Stock Analysis - Indoco Remedies

Indoco Remedies, a small sized pharma company, offers a promising business model consisting of manufacturing generic drugs and active pharmaceutical ingredients (APIs) as well as contract manufacturing.

The company’s stock price has tripled in the past one year and is inching towards its all-high of Rs 440 (in January 2005). Despite this run-up , the stock is an attractive bet for the long-term given that earnings upside likely to accrue from the long-term supply contracts and the company’s out-licensing deals.

Mumbai-based Indoco Remedies is one of the oldest pharma players in the domestic market with a prominent presence in the anti-infective , respiratory, gastro-intestinal and dental segments. The company earns 70% of its revenues from the domestic market with the rest comes from exports of APIs. The company’s growth in the domestic formulations business is driven by its top seven brands of the size of Rs 10-20 crore each and which are clocking an average growth of 25%.

The company is looking at contract manufacturing opportunities for overseas markets. It has recently signed a long-term deal with South-African drug maker Aspen Pharma, out-licensing its eyecare products for sale in over 30 emerging markets. Indoco will earn milestone payments as well as sale proceeds from supplying the drugs to Aspen. The company has earlier won manufacturing contracts for supplying products in Germany, New Zealand and Kenya.

The company is ramping up its manufacturing capacities to cater to the domestic formulations as well as its contract manufacturing business. The company has also launched two new marketing divisions to cater to the domestic market. One is to increase the coverage of company’s products in semi-urban areas and the other is for promoting company’s chronic therapeutic products to consulting physicians. The company has also gradually reduce APIs supply to the domestic market, which were of lower margin and moved into exports of high margin APIs. As a result, the company is looking at consistent high growth in revenues from exports.

The company’s net sales have grown at a compound annual growth rate (CAGR) of 15.5% over the past five fiscal years to reach around Rs 398 crore in FY10. The net profit has grown at a slower rate of 11% during the same period. The company has been consistently paying dividend with an average payout of 20% (in the past three years).

Going forward, the company, which is present in most mass therapeutic categories, is expected to grow better than the industry growth rate. Its domestic growth is likely to be supplemented by increased exports. It has given a guidance of 25% growth in domestic formulations business and a growth of 35-40 % in export business for this year. It has budgeted EBITDA margins at around 18.5% to 18.75%. With raw material costs likely to come down, the company expects significant rise in margins for the year FY11.


At a market cap of Rs 500 crore, the company is valued at a little above its annual turnover of Rs 400 crore. It's stock trades at a price-to-earnings value of 12. These are attractive valuations indicating further scope for appreciation in stock price, as pharma companies are typically valued at over twice their revenues. With company’s growth strategy in place, investors can consider to buy stocks of this mid cap pharma company in long-term investment portfolio.