Alembic Pharmaceuticals - Focusing on strengths; addressing the concerns - Asian Markets Securities Pvt. Ltd.

ALP is transforming its India portfolio (56% of total revenues) from pure acute (85% of domestic revenues) to lifestyle segment (50%) by enriching its product basket with an increasing focus on chronic therapies -dermatology, oncology, ophthal and CVS. In international market (29% of total revenues), a good product basket (60 filings, 30 pending approvals including Para-IVs), improving quality of product filing and investments to gradually shift from partnership model to own front end in the US has put the company on an accelerated growth path. High growth in international generics is expected to be supported by the current expansion of its USFDA formulation facility from 2.6bn tbs/ capsules p.a. to 5bn capacity (commissioned in Jan 2014) and a further 2bn capacity expected to come on-stream in 2HFY15. Hence, improvement in product mix both in domestic and international markets would further help the company to improve its margins and earnings profile considerably.

We expect ALP to sustain its premium valuation given continuing strong earnings growth, generic / research upsides and evolving business model with likely consistent margin improvement. With 33% earnings CAGR over FY13-16E, low debt profile and strong return ratios (RoCE's, RoE's at 30%+), we expect the stock to rerate further as valuations catch up with its new and improved revenue/ earnings profile. Initiate the coverage with a Buy rating and a TP of Rs. 330 (valued in-line with midcaps average, at 16x FY16E EPS of Rs. 20.7).

Source : Equity Bulls

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