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India shines; US struggles

Alembic Pharma (Alembic) reported Q2FY22 performance was broadly in line with our estimates. Revenue in US was below expectation at ~US$47mn due to continuous pricing pressure mainly in sartans & Theophylline. Revenues declined 11.3% YoY to Rs12.9bn, adjusted profit declined 49.2% YoY to Rs1.7bn and EBITDA margin dropped to 19.9% (-1,050bps YoY and +210bps QoQ). We believe near term outlook remains muted due to significant erosion in US sales which would also weigh on margin. Further, inspections at new plants have been delayed due to COVID-19 which in turn would delay the launches of complex generics. Recent correction already captures the near-term headwinds and has made valuations fair, hence we upgrade to HOLD from REDUCE with a revised target price of Rs818/share.

* Business review: India business revenues reported a strong growth of 22.7% YoY. Acute, specialty and veterinary grew 26.6%, 19.5% and 23.1% YoY respectively. Exazithromycin domestic revenues grew 35% YoY. Sequentially, US revenues declined 5.7% to US$47mn due to pricing pressure mainly in sartans and Theophylline. Management expects to launch ~15 products in FY22 which would help offset some of the pricing pressure. RoW business remained flat YoY while API declined 9.1% YoY. EBITDA margin at 19.9%, declined 1,050bps YoY, however it expanded 210bps QoQ mainly due to change in mix. Gross margin improved 320bps QoQ to 74.2% despite price erosion in key US products. Additional costs related to new plants would restrict EBITDA margin ~20-21% in medium term.

* Key concall highlights: 1) Received 10 observations post re-inspection of Karkhadi injectable Facility (F-3); the inspection was done for compliance and 3 products 2) Management expects delay in injectable approvals due to these observations 3) expects 20-25 filings and ~15 launches in the US annually 4) cost rationalisations in staff and S,G&A would be visible from H2FY22.

* Outlook: We believe near-term (FY22E-FY23E) earnings performance would be impacted by price erosion in sartans & Theophylline 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 with product approvals and launches resulting in increasing capacity utilisation. We expect PAT to decline 17.4% CAGR over FY21-FY23E.

* Valuations and risks: We marginally tweak our estimates to factor in quarterly performance. However, post recent correction that has made valuations fair, we upgrade to HOLD from REDUCE with a revised target of Rs818/share (earlier: Rs824/share). Key upside risks are: faster approval of new plants and high value launches in US. Key downside risks: competition in US and regulatory hurdles.

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