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Exports drive earnings; weak show in DF segment

Robust pace of launches to remain intact in US generics in FY25

* Alembic Pharma (ALPM) delivered better-than-expected 4QFY24 earnings, led by better gross margin and improved off-take in the API segment. After two consecutive years of weak financial performance, ALPM ended FY24 with 10%/14%/43% YoY growth in sales/EBIDTA/PAT to INR62b/INR9.3b/ INR6b.

* We slightly raise our earnings estimates by 3%/2% for FY25/FY26, factoring in a healthy pace of launches in US generics and robust execution in the animal health segment, partially offset by higher R&D spending. We value ALPM at 23x 12M forward earnings to arrive at a TP of INR960.

* We expect a 13% earnings CAGR over FY24-26, led by a 10% sales CAGR in both domestic formulation (DF)/US segments and improved operating leverage (160bp margin expansion over FY24-26). ALPM continues to build a product pipeline in injectables, ophthalmics and inhalation segments for the US market with a sound compliance track record. ALPM focuses on improving MR productivity in the DF segment. We believe the current valuation adequately factors in the upside in earnings. Hence, we maintain our Neutral rating on the stock.

Product mix benefit offset by higher employee expense in 4Q

* Sales grew 8% YoY to INR15.1b (our est. INR15.4b). DF sales rose 3% YoY to INR5b (35% of sales). Excluding US generics, exports grew 5% YoY to INR2.6b (17% of sales). US generics sales increased by 20% YoY to INR4.2b (USD51m; 28% of sales). API sales grew 7% YoY to INR1.2b (20% of sales).

* Gross margin expanded 580bp YoY to 75% due to a superior product mix and lower RM costs.

* EBITDA margin expanded by 130bp YoY to 17.1% (our est. 15.9%), as a favorable product mix was offset by higher employee costs (+530bp as % of sales). Other expenses decreased by 90bp YoY as % of sales.

* Consequently, EBITDA grew 16.5% YoY to INR2.6b (our est. INR2.5b).

* Adj. PAT grew 73% YoY to INR1.8b (our est. INR1.3b) due to lower tax expenses and interest expenses.

* FY24 revenue/EBITDA/PAT grew 10%/14%/44% YoY to INR62b/INR9.3b/ INR6.2b.

Highlights from the management commentary

* ALPM expects to sustain gross margin at 70%+ going forward.

* It targets R&D spending of INR5.5b-6b in FY25 (vs. INR4.8b in FY24), mainly for developing injectable, ophthalmic, oncology and inhalation. ALPM plans to launch 25 ANDAs in the US generics segment in FY25.

* The company witnessed high single-digit to low double digit price erosion in US generics base business.

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