PL Stock Report: Alembic Pharmaceuticals (ALPM IN) - Management Meet Update - US sales and profitability to improve - Not Rated

Alembic Pharmaceuticals (ALPM IN) - Param Desai - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: Not Rated | CMP: Rs747 | TP: NA

Management Meet Update - US sales and profitability to improve

We hosted Mr. R.K. Baheti (CFO) & Mr. Ajay Kumar Desai (SVP Finance) of Alembic Pharma Ltd (ALPM) for NDR at Mumbai. The company had strong growth trajectory over FY15-21 (27% PAT CAGR), largely aided by US sales where they managed to benefit from certain niche product specific opportunities. Strong cash flow generated from these opportunities induced company to get aggressive for US market and expand capabilities. ALPM committed Rs31bn (~75% of EBITDA) of capex over FY18-21 to create new manufacturing capacities for oral solids, oncology injectables, generic injectables, derma and ophthalmic. Due to covid led disruptions, subsequent delay in plant approval by USFDA, US pricing pressure, ALPM decided to write off Rs1.15bn. Given negative operating leverage, higher COGS and depreciation charges, PAT decline by 45% CAGR over FY21-23.

We believe that US business has bottomed out, but reduced capex and R&D intensity coupled with favorable input cost scenario should aid growth and improve profitability. In our view recovery may be gradual that hinges on timely and niche approvals in US. ALPM currently trades at 26.7x/20.9x FY24E/FY25E P/E respectively and 15.63x/12.78x FY24E/FY25E EV/EBITDA respectively. Not Rated.

§ US business – Gradual improvement expected: The management has guided for new product launches coupled with higher volumes to aid growth in FY24 and FY25. It intends to launch ~20 products annually in FY24 and FY25. Overall guided for moderate growth in FY24 and thereby 12-15% growth in FY25. The company’s focus remains on complex injectables, oncology and peptides. Price erosion scenario in US has seen moderation to low single digit. Currently all facilities for ALPM in US remains FDA compliant.

§ India business to beat IPM: The company is setting up a second plant at Pithampur, Indore dedicated for India business which is likely to be commercialize by H2FY25. The current MR productivity stands at Rs 0.33mn per person per month. Given 1200 MRs added over last 12-15 months, MR productivity should improve and drive domestic formulation business. Overall, outlook across segments- Specialty, Acute and Animal Health remains healthy.

§ Margins to recover: Largely cost has shot up on account of higher filing fees and negative operating leverage led by new plant getting operationalized and higher COGS. This resulted in sharp dip in margins from 27% in FY22 to 13% in FY23. This should improve as US revenues picks up from new facilities. Further management has guided lower R&D cost to tune of Rs 5bn vs Rs5.7bn in FY23 along with softening of input prices. Overall guided for 16-18% OPM over next 2-3 years.

§ Other highlights: ALPM is constantly looking for CDMO opportunities in injectable and opthal segment. It is enjoying MAT arrears, so tax rate is likely to remain in the range of 17-19% for next 3-4 years. Company does not expect any more hit on the financials as all impairment/write-offs related to US biz has been already done in FY23 within stipulated norms; thus return of application by BSE for approval of reorganization of general reserve is more of non-event.

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