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Non-US, API drive earnings

COVID-led compliance delay at new sites moderates US outlook

* Alembic Pharma (ALPM)’s 4QFY21 operational performance was marginally below estimates, largely due to lower traction in US / Domestic Formulation (DF) sales. ALPM awaits feedback from the USFDA on the resolution of observations at the recently inspected injectables Unit (F3).

* We tweak our estimates for FY22/FY23, factoring in a) a slowdown in US sales and b) lower expensing of operational cost related to newer facilities.

* We continue to value ALPM at 19x 12M forward earnings to arrive at TP of INR1,070. We maintain Neutral on a limited upside from current levels.

Inferior product mix offset by lower opex

* ALPM’s 4QFY21 revenues were up 6.1% YoY to INR12.8b (est. INR13.3b), led by 77% YoY growth in Non-US export sales (INR2.3b; 18% of sales) and 38% YoY growth in API sales (INR2.1b; 17% of sales).

* DF sales grew a moderate 5% YoY to INR3.6b (28% of sales), while US sales declined 18% YoY to INR4.8b (37% of sales).

* The gross margin contracted 270bps YoY to 75.4% due to a change in the sales mix. However, the EBITDA margin contracted at a lower rate of 40bp YoY to 26.7% (est. 26.5%), largely due to lower opex (employee cost / other expenses down 200bp/20bp as a percentage of sales).

* EBITDA was up 4.3% YoY to INR3.4b (est. INR3.5b).

* Adj. PAT grew at a higher rate of 7.4% YoY to INR2.5b (est. INR2.3b), largely owing to a lower tax rate of 18.7% (v/s 23.4% in 4QFY20).

* FY21 sales/EBITDA/PAT grew 17%/27%/36% YoY to INR54b/INR15.6b/INR11.8b.

Highlights from management commentary

* ALPM aims to launch 10+ ANDAs in the US in FY22.

* It expects 10–15% YoY growth in Non-US export sales in FY22.

* ALPM expects API business growth to moderate due to the reduced offtake of Azithromycin and increased competition from Chinese suppliers.

* It expects the overall gross margin to sustain at 75% over the medium term.

* ALPM maintained the EPS guidance of INR50 for FY22.

* Gross borrowings stood at INR5b; net borrowings were INR2b at end-FY21.

* ALPM indicated capex of INR5–7b for FY22.

Valuation and view

* We tweak our earnings estimates for FY22/FY23, factoring in a) ongoing price erosion in the US base business, b) gradual improvement in the DF outlook on account of the extended impact of COVID, c) the deferment of commercialization at newer facilities (due to COVID-related delay in USFDA inspections), and d) lower expensing of operational cost related to injectables facilities.

* We expect steady earnings over FY21–23 on the high base of FY21. We value ALPM at 19x 12M forward earnings to arrive at Target Price of INR1,070.

* While the significant investment is largely complete, a) successful USFDA compliance at injectables / oncology injectables / ophthalmic sites and b) subsequent product approvals are the key for earnings growth revival going forward. We maintain Neutral on a limited upside from current levels.

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