Indoco Remedies Limited

Type	100% book building	Shares on offer	3 m
Size	Rs 660 m to Rs 735 m (based on the range of Rs 220 to Rs 245 per share)	Face Value	Rs 10 per share
Price	Price band of Rs 220 to Rs 245 per share	Promoters post issue holding	59.5%
Minimum subscription	25 shares	Promoters	Mr. S.G. Kare
Listing	BSE & NSE	Lead Managers	Enam Financial Consultants Pvt. Ltd., IL&FS Investsmart Ltd.
Bid/Issue opens	December 17, 2004	Bid/Issue closes	December 23, 2004

	QIBs	Non-Institutional Investors	Retail Portion
Number of shares	1,500,000	750,000	750,000
% of total size	50%	25%	25%
Minimum Bid/Application size	Rs 50,001	Rs 50,001	25
Maximum Bid/Application size	Not exceeding the issue size	Not exceeding the issue size	Rs 50,000

Indoco Remedies is a tier-II player (on the basis of revenues) in the formulations segment in the domestic market. It was ranked 24th in the ORG retail audit in June 2004 with about 25 m prescriptions. Indoco Remedies has a total workforce of 1,750 employees out of which 1,248 are field staff. The company has four divisions viz., Indoco, spade, warren and radius.

	No of marketing personnel	Revenue (Rs m)	Therapeutic Segment
Indoco	445	923	Old therapeutic segment such an anti infectives, anti fungal etc.
Spade	234	285	Conventional therapeutic segment such an anti cold, and OTC
Warren	207	333	Dental range
Radius	128	44	Lifestyle segment like CVS and anti-diabetese

The company has plans to increase its presence in the exports markets and is working on several products in collaboration with companies in UK.

For Indoco, the major objectives of this public issue are:

• Investment in Indoco Healthcare to set a plant at Baddi, Himachal Pradesh
• Setting up a plant for manufacturing API's (Active Pharmaceutical Ingredients).
• Setting up of R&D center for APIs.
• Repayment of loans borrowed for acquisition of brands and office premises.

Mr. S.G. Kare, the Chairman and Managing Director of the company, is the promoter. He has an experience of about 40 years in the industry and has been involved with Indoco Remedies throughout his career.

The Indian pharma sector is in the transition phase. On the structural front, Indian markets are moving towards a product patent regime, while at the same time, spiraling production and R&D costs have resulted in MNC companies shifting their production bases to low cost countries like India in form of outsourcing. India is one of the favourite destinations for outsourcing of pharmaceutical products. The low cost advantage in capital, raw material and labor front has helped India to achieve this feat.

The major areas of growth that Indian companies are looking at are:

1. Top of the rung companies in India are looking at generics market in US and Europe.


2. The middle level companies are eyeing opportunities in partnering with MNC generics companies to supply bulk drugs and formulations on contract basis.


3. Other players are trying to offer contract manufacturing and contract research facilities to international pharma majors in order to help them reduce their costs.

The prospects of the Indian companies are very bright in the sense that India has the potential to emerge as the preferred destination for players in the US and Europe to outsource their drugs to India. The cost advantages that Indian companies enjoy are:

1. Capital cost: Due to the patent regime favoring domestic pharma industry, India has developed technical capabilities to manufacture plants and equipments for the use in pharma manufacturing. This reduces the capital costs. This advantage varies in the range of 30% to 50%.


2. Labour cost: There is a huge talent pool in India, which is comparatively cheaper than the western countries.


3. Raw material cost: The domestic pharma industry is developed to the extent that all the raw material like chemicals, and intermediaries are manufactured in India, which again leads to cost advantages in favour of Indian manufacturers.

Apart from these cost advantages Indian companies fare well on the quality and scale side. India has largest number of DMF's (Drug Master File) approved outside the US.

• Contract manufacturing opportunity: After establishing itself in the domestic market, the Indoco has plans to increase the contribution of exports. Currently, exports contribute to about 8% of the company's sales. The basic strategy on this front will be to enter into long-term contracts for manufacturing formulations with international pharma companies. The company is augmenting existing facilities as well as setting up new capacities for the same and is working with a US based company on ophthalmic products. While revenues from the same are likely to accrue a year later, the fact that Indoco has already received contracts is commendable.
  
  We believe that the company will benefit from the structural change that is taking place in the industry. While Indoco Remedies is one of those companies, which has entered into the bandwagon of contract manufacturing, we believe that there is enough room for players like Indoco to exist and prosper.
• Integration benefits: Against the earlier practice of sourcing bulk drugs from outside suppliers, the company is currently establishing a bulk drug plant to manufacture its own API's. This move has two advantages i.e. benefits from backward integration and secondly, it enables the company to exercise complete control over the entire production process (read quality). This plant will be further used for outsourcing in the future. The company is planning to file dossiers on its own behalf for the UK and the US markets.
• Strong player in the domestic market: Indoco Remedies is one of the Tier II players in the Indian markets with a strong presence in the segments it operates. With about 25 m prescriptions in FY04, Indoco was ranked 23rd in the prescription audit by ORG, and 24th in retail audit by ORG. The following table gives it's ranking amongst doctors.

Doctors	Ranking
Dentists	1
Ophthalmologists	9
Pediatricians	12
GP (non- MBBS)	20
GP (MBBS)	24
Consulting Physicians	36
Gynecologists	41

• Highly competitive market: Indoco Remedies has been a laggard in exploring exports opportunity. While there are substantial opportunities on the exports side, we believe it takes time for companies to really make a mark over the MNC's for outsourcing their requirement. Indoco Remedies will be one of the key players in the highly competitive market. In the future, as the 'cost' differentiation erodes, realizations are likely to come under pressure, which in turn will hamper the profitability of the company. The pricing power of the company, in this context, is relatively lower.
• Execution risks: The company is planning to set up new manufacturing facilities at a large scale. Also, the company is dependent on foreign partners for continuation of business, which might be affected if company fails to execute the contract or if one or more partners do not extend contracts. The execution risk is higher with the company since it has no substantial international exposure till now.
• Patent Regime: Currently about 92% of the company's revenues are derived from the domestic formulations market. With the new product patent regime coming in the country, the greatest problem that company will face is dearth of new products launches. Thus, it has to rely on existing products for growth in the domestic market and may have to wait for the products going off patent to launch them. This will severely impact the growth of the company.

We have compared Indoco with Unichem Laboratories. Apart from that we have compared it with the major players with somewhat similar business model but at a larger scale.

	Indoco*	Unichem	Nicholas Piramal	Cipla
Price (Rs)	245	209	1,295	291
P/E (x)	10.2	16.3	24.7	28.5
P/Sales (x)	1.4	2.0	3.5	4.7
OPM (%)	19.9	17.8	21.6	18.4
NPM (%)	13.6	12.4	14.4	16.6
Asset T/O	2.8	2.1	2.1	2.8

* Calculations at Rs 245 per share
Note: Calculations are based on FY04 numbers

Indoco Remedies comes at cheaper valuations as compared to its peer in the sector. On P/E basis the stock is at discount to the pharma sector valuation. Even on other valuation parameters like market cap to sales the company is at a discount to the market.

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Disclaimer:
We would like to inform our readers that this IPO note is just a one-time view on the company and in no way implies that there will be regular coverage on the company's performance or any other development. Should we decide to bring the company under research coverage in the future, it will be available exclusively to subscribers of the respective subscription.