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US biz ensures good start to FY20, but India performance concerning
* US generics – the only silver lining: Sales increased 10% YoY to INR9.5b (our estimate: INR9.7b), driven mainly by US generics (+53% YoY to INR3.5b; USD47.3m, +45% CC YoY), partly offset by a subdued performance by India business (-2% YoY; 34% of sales), API (-4% YoY; 18% of sales) and International ex-US business (-14% YoY; 11% of sales).
* Mix benefits percolate to profitability: Gross margin expanded 810bp YoY (+180bp QoQ) to 78.5%, driven by the expanding share of higher-margin products in the US portfolio. EBITDA margin of 23.7% (+620bp YoY) exceeded our estimate of 19.4%, but the pace of expansion trailed that of the gross margin due to increased employee cost (+350bp YoY). EBITDA was up 49% YoY to INR2.3b, exceeding our estimate of INR1.9b. We note that there was a one-time provisioning of INR328m for impairment of Algeria JV. Adjusting for the same, PAT was up 65% YoY to INR1.5b (our estimate: INR1.2b), led by higher other income and a lower tax rate (23% v/s 26% in 1QFY19).
* Con-call takeaways:
(a) Net borrowings stood at INR10b at end-1QFY20.
(b) ALPM received nine ANDA approvals in the quarter, of which it launched three products in the US market.
(c) Company intends to file 20-25 products and launch 15-20 in the US market this year.
(e) While there has been degrowth in India formulations business, management guided for steady growth in the number of both prescribers and prescriptions.
* Valuation view: We raise our FY20/21 EPS estimate by 12%/2% to INR31/INR32 to factor in product-based opportunities in the US market. Accordingly, we revise our target price to INR575 (prior INR565), based on 18x (unchanged) 12M forward earnings. While ALPM has started well in FY20 backed by the US business, weakness in India branded formulation remains a cause for concern. Further, higher operating cost post capex and elevated R&D spend would continue exerting pressure on margins. Also, with limited upside potential from the current levels, we maintain Neutral stance on the stock.
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