Indoco Remedies

 

Fresh Growth Opportunities & Recent Contracts May Drive Stock Valuations Higher

 

INDOCO Remedies, a small-sized pharma company, has been witnessing a lot of positive action in its stock lately. The stock price has tripled in the past one year and is inching towards its all-time high of Rs 440 (made in January 2005). Despite the current rally in its stock price, it has not undergone any re-rating.

   The company, which earns two-thirds of its revenues from domestic market, is looking at growth opportunities in the regulated and semi-regulated markets. It supplies generic products and active pharmaceutical ingredients (APIs) to the regulated markets of US and Europe. After a poor financial performance for the quarters ended June 2008 to June 2009, the company has registered improvement in performance for the preceding two quarters. A robust growth in domestic formulation business largely contributed to the improvement. 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.

   Indoco is looking at contract manufacturing opportunities for overseas markets. It recently signed a long-term deal with South-African drug maker Aspen Pharma for outlicensing its eye care products for sale in over 30 emerging markets. Indoco will earn milestone payments as well as sale proceeds from supplying the drugs to Aspen. It has earlier won manufacturing contracts for supplying products in Germany, New Zealand and Kenya. These contracts are likely to result in significant upside in revenues from the current fiscal.

   At a market cap of Rs 500 crore, the company is valued at slightly more than its annual revenues of Rs 380 crore. It is trading at a price- toearnings (P/E)multiple of 13. These are fair valuations for the company considering its past track record of slow growth. However, given the fresh growth opportunities and recently signed contract manufacturing deals, the company's stock has potential for further appreciation. Pharma companies posting growth are typically valued at twice their revenues. By continuing on its growth trajectory, Indoco may also command similar valuation.