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US inflection unlikely soon; ADD retained

Result Synopsis

Alembic Pharma managed to report a steady quarter as fear of a reversal in US on back of one-off opportunity in Q2 did not materialize. India continued with its healthy run and clocked ~11.5% growth YoY. OPM maintained their recovery from Q2 and included ~50bps worth of Aleor R&D write-off which is nearing its guided end. Management reiterated Rs2bn of operating cost hit to expenses as onco and general injectable plants come on stream in Q4 and Q1 FY24 respectively, in addition to ~Rs1bn of depreciation impact. Domestic business appears to sustain its trajectory and barring gastro, most of the therapeutic segments have fared well and improved performance is likely to persist. US business outlook is the key pivot around which margin would revolve over next 12 months; broadly, we expect US$220mn of sales (vs US$200mn in FY23) in FY24 (previous US$240-250mn). Commentary around 10% price erosion is a relief in our view as H1 had witnessed even higher pricing pressure and now leading to hope of a bottoming out of price erosion. Our FY23 EPS gets a raise as revenue performance has been better than expected leading to higher FY23 sales (approx. Rs1bn higher than earlier estimate) translating into a jump in PAT; FY24 estimate undergo marginal compression. Retain ADD as believe inflection point may be some distance away as juggling is underway between US growth and opex hit over next 6 months. We trim PE multiple from 25x to 22x as US business is unlikely to take off at least in H1 FY24 as earlier envisaged with FY25 having a higher possibility of an inflection. Our revised TP is Rs680 (earlier Rs830) based on 22x FY24 EPS.

Result Highlights

Revenue ahead of estimate as India +12% and US growth QoQ drive decent topline Margins continue to recover after Q1 disaster as gross margin stable and growth resumes Aleor R&D write off accounted for 50bps of margin compression while margin recovery was offset by higher ETR leading to flat PAT QoQ

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