While many companies rode the recent stock market wave to touch new horizons, there were, however , a few which were side-stepped in the rally.
While many companies rode the recent stock market wave to touch new horizons, there were, however , a few which were side-stepped in the rally. Mid-cap pharmaceutical, software and auto-ancillary companies have been largely ignored in the rise.
Indoco Remedies is one such company in the mid-cap pharmaceutical space that seems not to have participated in the market rally. Pegged in the same space as JB Chemicals, Unichem and FDC, Indoco, these are the companies that have been completely ignored in the rally. Almost all these companies are trading at single digit PEs for 2008 earnings.
Background
Indoco came out with its IPO January 2005 at a price of Rs 245 (premium of Rs 235). The Mumbai-based company, which ranks 33rd in the Retail Audit and 21st in the Prescription Audit, enjoys a strong presence in the domestic formulation market. The company is strong in dental, ophthalmic, respiratory, anti-allergy, anti-infective, nutrition, analgesics therapeutic segments.
Current scenario
Indoco is largely a domestic formulations company, with nearly three-fourth of its turnover coming from this segment. Exports account for 20% of sales while API is nearly 6%. Indoco’s domestic business is divided into five divisions. The company has a sales force of around 1,400 people.
Restructuring:
As a part of its restructuring, the company has decided to bring all its manufacturing facility under one roof. As a move toward backward integration, the company acquired an existing API manufacturing company — La Nova Chem.
Indoco later upgraded this facility to international standards. Currently, operational at around 50% of its capacity, this facility can meet the captive demand of Indoco as well as contribute around Rs 25-30 crore over the next two years. The company intends to merge two group companies in the similar field and having a manufacturing unit in Baddi, into itself. These measures will augur well in improving the image of the company.
Growth drivers:
Aditi Kare Panandikar, director, business development and HRD, expects exports to contribute more to the topline. Currently, exports, which is growing at a rate of 54%, contribute Rs 70 crore to the company’s topline.
The company has recently announced a partnership with Amneal Corporation, USA for 10 ophthalmic formulations to be marketed in the US. Another segment that can really push the company into a different space is its work with innovator companies. Indoco, currently, is working on six such projects.
Valuations:
Management of the company is confident of touching a turnover of Rs 1,000 crore by 2010, either organically or inorganically. The current turnover of the company is Rs 326 crore, thus an almost three-fold topline jump is envisaged by the management in three years. The company might be able to achieve this numbers through inorganic growth, unless there is a big contract manufacturing order, which it is confident of.
At a price of Rs 285, the company currently trades at a PE of eight times FY-07 numbers. Based on a very conservative growth of 20%, the company is likely to post an EPS of 47 in 2009, which makes it very attractively priced at 6.06 times. And if the management’s target of Rs 1,000 crore topline is achieved, a conservative EPS works out to 80, making it a 3.5 PE stock on 2010 numbers.
Under any circumstances, we think that the management has got it act right by merging its group companies in the listed entities as well as by having a robust growth strategy. Investors can add this stock to their portfolio with a two-year horizon to get at least a 75% return.
Disclaimer: The author doesn’t hold any shares in the company
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