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Numbers dwindle; US traction key for margins, return ratios

About the stock: Alembic Pharma operates in international generics (US:31% & exUS: 15% in FY22), domestic branded (36% in FY22) and API (18% in FY22).

* Domestic business has 1.5% of market share of IPM with three brands in the top 300. Going ahead, emphasis is on the specialty segment

* The company has invested ~ | 1800 crore in recent years in facilities geared mainly towards US formulations. As of Q1FY23, it has filed 237 ANDA and has 167 approvals with 110 launches in the US

Q1FY23 Results: Alembic’s numbers were a miss on revenues led by lower traction in US due to price erosion across the portfolio and high stocking in Q4FY22

* Sales de-grew 5% YoY to | 1262 crore

* EBITDA was at | 15 crore, down 94% YoY with margins at 1.2%. Adjusted EBITDA for Aleor’s impact was | 115 crore with margins at 9.1%

* Adjusting for | 115 crore impact of Aleor, adjusted PAT was at | 36 crore

What should investors do: Alembic’s share price has grown by ~1.3x over the past five years (from ~| 530 in August 2017 to ~| 680 levels in August 2022).

* Downgraded from HOLD to REDUCE rating on the stock amid 1) poor offtake in US amid persisting price erosion, 2) impending USFDA clearances of three plants and 3) likelihood of ~ | 350 crore expenses post commercialisation of F-2, F-3 and F-4 plants affecting profitability

Target Price and Valuation: Valued at | 590 i.e. 22x P/E on FY24E EPS of | 26.9

Key triggers for future price performance:

* Commercialisation of international formulation plants F2 (oncology injectable), F3 (general injectable & ophthalmic) & F4 (general oral solids)

* Aleor acquisition and ramp up in dermatology portfolio, further amortisation of Aleor’s intangible assets

* US performance in backdrop of price erosion. Resolving USFDA issues for timely new launches to improve margins amid additional expense of ~| 350 is expected to be incurred on commercialisation of F2, F3 and F4 facility

* Consistency of performances in Indian branded formulations

Alternate Stock Idea: Apart from Alembic, we like Ajanta Pharma.

* Ajanta Pharma is a focused player in branded with focus on launching maximum number of first time launches with new drug delivery system

* BUY with a target price of | 1495

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