Alembic Pharmaceuticals Ltd - Q3FY14 Update, CMP Rs.222, Rating change to BUY, increased Target of Rs.266 - Sushil Finance

Q3FY14 RESULT UPDATE
ALEMBIC PHARMACEUTICALS LTD (APL) - CMP Rs.222, Rating change to BUY, increased Target of Rs.266

Alembic Pharmaceuticals Limited (APL) has been consistently surprising us positively & yet again has reported exceptional set of numbers on a quarterly basis exceeding our estimates. APL recorded a revenue growth of 31.5% in Q3FY14. However, with the expansion of 230 bps YoY & 200 bps QoQ on the margins front, APL managed to record a strong PAT growth of 36.6% in Q3FY14. The following are the key highlights of the results:

Key Highlights of Q3FY14

- Revenues grew by 31.5% YoY from Rs.3693 mn in Q3FY13 to Rs.4857 mn in Q3FY14. The company registered a growth of 6.3% in its domestic business whereas Export business registered a phenomenal growth of 82.7%.

- Domestic formulations growth of 12.9% attributable to 22% growth in chronic portfolio (52% of domestic branded). Acute segment de-grew 2% with 9% growth in cough & cold whereas anti-infective de-grew by 6% due to NLEM impact. APL has accepted to increase trade margins to dealers from Jan14. It is also looking at expanding its field force by 350-500 people in the next 12 months with focus on strategically realigning its CVS & respiratory portfolio and entering new segments.

- Export formulations business registered a growth of 96.2% to Rs.1493 mn on the back of a 112% growth witnessed in its international generics business & 31.3% growth in its branded formulations business. International generics grew on the back of clearance of back log of orders with the expanded capacity. However, this high growth number would taper going forward on the back of increasing base. Current capacity utilization at 55-60%. APL is also looking at start creating its own front end presence in US by end of FY15E. APL is awaiting approvals in markets such as SE Asia, CIS & East African markets. The company filed for 1 new ANDA with 1 approval received in Q3FY14 taking the total filings at 60 (31 approved and 18 launched). APL expects to launch 8-10 products in the US market on a yearly basis from FY15E. Pristiq (Desvenlafaxine) ramp up still slow. However, ramp up is expected going ahead with repeat orders coming from grass root levels. The company also witnessed a growth of 52.4% in its export API business.

- Operating profit reported a growth of 47.1% from Rs.695 mn in Q3FY13 to Rs.1022 mn in Q3FY14. The company recorded a forex gain to the tune of Rs. 20 mn in Q3FY14. Q3FY14 Margins came in at 21.1% vs 18.8% in Q3FY13 led by strong domestic chronic growth (22% led by Ophthalmology – 47%, Cardio - 34%, Gynaecology - 30% etc.), product mix change (Anti infectives share reduced to 35% vs 41% in Q3FY13) & strong growth in international generics business & better plant utilization). The management is confident of maintaining EBITDA margins at 20% in FY15E.

- Net Profit grew by 36.6% from Rs.483 mn to Rs.659 mn in Q3FY14 partially offset by higher tax rate during the quarter.

OUTLOOK & VALUATION

On the domestic formulations front, the company is consistently recording strong growth backed by increasing contribution from its chronic portfolio. On the international front, increased R&D spend, increased product launches in the US market going ahead coupled with increasing exposure to other markets is expected to pay rich dividends to the company. We are thereby upgrading our estimates factoring in till date exponential growth in international generics business, consistent growth with greater focus on chronic space in the domestic business & earlier than expected improvement in EBIDTA margin. We are also introducing & rolling forward our TP to FY16E numbers. We believe margins will expand by ~70 bps in FY15E however with the company looking at creating a front end presence in FY16E; we are factoring in a cost pressure in FY16E numbers. Even though we expect the high growth numbers in the international business to taper down on the back of higher base kicking in, we continue to have a bullish stance on the stock citing consistent performance, strong return ratios, robust cash flows (CFO - FY15E: Rs.2716 mn, FY16E: Rs.3364 mn), low debt profile and expanding margins going forward. We recommend investors to BUY the stock on dips with a TP to Rs.266 based on 14x FY16E EPS of Rs.19.

Source : Equity Bulls

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