Alembic Pharma - Q2FY14 Update - CMP Rs.180, Rating Changed to Accumulate, Increased Target of Rs.204 - Sushil Finance

Alembic Pharmaceuticals Limited (APL) has reported exceptional set of numbers on a quarterly basis exceeding our margin & bottom line estimates. APL recorded a revenue growth of 19.5% in Q2FY14. However, with the expansion of 316 bps YoY & 233 bps QoQ on the margins front, APL managed to record a strong PAT growth of 45.1% in Q2FY14. The following are the key highlights of the results:

Key Highlights of Q2FY14

- Revenues grew by 19.5% YoY from Rs. 4069 mn in Q2FY13 to Rs. 4864 mn in Q2FY14. The company registered a de-growth ~1% in its domestic business whereas Export business registered a phenomenal growth of 68.4%.

- Domestic formulation business registered a growth of 8.3% from Rs. 2749 mn in Q2FY13 to Rs. 2539 mn in Q2FY14 whereas domestic APIs witnessed a YoY de-growth of 71.1%. APL's specialty segment (chronic segment) registered a healthy growth of 24% whereas acute business remained stagnant with 11% growth in Cough and Cold and de-growth of 3% in Anti infectives. The share of APL's Speciality segment to its total domestic formulations went up from 46% in Q2FY13 to 52% in Q2FY14. The company launched 7-8 products during the quarter. According to the management, the impact of the implementation of NLEM is already reflecting in the numbers (EBIDTA could have been higher by Rs. 50-60 mn if not for NLEM).

- Export formulations business registered a growth of 114.5% to Rs. 1280 mn on the back of a 123% growth witnessed in its international generics business (on the back of clearance of back log of orders with the expanded capacity coming on-stream) & 65.4% growth in its branded formulations business. Q2FY14 Rs/$ realization was at Rs. 62.5 vs Rs. 54 in Q2FY13. Panelav expansion – II phase is also completed. The company filed for 2 new ANDA with 1 approval received in Q2FY14 taking the total filings at 59 (30 approved and 16 launched). APL expects to launch 3-4 products in the US market in Q3FY14. Pristiq (Desvenlafaxine) ramp up was slower than expected this quarter. 3 players in the market as of now - Teva, Osmotica & APL. Current market share of APL is ~1%. The company also witnessed a growth of 18.1% in its export API business.

- Operating profit reported a growth of 43.3% from Rs. 647 mn in Q2FY13 to Rs. 927 mn in Q2FY14 majorly on the back of decline in material cost. The company recorded a forex loss to the tune of Rs. 40 mn in Q2FY14. Q2FY14 Margins came in at 19.1% vs 15.9% in Q2FY13 led by strong International generics growth, domestic chronic growth (24% led by Gastro - 16%, Cardio - 38%, Gynaecology - 29% etc.) & product mix change (Anti infectives share reduced to 36% vs 42% in Q2FY13).

- Net Profit grew by 45.1% from Rs. 425 mn to Rs. 616 mn in Q2FY14.

- APL has maintained its domestic growth guidance at 13-15% & API growth guidance at 10-12% for FY14E whereas International Generics growth is guided at 30-35% CAGR over the next 2 years.

OUTLOOK & VALUATION

On the domestic formulations front, the company is already recording strong growth backed by increasing contribution from its chronic portfolio. On the international generics front, with the completion of its expanded capacity leading to increased product launches going ahead + Desvenlafaxine ramp up expected going forward, the management is confident of recording 30-35% CAGR over FY13-15E. With greater focus on chronic segments & faster ramp-up from the regulated markets with the expanded facility coming on-stream coupled with expanding return ratios, robust cash flows (CFO - FY14E: Rs. 2164 mn, FY15E: Rs. 2585 mn), reducing debt profile and expanding margins going forward, we believe APL is still trading significantly cheaper vis-à-vis its peers and further re-rating is due on the counter. We have thereby upgraded our estimates factoring in higher growth in international generics business, increasing chronic portfolio in the domestic space & increased EBIDTA margin (Higher Rs/$ realizations). We recommend investors to ACCUMULATE the stock on dips with a TP to Rs. 204 based on 15x FY15E EPS of Rs. 13.6 & reiterate our view of it continuing to be a strong re-rating candidate.

Source : Equity Bulls

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