Alembic Pharma - Changing Tide - Motilal Oswal

Stepping into next phase of high growth

Started as a tincture and alcohol maker in 1907, Alembic Pharma Ltd (ALPM) is one of the oldest pharmaceutical companies in India. For a major part of the last decade, ALPM lagged the strong industry growth due to high dependence on the slow growing acute therapies in India, insignificant presence in international markets, dilution of management's time between varied businesses and high leverage. However, we see the tides changing for ALPM as the new management is investing in right geographies and markets to build a sustainable business model. We initiate coverage with a Buy rating and see potential upside of 40%.

Getting more organized under new management

Since mid 2007, the day-to-day operations of the company have been taken over by the next generation of entrepreneurs who have incorporated structural changes in the organization. They have strengthened their field force in India, increased ANDA filings in US, ironed out inefficiencies in the organization and hired personnel in important areas of R&D and marketing. These changes have led to reduction in cash conversion cycle by 50 days, near-zero net-debt/equity position and improvement in operational performance witnessed over the last 8 quarters. We believe ALPM has a focused management team in place and has stepped into its next phase of high growth.

Ingredients in place; large room for growth

ALPM has filed 60 ANDAs with majority of them backed by own DMFs, providing greater cost control compared to some of its larger peers. The company is awaiting approval for more than half of its ANDA filings. We note that ALPM has 45% of its ANDA filings with Para IV certification, which is significantly more than most of its peers. We believe US generics could grow more than 5x to USD125m by FY16E. In India, ALPM has increased its presence in the fast-growing specialty therapies which contribute 45% to its business. We believe these structural changes would enable ALPM to grow its revenue by 21% CAGR over FY14E-16E.

Improving business profile; re- rating candidate

The business mix at ALPM is likely to improve further, with higher contribution from US generics and specialty therapies in India, while low-margin APIs and acute therapies may continue to face slowdown. We expected transition to result in 280bp EBITDA margin expansion and 35% earnings CAGR over FY14E-16E. With majority of the capex behind them and high free cash generation visibility, we expect ALPM to be net-debt free by FY16E. Return ratios are expected to remain above 40%. Our EPS estimates for FY15E/16E are 10%/14% above Bloomberg consensus estimate. With improving business profile and strong earnings growth, we believe ALPM is a potential re-rating candidate. Initiate coverage with a Buy.

Source : Equity Bulls

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