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2QFY2013 Result Update | Pharmaceutical

October 19, 2012

Alembic Pharma
Performance Highlights
Y/E March (` cr) Net Sales Other Income Operating Profit Interest Net Profit 2QFY2013 406 1 64 3 42 1QFY2013 366 0 52 6 31 % chg (qoq) 10.9 477.3 21.7 (45.6) 37.8 2QFY2012 397 1 59 7 38 % chg (yoy) 2.2 12.4 7.2 (55.9) 11.7

BUY
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Pharmaceutical 1,314 205 0.6 79/34 59,792 2 18,682 5,684 ALEM.BO ALPM@IN

`70 `91
12 Months

Source: Company, Angel Research

Alembic Pharmaceuticals (Alembic)s 2QFY2013 results have come above our expectations on the operating front. On the sales front, the company grossed sales of `406cr, registering a revenue growth of 2.2% yoy, just in line with our expecations of `419cr. On the operating front, the company posted an OPM of 15.7% vs an expectation of 14.2%. This lead the net profits to come above expectations at `42cr (expectation was of `35cr). At the current market price, the stock is trading at an attractive valuation. Hence, we maintain our Buy view on the stock. Results above expectations on operating front: Alembic reported a revenue growth of 2.2% yoy to `406cr, mainly driven by the domestic formulation business which grew by 11.9% yoy. However, the exports segment de-grew by 18.5% yoy, impacted by de-growth of formulation exports (which de-grew by 28.4% yoy). The active pharmaceutical ingredient (API) exports on the other hand de-grew by 4.7%. On the operating front, the company posted an OPM of 15.7% vs expectations of 14.2%, which lead to the net profits coming above our expectations at `42cr (vs our expectation of `35cr). Outlook and valuation: Alembics growth and profitability profile has improved post the restructuring carried out by the management. Over FY2012-14, we expect the company to post a CAGR of 13.3% and 14.6% in sales and net profit respectively. At the current market price, the stock is trading at attractive valuations. Hence, we maintain our Buy recommendation on the stock with a target price of `91. Key Financials (Consolidated)
Y/E March (` cr) Net Sales % chg Net Profit % chg EPS (`) EBITDA Margin (%) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 74.1 2.5 7.4 16.0

Abs. (%) Sensex Alembic Pharma

3m 8.1 19.0

1yr 9.3 54.2

3yr* 7.8 -

*Since listed on Septeber 20, 2011

FY2011 1,177 85 4.5 12.1 15.4 26.3 19.0 4.4 1.4 11.2

FY2012 1,444 22.6 130 52.3 6.9 14.1 10.1 37.6 25.0 3.3 1.0 7.3

FY2013E 1,624 12.5 125 (4.2) 6.6 14.2 10.5 27.9 26.2 2.6 0.9 6.5

FY2014E 1,855 14.2 171 37.2 9.1 15.6 7.7 29.9 29.4 2.0 0.8 5.0

Sarabjit Kour Nangra


+91- 22- 36357600 6806
sarabjit@angelbroking.com

Please refer to important disclosures at the end of this report

Alembic Pharma | 2QFY2013 Result Update

Exhibit 1: 2QFY2013 performance (Consolidated)


Y/E March (` cr) Net sales Other income Total income Gross profit Gross margin Operating profit Operating margin (%) Interest Depreciation PBT Provision for taxation PAT before Extra-ordinary item Extra-Ordinary Expenses PAT after Extra-ordinary item & MI EPS (`)
Source: Company, Angel Research

2QFY2013 406 1 367 19 4.8 64 15.7 3 9 53 10 42 42 2.3

1QFY2013 366 0 367 191 52.2 52 14.3 6 9 38 7 31 31 1.6

% chg(qoq) 10.9 477.3 -89.8 21.7 (45.6) 1.8 38.9 43.5 37.8 37.8

2QFY2012 397 1 398 203 51.2 59 15.0 7 8 45 7 38 38 2.0

% chg (yoy) 1HFY2013 1HFY2012 2.2 12.4 (7.8) (90.4) 7.2 (55.9) 4.4 17.8 49.9 11.7 11.7 772 2 774 409 53.0 115 14.9 9 17 91 18 73 73 3.9 740 2 742 375 50.6 109 14.8 14 17 81 15 66 66 3.5

% chg (yoy) 4.3 36.0 9.1 5.3 (36.0) 5.0 13.1 19.0 11.8 11.8

Exhibit 2: 2QFY2013 Actual vs Angel estimates


` cr Net Sales Other Income Operating Profit Interest Tax Net Profit
Source: Company, Angel Research

Actual 406 262 104 1 10 42

Estimates 419 262 104 0 11 35

Variation (%) (3.3) 0.0 0.0 535.0 (0.4) 22.6

Sales just in line with expectations: Alembic reported revenue growth of 2.2% yoy to `406cr, mainly driven by the domestic formulation business which grew by 11.9% yoy. However, the exports segment de-grew by 18.5% yoy, impacted by degrowth of formulation exports (which de-grew by 28.4% yoy). API exports on the other hand de-grew by 4.7%. The exports segments, namely the branded exports and international generics, degrew by 27.9% yoy and 28.5% yoy respectively. The de-growth in the international generic formulations was mainly due to price erosion, product mix and capacity constraints. The management expects FY2013 to be a strong year for the domestic formulation business, where the company expects to log in a 12-15% yoy growth, driven by the chronic segment. The company has filed for 50 abbreviated new drug applications (ANDAs) in the US year till date and received 21 approvals.

October 19, 2012

Alembic Pharma | 2QFY2013 Result Update

Exhibit 3: Sales trend


440 420 400 397 381 366 341 406

(` cr)

380 360 340 320 300 280 2QFY2012 3QFY2012 4QFY2012

1QFY2013

2QFY2013

Source: Company, Angel Research

OPM came higher than expected: The gross margins expanded by 235bps on the back of higher contribution from domestic formulations, which aided on the operating front. The margins came in at 15.7% vs 14.2% (our expectation). On a yoy basis, the company posted a 72bps expansion in OPM, lower than the expansion in the gross margins, on account of a higher-than-expected rise in the salary and selling, general and administrative (SG&A) expenses, which grew by 30.7%yoy and 22.5%yoy respectively. On the other hand the other expenditure degrew by 4.8% yoy which aided the expansion in the OPM.

Exhibit 4: OPM Trend


20.0 18.0 16.0 17.8

(%)

15.7 14.3 15.0

14.0 12.0

11.6 10.0 2QFY2012 3QFY2012 4QFY2012 1QFY2013 2QFY2013

Source: Company, Angel Research

Net profit above expectation: While the operating profit grew only by 7.2% yoy, the reduction in the interest expense during the period aided an 11.7% yoy net profit growth. The net profits came in above our expectations at `42cr vs expectations of `35cr.

October 19, 2012

Alembic Pharma | 2QFY2013 Result Update

Exhibit 5: Net profit trend


50 45 40 35 30 25 20 15 10 5 0 2QFY2012 3QFY2012 4QFY2012 1QFY2013 2QFY2013 20 38 31 44 42

Source: Company, Angel Research

Concall Highlights
For FY2013, the domestic formulation growth is expected to be at 12-14%. For API exports, growth would be 10-15% yoy in FY2013. International generics are expected to be muted over the next two to three quarters. Overall, the management expects the growth in export revenue to be around 15% in FY2013. The company launched the dermatology division during the quarter with a field force of 100 people to strengthen its position in the specialty business. The company filed 1 ANDA in 2QFY2013. R&D Expenses are expected to be around 4% of sales in FY2013. OPM is expected to be around 15% for the next two years. Tax rate for FY2013 would be around 20% of PBT. For FY2013, the management has guided for `100cr of capex, of which `70cr would be towards the exports formulation plant, which would come on stream in 4QFY2013.

Investment arguments
Focus on chronic segment to drive domestic formulation growth: Alembic has been restructuring its business portfolio, which would aid in improving the companys growth and operating performance. The companys domestic formulation business contributed 54% to its total sales in FY2012, with ~70% of its revenue coming from the anti-infective, respiratory, gynaecological and gastro therapeutic space. The company has a strong field force of ~3,300 medical representatives. Going forward, the company expects its domestic formulation business to at least grow in line with the industry growth rate, before the share of the high growth chronic segment improves from the current levels of ~30%. For FY2012-14, we expect the domestic formulation business to grow at 14.0% CAGR.

October 19, 2012

(` cr)

Alembic Pharma | 2QFY2013 Result Update

Exports- US the key growth driver: On the exports front, the formulation business contributed 20% to the total turnover, with majority of the contribution coming from Europe and the US. In the US, the company has filed for 45 ANDAs year till date and received 20 approvals. The company, going forward, expects to keep its momentum high in terms of number of filings, by filing around 12-18 ANDAs per annum. FY2013 would see modest growth in exports as compared to its historical high growth rate on account of capacity constraints. However, FY2014 should witness the growth in exports to resume. For FY2012-14, we expect the exports to register a CAGR of 21.1%. Outlook and valuation: Alembics growth and profitability profile have improved post the restructuring carried out by the management. Over FY2012-14, we expect the company to post a CAGR of 13.3% and 14.6% in its sales and net profit respectively. At the current market price, the stock is trading at an attractive valuation. Hence, we maintain our Buy recommendation on the stock with a target price of `91.

Exhibit 6: Key assumptions


FY2013E Sales growth (%) R&D as % of sales Operating margins (%) Capex (` cr) Net Debt/Equity (x)
Source: Company, Angel Research

FY2014E 14.2 4.1 15.6 53 0.4

12.5 4.1 14.2 112 0.7

Exhibit 7: Recommendation summary


Company Alembic Pharma Aurobindo Pharma Sanofi India* Cadila Healthcare Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Orchid Chemicals Ranbaxy* Sun Pharma Reco. Buy Neutral Neutral Accumulate Accumulate Accumulate Neutral Neutral Buy Neutral Accumulate Neutral Neutral Neutral CMP (`) 70 157 2,209 851 359 1,701 97 1,995 65 458 571 109 540 694 Tgt Price Upside (`) 91 953 399 1,859 92 647 (%) PE (x) 30.6 12.0 11.1 9.3 42.3 13.3 7.7 12.4 21.1 18.5 18.0 18.3 8.6 24.2 7.3 12.5 18.3 4.9 18.1 24.6 FY2014E EV/Sales (x) 0.8 1.2 2.8 2.5 3.0 2.6 1.1 4.7 0.9 1.8 2.5 0.8 1.9 4.7 EV/EBITDA (x) 5.0 8.0 17.7 12.7 13.5 12.5 5.9 15.1 5.9 8.7 12.8 5.7 11.8 11.3 FY12-14E CAGR in EPS (%) 14.8 61.1 12.0 20.5 18.4 2.3 26.6 8.7 32.8 29.5 26.7 27.8 44.8 0.1 FY2014E RoCE (%) RoE (%) 29.4 10.4 16.1 20.2 16.8 15.1 8.9 38.9 15.5 26.1 22.9 11.5 15.8 26.7 29.9 16.4 17.0 26.8 16.6 20.8 10.0 29.0 17.0 26.0 24.7 7.9 28.9 18.8

Source: Company, Angel Research; Note: *December year end

October 19, 2012

Alembic Pharma | 2QFY2013 Result Update

Background
Alembic Pharmaceuticals is a leading pharmaceutical company in India. The company is vertically integrated to develop pharmaceutical substances and intermediates. The company is the market leader in the Macrolides segment of anti-infective drugs in India. Its manufacturing facilities are located in Vadodara and Baddi in Himachal Pradesh (for the domestic and non-regulated export market).The Panelav facility houses the API and formulation manufacturing (both USFDA approved) plants.

October 19, 2012

Alembic Pharma | 2QFY2013 Result Update

Profit & Loss Statement (Consolidated)


Y/E March (` cr) Gross sales Less: Excise duty Net sales Other operating income Total operating income % chg Total expenditure Net raw materials Other mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation& amortisation Interest & other charges Other income (% of PBT) Share in profit of Associates Recurring PBT % chg Extraordinary expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of associate Less: Minority interest (MI) Prior period items PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg 0 107 21 20.1 85 85 85 7.2 4.5 4.5 161 31 19.2 130 130 130 52.3 9.0 6.9 6.9 52.3 163 38 23.3 125 125 125 (4.2) 7.7 6.6 6.6 (4.2) 216 45 20.8 171 171 171 37.2 9.2 9.1 9.1 37.2 12.1 30 24 3 2 107 FY2011 1,192 14 1,177 15.6 1,193 1,035 590 59 141 244 142 FY2012 1,455 11 1,444 17.4 1,461 22.5 1,241 708 63 168 301 203 42.7 14.1 34 26 0 0 161 FY2013E 1,634 10 1,624 16.3 1,640 12.2 1,394 771 71 189 362 230 13.4 14.2 37 31 0 0 163 FY2014E 1,866 11 1,855 18.9 1,874 14.2 1,565 881 82 216 386 289 25.7 15.6 39 35 0 0 216

October 19, 2012

Alembic Pharma | 2QFY2013 Result Update

Balance Sheet (Consolidated)


Y/E March (` cr) SOURCES OF FUNDS Equity share capital Preference Capital Reserves & surplus Shareholders funds Minority Interest Other Long Term Liabilities Long Term Provisions Total loans Deferred tax liability Total liabilities APPLICATION OF FUNDS Gross block Less: acc. depreciation Net block Capital work-in-progress Goodwill Long Term Loans and Advances Investments Current assets Cash Loans & advances Other Current liabilities Net current assets Mis. Exp. not written off Total assets 434 162 272 27 7 3.3 535 6 114 415 250 286 594 463 195 268 58 35 3.3 688 47 182 459 395 292 657 573 233 340 58 35 3.3 761 35 211 515 438 322 759 673 272 401 59 35 3.3 911 82 241 588 501 410 909 37.7 259 297 11.8 5.1 275 5 594 37.7 357 395 12.3 5.4 234 10 657 37.7 460 497 12.3 5.4 234 10 759 37.7 609 647 12.3 5.4 234 10 909 FY2011 FY2012 FY2013E FY2014E

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Alembic Pharma | 2QFY2013 Result Update

Cash Flow Statement (Consolidated)


Y/E March (` cr) Profit before tax Depreciation (Inc)/Dec in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec.in Fixed Assets (Inc.)/Dec. in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2011 107 30 (49) 19 69 (61) (61) 11 (59) (22) 53 (17) (9) 15 6 FY2012 161 34 (76) 31 87 (76) (76) (40) (22) 91 29 41 6 47 FY2013E 162 37 (55) 38 106 (110) (110) (22) 13 (9) (12) 47 35 FY2014E 216 39 (15) 45 195 (101) (101) (22) (25) (47) 47 35 82

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Alembic Pharma | 2QFY2013 Result Update

Key Ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Interest) 0.9 1.9 4.7 0.5 0.9 6.5 0.4 0.9 6.3 0.2 0.5 7.2 2.1 66.1 64.0 60.1 85 3.3 61.1 57.7 53.2 65 3.2 63.8 61.4 54.2 59 3.0 63.4 61.0 53.9 60 19.0 20.1 26.3 25.0 26.0 37.6 26.2 27.0 27.8 29.4 30.7 30.0 9.6 79.9 2.0 15.5 5.5 0.9 24.6 11.7 80.8 2.4 23.2 8.3 0.7 33.4 11.9 76.6 2.5 22.3 10.0 0.4 27.7 13.5 79.2 2.4 25.9 11.8 0.3 30.4 4.5 4.5 6.1 1.0 15.7 6.9 6.9 8.7 1.0 21.0 6.6 6.6 8.6 1.5 26.4 9.1 9.1 11.2 2.0 34.3 15.4 11.4 4.4 1.4 1.4 11.2 2.7 10.1 8.0 3.3 1.4 1.0 7.3 2.3 10.6 8.1 2.6 2.1 0.9 6.5 2.0 7.7 6.2 2.0 2.9 0.8 5.0 1.6 FY2011 FY2012 FY2013E FY2014E

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Alembic Pharma | 2QFY2013 Result Update

Research Team Tel: 022 - 4040 3800 DISCLAIMER

E-mail: research@angeltrade.com

Website: www.angeltrade.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Alembic Pharma No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors.

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

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