Alembic Pharma - Key takeaways from management meet - Anand Rathi

We recently met the management of Alembic Pharma to understand its business model and growth outlook. Post de-merger from Alembic Ltd, Alembic Pharma is a core pharma business, which has led to valuation re-rating, in our view; this could continue, considering 15-20% discount to peers' valuations. We foresee steady growth, led by domestic sales as well as exports, strong free cash flows and high return ratios (20%+).

- Higher focus on chronic segments at home. Chronic segments currently contribute 35% to domestic formulations (53% of revenue), which management expects to rise to 50% by FY15 led by more product launches in the chronic category. Alembic has created strong brands like Azithral, Roxid, Althrocin and Wikoryl with rank of 25, 42, 106 and 134, respectively, which would help it achieve above industry growth rate.

- Capacity expansion to drive export growth. Export formulations (23% of revenue) would grow faster, led by capacity expansion for regulated markets. The company is doubling its existing capacity for a total capex of Rs.1bn. Alembic has also filed two para IVs which may drive incremental upside to its expectation of 20%+ exports growth.

- Strong financials. Post de-merger, Alembic's margins and return ratios have improved with EBITDA margin of ~15% and ROE & ROCE of 30%+ & 20%+ respectively. Further, the company is generating enough free cash flows (~Rs.1bn annually), which would help it bring down D/E of 0.8x and fund future capex.

- Valuation. The stock trades at 10x FY13e and 8x FY14e Bloomberg consensus earnings. Current valuations are still at 15-20% discount to peers like Unichem and Indoco Remedies. Risks: Implementation of the new pharma policy in the domestic market and currency fluctuations.

Source : Equity Bulls

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