Indoco Remedies (Indoco) has a strong foothold in the domestic market through its sound brand portfolio of 120 products.
Focusing on the CRAMS segment to enhance its presence in regulated markets, its international exposure has grown at a CAGR of 59.4% over FY2004-08. The export contribution to net sales has increased from 8.5% in FY2004 to 22.7% in FY2008.
Going ahead, we expect the company’s exports to post CAGR of 24.3% over FY2008-10E driven by Formulation exports, which will post a CAGR of 25.8% over the mentioned period.
Strong presence across major therapeutic segments has seen its domestic formulation business grow at 15.9% CAGR, above industry average, over FY2004-08. Continued focus on domestic formulations in the past has laid strong foundation for its future growth.
However, we expect the company’s FY2009 performance to be flat on account of its strong credit control measures adopted in Q1FY2009. For FY2010 we remain cautious and expect the company to grow its domestic business by 10.3% over FY2009.
Indoco has traded in the 3-13x PE band and at an average 9x one-year forward Earnings in its brief trading stint - listed in 2005.
Between January-September 2008, on an average, the stock traded at 7.9x. However, post September 2008 the stock declined by a substantial 45% owing to weak 2QFY2009 results and risk aversion on the street.
At Rs128, the stock is trading at 3.1x FY2010E EPS, which is at the lower end of its historical trading band.
We have revised our target price to Rs204 (Rs370), which implies a target multiple of 5x (8x earlier), a steep 45% discount to its average multiple and close to the lower-end of its historical PE band.
However, we believe the stock has the potential to get re-rated going forward once the concerns on its domestic formulation front abate. We maintain a BUY rating on the stock.