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Alembic Pharmaceuticals Ltd>
  • CMP : 726.6 Chg : 1.85 (0.26%)
  • Target : 720.0
  • Target Period : 12-18 Month

04 May 2022

US beat due to one-offs; Aleor provisioning drags profits…

About The Stock

Alembic Pharma operates in international generics (US:31% & ex-US: 15% in FY22), domestic branded (36% in FY22) and API (18% in FY22).

  • Domestic business has 1.5% of market share of IPM with three brands in the top 100. Going ahead, emphasis is on specialty segment with 94% of new launches being specialty products
  • The company has invested ~ ₹ 1800 crore in recent years in facilities geared mainly towards US formulations. As of FY22, it has filed 230 ANDA and has 160 approvals with 105 launches in the US

Alembic reported traction in US, while profitability was affected due to non-recurring expenses at its subsidiary Aleor (now wholly owned)

  • Sales grew 10.6% YoY to ₹ 1415.7 crore, driven by 17.3% YoY growth in US generics to ₹ 557 crore
  • EBITDA was at ₹ 160.1 crore, down 50% YoY with margins at 11.3%. Adjusted EBITDA for Aleor’s impact was ₹ 286 crore with margins at 20%
  • PAT was at ₹ 35.5 crore (down 85.9% YoY). Adjusting for ₹ 145 crore impact of Aleor, adjusted PAT was at ₹ 180.5 crore
What should Investors do?

Alembic’s share price has grown by ~1.2x over the past five years (from ~₹ 592 in May 2017 to ~₹ 725 levels in May 2022).

  • We maintain HOLD rating on the stock as current levels have priced in the challenges due to slower offtake in US base business as well as impending USFDA clearances.
Target Price Valuation

Valued at ₹ 720 i.e. 20x P/E on FY24E EPS of ₹ 35.9

Key Triggers for future price performance
  • Commercialisation of international formulation plants F2 (oncology OSD & injectable), F3 (general injectable & ophthalmic) & F4 (new oral solids)
  • Aleor acquisition and ramp up in dermatology portfolio, further amortisation of Aleor’s intangible assets
  • US performance in the backdrop of price erosion. Resolving USFDA issues for timely new launches
  • Consistency of performances in Indian branded formulations
New Stock Ideas

Apart from Alembic, we like Ajanta Pharma.

  • Ajanta Pharma is a focused player in branded with focus on launching maximum number of first time launches with new drug delivery system
  • BUY with a target price of ₹ 2605

Key Financial Summary

Particulars FY19 FY20 FY21 FY22 5 Year CAGR(FY17-FY22) FY23E FY24E 2 Year CAGR (FY22-FY24E)
Revenues 3,934.7 4,605.7 5,393.1 5,305.8 11.1 5,659.0 6,216.8 8.2
EBITDA 873.6 1,223.0 1,536.1 874.2 7.3 950.1 1,212.3 17.8
EBITDA margins (%) 22.2 26.6 28.5 16.5 - 16.8 19.5 -
Net Profit 592.7 872.8 1,233.9 545.7 6.4 583.8 705.6 13.7
EPS (|) 30.2 44.4 62.8 27.8 - 29.7 35.9 -
PE (x) 24.0 17.2 11.5 26.1 - 24.4 20.2 -
EV to EBITDA (x) 16.7 12.5 9.0 16.3 - 14.8 11.2 -
RoCE (%) 19.6 21.0 25.1 10.6 - 11.2 13.8 -
RoNW (%) 21.8 27.1 24.1 10.4 - 10.3 11.3 -
- - - - - - - - -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

Q4FY22 Results: US one-off drives revenues

  • Revenues grew 10.6% YoY to | 1415.7 crore. Domestic formulations grew 25.4% YoY to | 449 crore due to faster growth in acute segment. US generics grew 17.3% YoY at | 557 crore mainly due to 1) one one-off opportunity, 2) restocking in US and 3) market share gains in some products. International formulations sales de-grew 19.3% YoY at | 188 crore while APIs grew 3.7% YoY to | 222 crore on a high base of Azithromycin. EBITDA margins declined 1370 bps YoY to 11.3%, mainly due to lower gross margins (down 268 bps YoY to 72.7%) and higher other expenditure due to Aleor’s recurring R&D expenses. Adjusted EBITDA margins were at ~ 20%. EBITDA declined 50% YoY to | 160.1 crore. Adjusted EBITDA for Q4FY22 was | 286 crore. PAT de-grew 86% YoY to | 35.5 crore while adjusting for
    | 145 crore impact of Aleor, adjusted PAT was at | 180.5 crore
  • Alembic’s numbers were a significant beat on revenues on the back of better traction in the US driven by one-off opportunity and inventory re-stocking. On the profitability front, however, the numbers were optically muted due non-recurring expenses at its subsidiary Aleor (now wholly owned) trending accelerated amortisation of existing intangible assets and non-recognition of current year R&D expenses as intangible assets. New launches and commercialisation of new facilities earmarked for the US market and consistency of performances in Indian branded formulations are key levers for the company

Q4FY22 earnings conference call highlights

  • US: The management guided that US has formed a new base at ~ US$55 million. One product was launched in US during Q4FY22 with 13 in FY22. Total 105 products launched in US market. The management guided for 15+ launches in FY23. Lacosamide has big competition in US and management does not see meaningful contribution while also guiding for 5-10% price erosion in overall US portfolio on a sequential basis
  • Branded business: Performance in Q4FY22 was led by growth of 57% in acute segment compared to industry growth of 25%. Speciality segment grew 13% compared to industry growth of 7%. Alembic’s 21.5% portfolio is under NLEM. Covid led stocking in Q1FY22 is likely to be a drag on growth in FY23. Growth is estimated to be 70% volume and 30% price. NLEM hike is unlikely to be reflected in Q1FY23 as Alembic has manufactured inventory for about two months. PCPM of | 3 lakh for FY22 with 5,500 MRs
  • Aleor Dermaceuticals: Alembic Pharma acquired the balance 40% stake in Aleor from its JV Partner Orbicular Pharmaceutical
  • Alembic’s Derma portfolio has 30 ANDAs filed till date. Out of this, 18 products are approved (two tentative approvals) and 13 products have been launched in the US market so far. The management further expects to launch around five to eight products in the next 12-18 months
  • Aleor posted revenue of ~ | 36 crore, with R&D expense at | 40-50 crore and plant expense around | 30-40 crore
  • Due to current market conditions in the US generic business, Aleor has carried out a thorough review of its intangible assets (R&D development expenses) and decided to expense out additional | 188 crore in the current quarter/year (| 65 crore higher in Amortisation expense and the balance in various heads of R&D expenses i.e. employee benefits, material cost and other expenses). Had Aleor followed previous year’s practice, the company's consolidated profit before tax would have been higher by | 188 crore and PAT would have been higher by | 145 crore. Another | 175 crore of intangible assets likely to be expensed off in FY23
  • The company recommended a dividend of | 10 per equity share in FY22
  • FY23 guidance: R&D of | 700 crore; capex of | 450 crore
Variance Analysis

  Q4FY22 Q4FY22E Q4FY21 YoY (%) Q3FY22 QoQ(%)   Comments
Revenue 1,415.7 1,216.3 1,280.4 10.6 1,271.7 11.3   Significant beat on revenues on back of better traction in the US driven by one-off opportunity and inventory re-stocking.
Raw Material Expenses 385.8 327.7 314.6 22.6 342.7 12.6    
Gross Margin (%) 72.7 73.1 75.4 -268 bps 73.1 -30 bps   A 5-10% price erosion in overall US portfolio on sequential basis
Employee Expenses 277.2 260.9 237.2 16.8 272.8 1.6    
R&D Expenditure 161.8 152.0 194.9 -17.0 153.6 5.3    
Other Expenditure 430.9 243.3 213.4 101.9 260.9 65.2    
EBITDA 160.1 232.4 320.2 -50.0 241.7 -33.8   Adjusted EBITDA for Aleor's expenses in Q4FY22 was | 286 crore.
EBITDA (%) 11.3 19.1 25.0 -1370 bps 19.0 -770 bps   Adjusted margins for Aleor's expenses in Q4FY22 was 20%
Interest  6.7 4.3 2.6 161.7 4.3 54.7    
Depreciation 123.1 55.9 51.2 140.3 55.9 120.0   Total | 65 crore higher in amortisation expense on count of Aleor
Other Income 10.3 1.3 25.4 -59.6 15.3 -32.7    
PBT before EO & Forex 40.6 173.4 291.9 -86.1 196.7 -79.4    
Forex & EO 0.0 0.0 0.0 NA 0.0 NA    
 PBT  40.6 173.4 291.9 -86.1 196.7 -79.4    
Tax  -1.7 28.6 54.5 -103.2 32.5 -105.3    
PAT before MI 42.3 144.7 237.4 -82.2 164.3 -74.2    
Adjusted Net Profit 35.5 155.9 250.7 -85.9 176.4 -79.9   Adjusting for | 145 crore impact of Aleor, PAT was at | 180.5 crore
Key Metrics                
Domestic Formulation 449.0 433.2 358.0 25.4 488.0 -8.0   YoY growth and beat vis-à-vis I-direct estimates mainly due to faster growth in specialty segment
US 557.0 382.7 475.0 17.3 393.0 41.7   Significant beat mainly due to 1) one one-off opportunity, 2) restocking in US due to change in distributor and 3) market share gains in some products
RoW 188.0 186.4 233.0 -19.3 193.0 -2.6    
APIs 222.0 214.0 214.0 3.7 198.0 12.1   YoY growth muted on a high base of Azithromycin

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