Buy Indoco Remedies, target Rs 198: Anand Rathi

Anand Rathi has given a buy recommendation on Indoco Remedies with a target price of Rs 198.

Shares of Indoco Remedies traded at Rs 158.9 around 2 pm on 2 July, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.

Investment rationale

After domestic formulations were flattish in FY19, the brokerage expects it to recover and register a 12 per cent revenue CAGR over FY19-21, supported by its re-structuring and greater MR productivity (current MR strength is 2,300), besides the continuous focus on brand-building and launches.

During FY19 the US business was under stress (down 39 per cent) due to the regulatory overhang on the Goa II and III plants. In recent months, there has been progress in improving regulatory compliances (lifting of a warning letter), which would enable the US business to regain momentum.

The management expects US supplies (gCusopt, gTrusopt, a few oral solids and injectables) to resume in the near future and the brokerage expects Rs 50 crore/Rs 140 crore revenue in FY20/FY21.

The company has 37 ANDAs pending. Early launches of gToprol and gBrinzolamide would give a fillip to earnings.

The company has already undertaken remediation measures regarding Goa plant I and is expecting the import alert to be lifted and to then resume supplies to the EU.

Besides, Baddi plant III (acquired from Microlabs) has stared supplying 2-3 products to the EU, which would help alleviate the revenue loss to some extent.

The brokerage expects Rs 190 crore/Rs 200 crore revenue in FY20/FY21.

"We trim our FY20 and FY21 revenue estimates of 3 per cent and 1.3 per cent, respectively, due to a delay in US supplies and earnings 8.3 per cent and 4.7 per cent, respectively, due to assumption of a higher tax rate," the brokerage said.

The brokerage believes revenue from the US and EU will resume from FY20, and domestic formulations recover in FY20.

"With the recent price drop, valuations seem attractive. Therefore, we upgrade our recommendation to a buy, with a target price of Rs 198 (earlier Rs 207), based on 18 times FY21E earning per share," the brokerage said.

Currency fluctuations, regulatory issues regarding any other plant and delay in supplies to the US and EU are the key risks, the brokerage added.