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US challenges offset domestic performance…

About the stock: Alembic Pharma operates in international generics (US:27% & ExUS:15% in H1FY22), domestic branded (37% in H1FY22) and API (20% in H1FY22).

* Domestic business has 1.5% of market share of IPM with three brands in the top 100. Going ahead, emphasis is on specialty segment with 94% of new launches being specialty products

* The company has invested ~ | 1800 crore in recent years in facilities geared mainly towards US formulations. As of Q2FY22, it has filed 214 ANDA and has 150 approvals with 98 launches in the US

Q2FY22 Results: Alembic reported mixed Q2FY22 results.

* Sales declined 11.3% YoY to | 1292.3 crore

* EBITDA was at | 257.2 crore, down 42% YoY with margins at 19.9%

* Consequent PAT was at | 169.3 crore (down 49.2% YoY)

What should investors do? Alembic’s share price has grown by ~1.4x over the past five years (from ~| 573 in June 2016 to ~| 793 levels in November 2021).

* We maintain our HOLD rating on the stock due to challenging business environment in the US business as well as impending USFDA clearances.

Target Price and Valuation: We value Alembic at | 790 i.e. 20x P/E on FY23E EPS

Key triggers for future price performance:

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

* Maintains aggressive guidance for capex (| 1000 crore for FY22, FY23) and R&D 12.5-13% of revenues for FY22

* Easing of pricing pressure in US and resolving USFDA issues for timely new launches

* Consistency of performances in Indian branded formulations and diverse portfolio with steady pipeline of speciality medicinesv

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

* Ajanta Pharma is a focused player in branded, which constitutes ~70% of overall sales, which are spread across geographies including India. Focus is on launching maximum number of first time launches with new drug delivery system (NDDS)

* BUY with a target price of | 2500

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