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API/India trim earnings growth

Making efforts to revive performance across segments

* Alembic Pharma’s (ALPM) 2QFY25 results came in below our estimates due to the deterioration in API business and higher operational costs. Weak seasonality impacted acute category of its domestic formulation (DF) business, which affected the overall 2Q performance.

* We cut our earnings estimates by 15%/8%/5% for FY25/FY26/FY27 to factor in a) the loss of some customers in API business, b) muted demand in acute therapies, c) slower execution in specialty DF segment, and d) higher operational costs. We value ALPM at 25x 12M forward earnings to arrive at a TP of INR1,110.

* ALPM is implementing efforts to a) scale up US generics with new launches, b) build capabilities/capacities in GLP-1 set of products, and c) improve growth prospects in specialty products. Considering a CAGR of 11%/17%/22% in sales/EBITDA/PAT for FY25-27 and valuation at 28x/23x FY26/FY27 PE, there is limited upside from current levels. Maintain Neutral.

Improved product mix offset by reduced operating leverage

* ALPM sales grew 3.3% YoY to INR16.5b (in line). DF sales rose 5.5% YoY to INR6b (37% of sales). US generics sales increased 5.2% YoY to INR4.7b (USD56m; 28% of sales). Excl. US generics, export sales grew 18.3% YoY to INR3b (18% of sales). API sales declined 15% YoY to INR2.7b (17% of sales).

* Gross margin expanded 290bp YoY to 74% due to a superior product mix and lower RM costs.

* EBITDA margin expanded by 150bp YoY to 14.5% (our est: 16.8%), as a favorable product mix and lower other expenses (-60bp as % of sales) were offset by higher employee costs (+200bp as % of sales).

* Consequently, EBITDA grew 15% YoY to INR2.4b (our est: INR2.7b).

* After adjusting an extraordinary gain of INR129m regarding an insurance claim received for its Sikkim plant, PAT grew 4% YoY to INR1.4b (our est: INR1.7b).

* 1HFY25 revenue/EBITDA/PAT grew 4%/17%/7% YoY to INR32b/INR4.8b/ INR2.8b.

Highlights from the management commentary

* In 1HFY25, API business was weak due to the loss of customers and price erosion. ALPM expects the API business to return to growth in FY26.

* ALPM expects the ROW market to grow ~15-20% YoY in 2HFY25.

* It is building capacity for in-house manufacturing of GLP-1 products.

* ALPM expects 2HFY25 to be stronger for US business, led by new launches and market share gains.

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