FY09
FY10E
RoCE
FY11E
FY12E
RoNW
Page 13
Valuations
Indoco Remedies (IRL) is a mid sized pharma player with robust
presence in the domestic mass therapies. We believe smooth order
execution (current order size of ~Rs 65 crore over two years) will
complement the base business growth over FY09-12E. We estimate
base business to grow at FY09-12E CAGR of 10.5% on account of 11%
CAGR in the domestic formulation business. We believe base business
of semi-regulated market to remain flat on account of payment issues in
some of the CIS countries. With new order execution, we believe IRL
would be able to grow its sales & net profit at CAGR of 13% & 20% over
FY09-12E respectively.
We expect IRLs domestic sales to grow at a FY09-12E CAGR of 10% to Rs
337 crore on continued focus on power brands (top 10 brands contribute
~60% to the formulation sales) and new launches. It has grown steadily
in the domestic market with robust portfolio of power brands and new
product introductions.
Supplies on Rs 18 crore Kenyan contracts (for 2 years) and US$3mn
Metformin South African contract (for two years) are likely to start from
Q1FY11E. Moreover, IRL has Rs 3 crore worth order from Sudan for 2
years for Lidocaine Injections. We expect IRLs exports to grow 1.7x over
FY09-12E to Rs 174 crore.
Indoco has entered into a supply agreement with Watson Pharma for a
basket of 7 products, which currently has market size of US$679mn.
Indoco plans to file ANDA for these products from 4QFY2010 onwards.
Substantial revenue flow from the deal is expected to commence from
FY13E onwards. However, earlier than expected milestone payment from
Watson poses an upside risk to our valuation.
We initiate coverage on Indoco Remedies with a REDUCE rating and a
target price of Rs 389, 8.8x FY12E EPS. We expect the stock to get rerated on account of successful implementation of Watson deal.
Exhibit 19: Peer Comparison
(Rs Crore)
FY11E
MCap
Sales
FY09
FY09-11E
Sales
CAGR
EBITDA
FY09
FY09-11E
EPS
EBITDA
FY09
CAGR
EPS
FY11E
EV/EBITDA
EV/Sales
MCap/Sales
PE
ROCE
RONW
Target
PE
Target
EV/E
P/BV
Indoco
491
350.6
13.4
46.2
18.5
25.6
38.8
7.6
1.0
1.1 10.3
12.5
13.2
9.0
6.6
1.4
Alembic
685
1116.1
5.9
125.2
10.9
3.4
5.4
5.4
0.7
0.6
9.2
12.7
13.5
9.0
5.3
1.2
Unichem
1514
735.2
12.6
142.2
17.7
30.0
39.3
7.2
1.5
1.7 10.7
23.6
20.9
10.1
6.7
2.2
Page 14
Exhibit 20: Indoco trading at 10.3x one-year forward earnings

600
11x
8x
300
5x
0
Mar-05
Jan-06
Nov-06
Sep-07
Jul-08
May-09
Mar-10
Exhibit 21: Indoco trading at 1.4x one-year forward book value

600
2x
2x
300
1x
1x
0
Jul-05
Feb-06
Sep-06
Apr-07
Nov-07
Jun-08
Jan-09
Aug-09
Mar-10
Page 15
Table and Ratios

Profit and Loss Statement
Sales
Growth (%)
Op. Expenditure
EBITDA
Growth (%)
Other Income
Depreciation
EBIT
Interest
PBT
Growth (%)
Tax
Extraordinary Item
Rep. PAT before MI
Minority interest (MI)
Rep. PAT after MI
Adjustments
Adj. Net Profit
Growth (%)
(Rs Crore)
FY12E
511.5
13.9
434.6
76.9
14.3
5.1
17.4
64.6
2.9
61.7
14.0
7.4
0.0
54.3
0.0
54.3
0.0
54.3
14.0
FY08
262.7
-19.4
219.9
42.8
-28.0
2.5
7.8
37.5
3.6
33.9
-29.7
2.0
0.0
31.9
1.8
30.1
0.0
30.1
-28.4
FY09
350.6
33.5
304.4
46.2
8.1
3.9
11.2
39.0
5.9
33.1
-2.2
1.7
0.0
31.4
0.0
31.4
0.0
31.4
4.5
FY10E
384.6
9.7
330.6
54.1
17.0
3.7
11.7
46.1
3.1
43.0
29.6
1.2
0.0
41.7
0.0
41.7
0.0
41.7
32.7
FY11E
448.9
16.7
381.7
67.3
24.4
4.5
14.6
57.1
3.0
54.1
26.0
6.5
0.0
47.6
0.0
47.6
0.0
47.6
14.2
FY08
42.9
12.3
25.8
2.7
10.5
5.8
FY09
42.7
13.7
27.9
2.6
10.5
5.1
FY10E
42.0
14.7
26.7
2.6
4.1
2.9
FY11E
41.0
14.5
27.0
2.6
4.0
12.0
(%)
FY12E
40.5
14.0
27.0
3.5
4.0
12.0
13.2
9.0
9.0
14.1
10.9
10.9
15.0
10.6
10.6
15.0
10.6
10.6
285.4
420.9
226.6
23.6
25.6
34.7
2.0
312.9
401.5
257.6
59.5
34.0
43.4
2.5
365.3
414.8
293.4
44.6
38.8
50.7
2.5
416.2
409.9
334.7
47.8
44.2
58.4
2.5
Ratios
Raw material
Emp Exp
SG&A
R&D
Average cost of debt
Effective Tax rate
Profitability ratios (%)
EBITDA Margin
16.3
PAT Margin
12.2
Adj. PAT Margin
11.5
Per share data (Rs)
Revenue per share
213.8
EV per share
414.1
Book Value
206.9
Cash per share
13.1
EPS
24.5
Cash EPS
32.3
DPS
5.0
Costs as % to sales except tax rate and average cost of debt
Page 16
Balance Sheet
Equity Capital
Preference capital
Reserves & Surplus
Shareholder's Fund
Minority Interest
Secured Loans
Unsecured Loans
Deferred Tax Liability
Source of Funds
Gross Block
Less: Acc. Depreciation
Net Block
Capital WIP
Net Fixed Assets
Intangible asset
Investments
Cash
Trade Receivables
Loans & Advances
Inventory- Other
Total Current Asset
Current Liab. & Prov.
Net Current Asset
Misc Expense
Application of funds
(Rs Crore)
FY12E
12.3
0.0
399.1
411.4
0.0
63.2
8.7
23.0
506.3
389.8
102.1
287.7
0.0
287.7
0.0
0.0
58.7
106.2
61.4
71.6
297.9
79.4
218.6
0.00
506.3
FY08
12.3
0.0
242.0
254.3
0.0
22.1
12.1
21.9
310.4
219.0
47.4
171.6
1.8
173.4
0.0
0.0
16.1
107.8
30.9
44.3
199.1
62.6
136.5
0.43
310.4
FY09
12.3
0.0
266.2
278.4
0.0
39.8
15.8
23.0
357.0
234.3
58.4
175.9
16.3
192.2
0.0
0.0
29.0
100.3
41.5
52.5
223.3
58.7
164.6
0.14
357.0
FY10E
12.3
0.0
304.3
316.6
0.0
63.2
12.7
23.0
415.5
279.8
70.0
209.7
0.8
210.6
0.0
0.0
73.2
90.5
46.2
54.8
264.6
59.7
204.9
0.00
415.5
FY11E
12.3
0.0
348.3
360.6
0.0
63.2
10.7
23.0
457.6
340.6
84.7
255.9
0.0
255.9
0.0
0.0
54.8
99.4
53.9
63.3
271.3
69.6
201.6
0.00
457.6
FY08
11.8
12.1
16.2
FY09
11.3
10.9
14.5
FY10E
13.2
11.1
16.3
FY11E
13.2
12.5
17.1
(%)
FY12E
13.2
12.8
17.5
33.8
8.5
310.4
0.1
0.1
9.4
0.8
240.8
-13.5
357.0
0.2
0.2
5.7
1.2
425.0
-17.5
415.5
0.2
0.2
13.8
1.4
556.2
4.1
457.6
0.2
0.2
18.3
1.1
0.0
3.4
506.3
0.2
0.1
21.5
0.9
0.9
0.9
0.1
0.7
1.5
0.9
0.8
0.1
0.8
1.5
1.0
0.9
0.1
0.8
1.5
0.9
0.9
0.1
0.9
1.5
0.9
1.0
0.1
0.9
1.4
16.2
8.4
1804.1
7.8
14.5
8.5
1619.7
6.0
16.3
8.5
2201.7
7.8
17.1
8.5
2887.6
8.7
17.5
8.4
3354.6
9.1
Ratios
Return ratios
RoNW
ROCE
ROIC
Financial health ratio
Operating CF (Rs Cr)
FCF (Rs Cr)
Cap. Emp. (Rs Cr)
Debt to equity (x)
Debt to cap. emp. (x)
Interest Coverage (x)
Debt to EBITDA (x)
DuPont ratio analysis
PAT/PBT
PBT/EBIT
EBIT/Net sales
Net Sales/ Tot. Asset
Total Asset/ NW
Spread of RoIC over WACC

RoIC
WACC
EVA (Rs)
RoIC-WACC
Page 17
Cash Flow Statement

Profit after Tax
Misc exp w/o
Dividend Paid
Depreciation
Provision for deferred tax
CF before change in WC
Inc./Dec. in Current Liab.
Inc./Dec. in Current Assets
CF from operations
Purchase of Fixed Assets
(Inc.)/Dec. in Investment
CF from Investing
Inc./(Dec.) in Debt
Inc./(Dec.) in Net worth
CF from Financing
Opening Cash balance
Closing Cash balance
FY08
31.9
0.1
-7.2
7.8
1.2
33.8
4.9
20.7
18.0
12.5
-2.8
-9.7
-1.3
-3.0
-4.3
12.2
16.1
FY09
31.4
0.3
-3.6
11.2
1.1
40.4
-3.9
11.3
25.2
29.9
0.0
-29.9
21.3
-3.7
17.6
16.1
29.0
FY10E
41.7
0.1
-3.6
11.7
0.0
49.9
0.9
-2.9
53.7
30.0
0.0
-30.0
20.4
0.0
20.4
29.0
73.2
FY11E
47.6
0.0
-3.6
14.6
0.0
58.7
10.0
25.1
43.6
60.0
0.0
-60.0
-2.0
0.0
-2.0
73.2
54.8
(Rs Crore)
FY12E
54.3
0.0
-3.6
17.4
0.0
68.1
9.7
22.7
55.2
49.2
0.0
-49.2
-2.0
0.0
-2.0
54.8
58.7
FY08
-19.4
-28.0
-28.4
-27.5
-39.8
9.3
FY09
33.5
8.1
4.5
7.3
19.5
9.5
FY10E
9.7
17.0
32.7
25.3
23.5
13.7
FY11E
16.7
24.4
14.2
16.7
17.5
13.9
FY12E
13.9
14.3
14.0
15.1
16.1
14.1
Ratios
Y-oY Growth (%)
Net sales
EBITDA
Adj. net profit
Cash EPS
FCF
Net worth
Page 18
RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns

ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Add, Reduce and Sell. The performance horizon is two years unless specified and the
notional target price is defined as the analysts' valuation for a stock.
Strong Buy: 20% or more;
Buy: Between 10% and 20%;
Add: Up to 10%;
Reduce: Up to -10%
Sell: -10% or more;
Pankaj Pandey
Head Research
pankaj.pandey@icicisecurities.com
ICICIdirect.com Research Desk,

ICICI Securities Limited,
7th Floor, Akruti Centre Point,
MIDC Main Road, Marol Naka,
Andheri (East)
Mumbai 400 093
research@icicidirect.com
ANALYST CERTIFICATION
We /I, Raghvendra Kumar CFA; Ashish Thavkar MBA research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately
reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific
recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.
Disclosures:
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The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and
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Initiating Coverage

March 26, 2010

Indoco Remedies (INDREM)

Current & target multiples (x)

Comparative return matrix (%)

Indoco Remedies (IRL) is a mid-sized pharma player with a robust

Base business remains key to drive the overall performance

Domestic market set to grow at double digits

Order build-up on improved visibility in exports

Price movement (stock v/s Nifty)

ICICIdirect.com | Equity Research

Indoco Remedies at Rs 399 trades at 10x FY11E and 9x FY12E EPS of Rs

Source: Company, ICICIdirect.com Research

Indoco Remedies (INDREM)

Shareholding pattern (Q3FY10)

Promoter and institutional holding trend (%)

Institutional Investors (%)

Source: Company, ICICIdirect.com Research

Indoco Remedies (IRL) was incorporated in the 1947. It is a mid-sized

ICICIdirect.com | Equity Research

Indoco Remedies (INDREM)

Exhibit 2: Event Chart

Market Price (Rs), LHS

P/E (x), RHS

Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

Indoco Remedies (INDREM)

Exhibit 3: Business Model for FY09

Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

Indoco Remedies (INDREM)

Exhibit 4: Geography-wise revenue break-up

Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

Indoco Remedies (INDREM)

Base business remains key to drive the overall performance

Source: Company, ICICIdirect.com Research

Domestic market set to grow at double digit

Indoco's domestic business is expected to register a

IRLs domestic business, which contributed around 71% of overall sales in

ICICIdirect.com | Equity Research

Indoco Remedies (INDREM)

Exhibit 6: Contribution of key therapies to grow substantially by FY12E

Respiratory & Anti-Allergy

Source: Company, ICICIdirect.com Research

. . . leading to double digit growth in domestic formulations

Domestic Sales (Rs Cr)

Source: Company, ICICIdirect.com Research

Exhibit 7: New products launched during FY08-09

Source: Company, ICICIdirect.com Research

In case of prescription medicines, Indoco is ranked 23rd among the

ICICIdirect.com | Equity Research

Indoco Remedies (INDREM)

Exhibit 8: Robust rankings in doctor categories to drive formulations sales

Current Rankings (FY09)

Source: Company, ICICIdirect.com Research

Exhibit 9: Robust market share in existing brands

We expect robust market share in existing brands to result

Market Share (%)

Source: Company, ICICIdirect.com Research

% of Domestic Formulation Sales

Sales (Rs Cr)

Source: Company, ICICIdirect.com Research