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US continues to be under pressure

Alembic Pharma (Alembic) reported Q4FY21 performance largely in line with estimates, though EBITDA margin was higher due to lower operating costs. Revenue in US was below expectation at ~US$63mn due to competitive pressure in sartans and the management indicated the US revenue quarterly base would be between US$55-60mn.

Consolidated revenues grew 6.1% YoY to Rs12.8bn (I-Sec: Rs13.1bn), adjusted profit grew 7.6% YoY to Rs2.5bn (I-Sec: Rs2.0bn) and EBITDA margin dropped 40bps YoY to 26.7% (I-Sec: 24.7%). We remain positive on the long-term outlook considering revival in India growth, focus on complex and niche R&D, and track record of healthy return ratios. However, increased competition in sartans and start of new plants would impact earnings growth in medium term. Downgrade to HOLD with a revised target price of Rs984/share.

* India and US were weak; ROW supports growth:

India business revenues reported a subdued growth of 4.7% YoY. Segment wise, acute declined 28.8%, specialty grew 21.0% and veterinary grew 55.2%. Sequentially, US revenues declined 7.2% to US$63mn due to increased competitive pressure in sartans. Management expects to launch ~10-15 products in FY22 and continue to launch 15- 20 products in the US over the next few years, which would aid growth. RoW business has grown 75.2% YoY on a low base due to cessation of sales caused by serialisation in EU. Sequentially, it grew 36.3% QoQ led by strong order book. API revenue grew strong 38.1% to Rs2.1bn with continued traction in API supplies.

* Lower staff and S,G&A expenses boosted EBITDA:

EBITDA margin at 26.7%, declined 110bps sequentially (-40bps YoY), but it was higher than our estimate of 24.7% due to lower staff and S,G&A expenses which declined 10% and 22% QoQ. We expect these costs to increase in the coming quarters as it reverts to pre-COVID levels. While, R&D expenses at 15.2% grew 390bps QoQ, it was flattish YoY. Additional costs related to new plants would restrict EBITDA margin ~23-24% over FY22E-FY23E.

* Outlook:

We believe near-term (FY22-23E) earnings performance would be impacted by reducing sales of sartans in US, continuous investments in R&D and additional costs (Rs3-4bn annually) when new plants become operational. However, these costs would be absorbed over the medium term as approvals start resulting in increasing capacity utilization. We expect PAT to decline 9.4% CAGR over FY21- FY23E despite growth of 8.2% CAGR in revenue.

* Valuations and risks:

We cut EPS estimates by 3-4% for FY22E-FY23E to factor in lower US sales with declining contribution of sartans. Downgrade the stock to HOLD from ADD with a revised target of Rs984/share (earlier: Rs1,009/share). Key downside risks are: regulatory hurdles and delay in new plant/product approvals. Key upside risks are faster approval of new plants and products

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