Alembic Pharmaceuticals Ltd. share price target

Alembic Pharma (ALPM) has underperformed the midcap and Sensex indices since 2015 due to subdued earnings. This cycle should reverse in the next 3-4 years.

ALPM's secret sauce remains its ability to scale with judicious capital allocation and ALPM IN 8.0 -1.2 -7.8 Daily Vol. (3M Avg.) execution prowess to capitalize on shortages and limited competition products. NIFTY st 3.5 1.1 14.4 *as on 1 November 2019; Source: Bloomberg, MNCL Research Moreover, domestic business, presently undergoing a strategic reset, should revert...

Revenues and margins outperform in US due to supply shortages

In Q1FY20, total revenues of Alembic Pharma increased by 10% YoY to Rs 9.5 bn (below our estimates Rs 9.8 bn).

1QFY20's sharp improvement in operating performance was driven by short-term opportunities in the US, which will not persist. Sustainable growth relies upon approvals for lucrative onco-injectables and derma products, which will reflect in revenues only by FY22E. Meanwhile in India, the co is consistently underperforming the broader market. Hence, we lack visibility on revenue growth above 13% CAGR over FY19-21E. Additionally, incremental stress on margins (-100bps over FY19-21E) will restrict PAT CAGR to 11%. Valuations, too, remain unsupportive at 21.1/16.8x FY20/21E P/E. We maintain NEUTRAL on ALPM following a miss on our revenue estimates, while profitability was higher than expectation. Growth across segments was muted, barring the US. Our TP is unchanged at Rs 570 (18x FY21E EPS).

Specialty contribution in the domestic branded space increased to 63% in FY19 from 54% in FY14. With ~3900 MRs at its disposal, the company enjoys a wide reach among doctors. We expect the specialty segment to remain a key driver for domestic market on the back of aggressive product launches and constant addition of new speciality segments & sub-segments....

Alembic Pharma's (Alembic) Q4FY19 result came broadly in line with expectations. The revenue/EBIDTA/PAT grew by 9%/3%/32% in 4QFY19. While the valsartan opportunity arising out of shortage in US continued to flow in this quarter, a muted performance in domestic formulation business (-1.3% YoY) and sequential decline in RoW business were key disappointments. Going forward, the growth in international business is likely to moderate in FY20 due to high base in FY19 and opportunities in key products (sartan based formulation and API) may reduce. Alembic spent nearly Rs18bn of capex over FY17-19 to set up advance facilities for manufacturing specialty products. The Capex...

The shortage in Sartans has moderated in the US and the co is not expected to gain from this in FY20E. Sustainable growth relies upon new launches in the US. We believe the benefits of new launches would be back-ended (post FY21E), stretching the payback period on the US$ 450mn spent by Alembic over the last ~3 years. Meanwhile, with a majority of the new plants nearing commissioning, the incremental cost would remain unabsorbed and dent profitability as revenue growth will be delayed. The valuations seem unfavorable at current levels of 22/18x FY20/21E P/E. Maintain Neutral. We maintain NEUTRAL on ALPM following a miss on our estimates. Our TP is revised at Rs 570/sh (18x FY21E EPS) following a 4% cut in FY21 EPS to account for higher R&D;.

Specialty contribution in the domestic branded space increased to 63% in FY19 from 54% in FY14. With 3800+ MRs at its disposal, the company enjoys a wide reach among doctors. We expect the speciality segment to grow at 15-20% CAGR in FY19-21E on the back of aggressive product launches and constant addition of new speciality segments & sub-segments....

Operationally a mixed bag; concerns loom over rising opex Strong API traction offset by India formulations weakness: Sales grew by a moderate 8.6% YoY to INR9.2b (in-line), with strong API sales (+16% YoY; 24% of sales) offset by the muted performances by the US (+8% YoY; 33% of sales) and India formulations (-1% YoY; 33% of sales) businesses. The contrasting gross and EBITDA margin movements: Gross margin improved 753bp YoY (+102bp QoQ) to 76.6%, driven by a better product mix. However, the EBITDA margin shrank 100bp YoY (-460bp QoQ) to 19.2% (our estimate:...