Alembic Pharmaceuticals - India recovers, US sees pressure - ICICI Securities

Alembic Pharma (Alembic) reported lower than estimated performance in Q3FY21 with inline margins supported by lower R&D expenses. Revenue from exports, particularly US was below expectation due to competitive pressure in sartans. However, India business delivered healthy growth of 13.6% with growth pick up across specialty therapies. Consolidated revenues grew 8.7% YoY to Rs13.1bn (I-Sec: Rs14.4bn), adjusted profit grew 24.9% YoY to Rs2.9bn (I-Sec: Rs2.6bn) and EBITDA margin improved 90bps YoY to 27.8% (I-Sec: 28.0%). We remain positive on the long-term outlook considering revival in India growth, focus on complex and niche R&D, and track record of healthy return ratios. However, increased competition in sartans and start of new plants would impact earnings growth in medium term. Retain ADD with a revised target price of Rs1,110/share.

- India growth recovers; weak exports impacts revenue growth: India business revenues recovered well with a growth of 13.6% YoY. Segment wise, acute grew 4.4%, specialty grew 16.6% and veterinary grew 35.1%. Sequentially, US revenues declined 10.2% to US$70mn despite launching seven new products during the quarter and 13 during 9MFY21. This was mainly due to increased competitive pressure in sartans. Management expects to launch ~5 products in Q4FY21 and continue to launch 15-20 products in the US over the next few years, which would aid growth. RoW business grew 14.8% YoY on a low base due to cessation of sales caused by serialisation in EU but it declined 13.2% QoQ. API revenue grew strong 20.9% to Rs2.1bn with continued traction in API supplies.

- EBITDA margin supported by lower R&D: EBITDA margin at 27.8%, declined 260bps sequentially, with 90bps fall in gross margin and higher staff and S,G&A expenses. However, R&D expenses at 10.2% declined 250bps QoQ and 190bps YoY cushioning EBITDA margin to some extent. Most of the expenses have reverted to pre-COVID levels in this quarter and we expect R&D spend to increase in the coming quarters as company is investing in complex and niche products. Additional costs related to new plants would restrict EBITDA margin ~24% over FY22E-FY23E.

- Outlook: We believe near-term (FY22-23E) earnings performance would be impacted by reducing sales of sartans in US, continuous investments in R&D and additional costs (Rs4-5bn annually) when new plants become operational. However, these costs would be absorbed over the medium term as approvals start and capacity utilisation. We expect 14.0% revenue, 9.8% EBITDA and 5.1% EPS CAGR over FY20-FY23E.

- Valuations and risks: We cut EPS estimates by 0-4% for FY21E-FY23E to factor in lower US sales with declining contribution of sartans. Maintain our ADD rating with a revised target price of Rs1,110/share based on 22xSep'22E EPS (earlier: Rs1,151). Key downside risks are: regulatory hurdles and delay in new plant/product approvals.

Shares of ALEMBIC PHARMACEUTICALS LTD. was last trading in BSE at Rs.1029.9 as compared to the previous close of Rs. 1070.1. The total number of shares traded during the day was 45522 in over 3284 trades.

The stock hit an intraday high of Rs. 1090.75 and intraday low of 1025. The net turnover during the day was Rs. 48028457.

Source : Equity Bulls

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