CMP: 121 (9th May 2013)

Target: Rs.185.

Alembic Pharmaceuticals Ltd

Sector: Pharmaceuticals

BSE Code NSE Code Mkt Cap (Rs.bn) Beta 52 week High 52 week Low Avg volume (BSE) Avg volume (NSE) Face Value (Rs) Equity (Rs mn)

533573 APLLTD 22.83 0.61 126.8 47.5 68912 145611 2 377

hr

Despite the seasonality factor, results for Q4FY13 were above expectations. With the two key growth drivers generic dosages exports and domestic formulation sales doing well during the quarter, the topline growth and OPM has been impressive. Improvement in margins and cash flows leading to lower financial costs is a continuing story. The highlight of the quarter was the above industrial growth rate of the domestic dosages biz as the share of chronic medications continues to rise. More importantly, among the larger divisions, GI, CV and gynaecology have been growing at a faster pace than the industry. Exports of dosages to developed markets would receive a fillip in FY14 once its aggressive Rs.1bn capex gets commissioned fully during H1FY14. This would usher in a high growth phase during FY14 and FY15 as the pace of ANDA approvals too would gather pace.
Good prospects ahead: The quarter was marked by a sharp growth in generic dosages exports due to partial commissioning of the capacity expansion. Branded dosages exports suffered a setback as a part of the capacity was used for preparing samples for filings across the U.S, E.U and Latin America. The domestic dosages business is set for a high teen growth as the share of the chronic segment (currently at 51% and growing at 31%) increases. The APIs biz is the bulwark of the company. With 59 DMF filings, its able to cash on one-time opportunities from innovator companies. Once the enhanced dosages capacity goes on stream, the management expects a 35-35% CAGR for exports over the succeeding three years. During FY14 EBIDTA margin is expected to grow by 100-125bps. Investment potential High growth, low risk

Amish Mishwani Analyst: Healthcare Support@TimesFinancials.com www.TimesFinancials.com

Owing to the better business clarity, we are taking a two year call. Over the FY13-15 period, we expect the company to post a sales CAGR of 18.1% (Rs.15.17bn to Rs.21.16bn). Due to margin improvement, we expect EBIDTA to post a CAGR of 29% (Rs.2.52bn to Rs.4.19bn). PAT is forecasted to post a 32.5% growth (Rs.1.65bn to Rs.2.9bn). Our 12-18 months target is Rs.185 (12XFY15EPS; at the lower end of its peerset), a 52.5% appreciation from the current level. 1

TimesFinancials Ltd./Research

Quarterly Results [Consolidated]

Rs.Mn Net Sales Other opg income Operating Income COGS % Net Sales Excise duty Employees cost % Net Sales R&D Expenses % Net Sales Other expenditure % Net Sales Operating Profit % Net Sales Other income PBDIT Interest Depreciation PBT % Net Sales Current tax Effective tax rate Deferred tax PAT % Net Sales Equity EPS Q4FY12 3766 15 3781 1671 44.4% 17 508 13.5% 220 5.8% 709 18.8% 656 17.3% 1 657 18 86 552 14.6% 102 18.4% 14 437 11.6% 377 9.3 Q4FY12 3408 16 3423 1530 44.9% 31 431 12.7% 221 6.5% 801 23.5% 408 11.9% 4 412 54 89 269 7.9% 53 19.5% 14 203 6.0% 377 4.3 -0.7% 115.1% 93.3% -82.5% 59.3% -66.0% -3.1% 105.0% 60.7% -11.4% -0.6% 17.8% Growth 10.5% -3.2% 10.4% 9.2% Q3FY13 3688 5 3693 1506 40.8% -30 495 13.4% 217 5.9% 810 22.0% 694 18.8% 34 728 39 89 601 16.2% 121 20.2% -3 483 13.1% 377 10.2 -9.1% 9.2% 25.6% 6.1% -44.4% 9.4% 12.2% 1.3% 13.2% 122.5% 14.5% Growth -3.3% -39.2% -3.4% -20.5% Q2FY13 4058 11 4069 1886 46.5% 12 486 12.0% 160 4.0% 878 21.6% 647 15.9% 2 649 31 88 530 13.0% 106 19.9% -1 425 10.5% 377 9.0 -97.1% 11.7% 15.9% 120.0% 7.2% -55.9% 4.4% 17.6% 7.0% 1.7% 9.8% 20.3% Growth 2.2% 1.9% 2.2% -2.7% Q1FY13 3661 7 3668 1744 47.6% 11 450 12.3% 139 3.8% 801 21.9% 523 14.2% 2 525 57 87 381 10.3% 73 19.2% -1 308 8.4% 377 6.5 11.8% 1.1% 175.0% 4.1% -15.2% 5.7% 7.4% 3.8% 18.1% 14.9% 7.7% Growth 6.6% 75.0% 6.7% 1.6% FY13 15173 37 15210 6807 44.9% 10 1938 12.8% 737 4.9% 3199 21.1% 2519 16.6% 39 2559 146 350 2063 13.6% 401 19.5% 10 1652 10.9% 377 8.8 27.0% 28.5% 793.2% 15.9% -44.4% 3.9% 28.2% 14.3% 4.6% 25.7% 15.0% Growth 3.8% -7.7% 3.7% -3.8%

v Owing to the partial commissioning of the enhanced dosages capacity, YoY growth for Q4 at 10.5% was the best during the fiscal, notwithstanding the seasonality factor. v Due to a 11.4% dip in other expenses at Rs.709mn, operating margin for the quarter was a respectable 17.3%. For the fiscal too, at 16.6%, its grown by 160bps. v The pre-tax profit of Rs.552mn for the quarter means that for the past three quarters, it has been in the Rs.530-600mn range. A continuous decline in net interest expenses had a large role to play in this improvement. v Relatively lower tax rate of 18.4% for the quarter has led to a PAT of Rs.437mn. Thus, for the past three quarters, it has been in the Rs.425-483mn range. TimesFinancials Ltd./Research

Highlights:
Cumulative ANDA filings stand at 57 with approvals at 24. Cumulative DMF filings stand at 60. During the quarter, it had two ANDA filings and three approvals. DMF filings during the quarter too were two. The enhanced dosages capacity was partially commissioned during the quarter. Its expected to run at full capacity of 5bn (from the current 2.6bn) dosages by the first half of FY14. Of the Rs.1.02bn spent on capex in the current fiscal, Rs.870mn was for the dosages expansion. NDA for Desvenlafaxine HCl XR tabs was approved during the quarter. This is a bioequivalent of Pfizers Pristiq (Sales of $573mn), though not AB rated. APLs first 505 B2 application, it has been partnered and launched by Ranbaxy. During the year, three dossiers were filed with ANVISA and two were filed in the EU. DER has improved significantly from 0.9 in March 2012 to 0.33. Sales break-up:
Rs.Mn Formulations Domestic Export - ROW Export - Reg Bulk Domestic Export - ROW Total Q4FY13 2980 2075 129 777 787 250 537 3767 Q4FY12 2526 1845 177 504 873 192 681 3399 Growth 18.0% 12.5% -27.5% 54.2% -9.9% 30.3% -21.3% 10.8% Q3FY13 3037 2276 150 611 670 250 420 3707 Growth 11.3% 14.5% -3.7% 4.4% -38.3% 33.5% -53.3% -2.8% Q2FY13 3136 2539 87 510 910 334 576 4045 Growth 1.0% 11.9% -27.9% -28.5% 10.3% 51.5% -4.7% 3.0% Q1FY13 2508 1972 76 461 1140 305 835 3648 Growth 2.4% 14.4% -33.3% -24.7% 19.3% -12.3% 37.5% 7.2% FY13 11662 8863 441 2358 3506 1138 2367 15167 Growth 7.9% 13.2% -22.2% -2.5% -6.1% 20.8% -15.2% 4.3%

In the domestic market, it maintained its market share at 1.79% by virtue of the 13.2% growth during the year. The chronic and acute segments posted a 27% and 3% growth respectively vis a vis 11% and 3% for the industry. In recent months, industrial growth rate has declined from 15-16% to 11%. During the year, it launched a dermatology division, with eight products. This addition to the basket of specialty products is expected to propel future growth. Exports to the regulated markets spurted by 54% to Rs.777mn during Q4. However, for the fiscal, sales at Rs.2.36bn was down by 2.5%. During the quarter, desvenlafaxine base XR tablets was launched in the U.S. Recent generic approvals
Product Modafinil Valsartan+HCT Irbesaratan Irbesaratan+HCT Dosage (mg) 100, 200 Multiple Multiple Multiple Approval date Oct12 Mar13 Oct12 Oct12 Branded sales ($Mn) 1200 1600 2100 351 Opportunity Limited competition High competition High competition High competition

TimesFinancials Ltd./Research

Domestic biz on the growth path:

v During Q4FY13, while the share of anti infectives in domestic sales has declined by 500bps to 36%, that of specialty therapies has risen by a whopping 600bps to 51%.
Comparative growth rate Segment Anti Infective Gastro Cough and cold Cardio Gynaecology Ortho Diabetology Nephro/Uro Opthal MS 4.4% 2.6% 5.1% 1.4% 2.3% 1.2% 1.3% 2.2% 1.6% FY13 Inds 3.0% 11.0% 8.0% 12.0% 5.0% 7.0% 23.0% 15.0% 7.0% Alembic 2.0% 25.0% 8.0% 42.0% 30.0% 6.0% 40.0% 63.0% 48.0% Inds 11.0% 11.0% 9.0% 16.0% 11.0% 11.0% 25.0% 17.0% 15.0% FY12 Alembic 8.0% 28.0% 6.0% 22.0% 6.0% 10.0% 26.0% 25.0% 13.0%

v Among the top five therapies, the anti infective and gynaecology segments have been witness to a sizable degrowth. While the company has fared badly in the former, in the gynaecology segment, it has posted a 30% growth vis a vis a 5% growth for the segment. It has managed to post a very good growth rate in the GI and CV segments but the cough and cold segment continues to be a drag with high single digit growth rates. v Among the emerging segments for the company, while the orthopaedics segment has posted a 400bps degrowth, the diabetology and urology/nephrology segments have continued to outpace the industry with the company outpacing the segments by a huge margin. v In a nutshell, as the share of anti infectives and cough and cold in overall domestic sales declines, the overall growth would outpace the industry growth by a wider margin. v A dermatology division with eight products was launched during the year. v Future investments are earmarked for the faster growing segments.

Con-call highlights:
v During the quarter, it posted a forex gain of Rs.32mn. Gains for the fiscal was Rs.45mn. v Milestone payment for FY13 was around Rs.250mn. Since a part of this was on account of desvenlafaxine (received in Q3FY13), the management has guided for a lower figure in FY14. v Of the regulated market sales, the N.American market accounts for 60% of revenues. US generic sales would drive sales over the next two years. The management expects exports to regulated markets to grow by 30-35% over the next 2-3 years. Apart from the spurt in TimesFinancials Ltd./Research 4

v v

v v

US sales, the outlook for U.K and German too are good. The management expects to launch 8-10 products every year over the next three years in the U.S market. During the current fiscal, it launched seven products. Going forward, the emphasis would be on niche products and NDA filings. Apart from oral solids, the current focus is on Para-IV challenges to be followed by filings in niche and high technology areas like inhalations and dermatology. For FY14, it targets 10-12 ANDA filings, 3-4 of which would be FtoFs. During FY13, itd three FtoFs. A 505 b-2 application is expected in the case of Warfarin over the next 12 months based on the Accubreak technology. R&D expenses, currently around 5% of sales is expected to gradually inch upto 6-7% of sales. It has great expectations from Modafinil, which was launched recently owing to the limited competition. Valsartan too, which is slated for launch in the next few months holds good promise due to the large opportunity. The biggest growth driver for the current fiscal, DesVenlafaxine has seen the shipment of a portion of the launch quantity during Q4FY13. It expects sales to kick in from Q1FY14 with a gradual gain in market share. In the case of EU and Brazil, it expects traction in FY15 when three products are expected to be launched in both the markets, either on its own or through partners. It already has three launches in Australia. Apropos the domestic dosages, the growth in the GI segment was led by sartans, while in the case of gynecology, Ovigyn-D has fared very well. That apart, the ophthalmology division has attained critical mass and is expected to start generating profits. New product launches (25 during the fiscal) contributed 3.2% to sales. The emphasis is on enhancing productivity. During the past twelve months, it has recruited only 100 MRs for the new derma division. The current MR strength is around 3,000 with the supervisory strength being another 600. For FY14, domestic dosages is expected to grow at 15%. The API biz has struggled owing to the high base effect and the greater emphasis on captive consumption. It expects this division to post a 10-15% growth. Debt decreased sizably during FY13 as it managed to close out inter group transactions. It expects to become debt free in the current fiscal. The capex for FY14 is estimated at Rs.600mn. In order o prepare for the future growth, it has plans of setting up a new unit from FY15 at an outlay of Rs.1.5-2bn for international generics.

v It expects a 100-125 expansion in operating margins year on year.

TimesFinancials Ltd./Research

Balance sheet (Consolidated)

Rs.Mn Equity Reserves Networth Secured loans Unsecured loans Total debt Total capital employed FA Investments Inventories SDs Cash and bank Loans and advances Total Cas CLs Prov Total CLs NWC DTA Total assets Gearing Current ratio Asset turnover ROCE RONW Inventories SDs Loans and advances Mcap EV EV/EBIDTA FY13 377 4652 5029 833 701 1534 6563 3765 33 2668 2329 161 1522 6680 3092 684 3776 2905 -139 6564 0.3 1.8 4.0 33.1% 32.9% 119 56 64 22999 24372 9.6 FY12 377 3573 3950 1071 1384 2456 6406 3261 33 2587 1993 471 2174 7226 3607 411 4018 3208 -95 6406 0.6 1.8 4.5 29.2% 32.9% 111 50 91

Valuation: Owing to the better business clarity, we are taking a two year call. Over the FY13-15 period, we expect the company to post a sales CAGR of 18.1% (Rs.15.17bn to Rs.21.16bn). Due to margin improvement, we expect EBIDTA to post a CAGR of 29% (Rs.2.52bn to Rs.4.19bn). PAT is forecasted to post a 32.5% growth (Rs.1.65bn to Rs.2.9bn). Our 12-18 months target is Rs.185 (12XFY15EPS; at the lower end of its peer-set), a 52.5% appreciation from the current level.
Coverage History with adjusted price Date of coverage CMP rd 41.3 3 October 2011 45.2 19th October 2011 41.9 2nd February 2012 53.3 26th April 2012 9th 58.8 August 2012 19th 69.5 October 2012 22nd 69.4 January 2013 121.0 9th May 2013 Recommendation BUY BUY BUY BUY BUY BUY BUY BUY Price target 65.0 65.0 65.0 85.0 100.0 100.0 100.0 185.0

TimesFinancials Ltd./Research

Domestic formulation sales (ORG IMS)

Therapy Anti Infectives Brand Azithral Azithral XL Althrocin Roxid Zofix Megaclav Fort.Proc.Peni Furobid Cepime-O Anti diabetic Glisen Glisen-MF Glisen-PM Glimser Glimser-P Vogo GLZ Popfix Cardio Revas Revas-H Atecard Tetan Tetan-H Tetan-AM Tellzy Tellzy-H Tellzy-AM Rosave Gastro Ulgel Ulgel-A Rekool Rekool-D Rekool-L Livfit Levogastrol Urdiogem Pentab-D Gynaec Gestofit Protinules Ricahr XT Cycloset Ovigyn Ovigyn-D Ortho Osteofit Magadol Nimegesic Etrik Axogard 70 50 46 34 17 86 54 91 65 6.0% 19.0% 62 48 46 45 37 131 101 82 80 47 267 123 73 83 98 103.0% 22.0% -11.0% 4.0% 110.0% 200 198 252 103 132 180 76 176 58 85 295 138 159 225 136 168 66 107 17.0% 34.0% 20.0% 25.0% 78.0% -5.0% 14.0% 26.0% 82 56 55 46 55 59 64 50 39 52 41 38 44 52 60 57 78 71 58 87 71 67 65 13.0% 9.0% -4.0% 22.0% 42.0% 49.0% 68.0% 72.0% 74.0% 48.0% 51 76 42 28 19 11 9 37 46 51 70 36.0% 51.0% 118 53 55.0% 25.0% FY11 (9M) 728 619 443 71 48 FY12 1189 54 919 577 191 135 83 41 56 FY'13 1332 78 928 543 187 167 80 58 51 Growth 12.0% 43.0% 1.0% -6.0% -2.0% 24.0% -3.0% 41.0% -9.0%

45

21

88 33 19

TimesFinancials Ltd./Research

Therapy
Respiratory

Brand
Wikoryl Zeet Bro-Zeet Glycodin Laveta Laveta-M Ephedrex

FY11 (9M)
253 235 64 38 30 104 39 10 8 3

FY12
517 256 135 112 44

FY'13
522 274 146 105 62

Growth
1.0% 7.0% 8.0% -6.0% 39.0%

Vitamins and tonics Sharkoferrol Hermin Cadx Diax Vitaresp Lactonic Al5Zyme Nephrology Geriflo Geriflo-D Darif Fulflo Grand Total 49 6 3 4653 55 59 60 77 9.0% 31.0% 219 83 221 100 1.0% 20.0%

67 39

96 55

43.0% 41.0%

9706

10968

13.0%

TimesFinancials Ltd./Research