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Alembic
Performance Highlights
Y/E March (` cr) Net Sales Other Income Operating Profit Interest Net Profit 2QFY2011 363 2 43 7 22 1QFY2010 % chg (qoq) 279 1 28 4 11 29.9 16.2 57.0 50.6 89.9 2QFY2010 % chg (yoy) 284 1.5 33.8 9.0 13.3 27.8 6.0 28.3 (26.3) 64.3
NEUTRAL
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Pharmaceutical 959 0.5 74/40 194822 2 19,243 5,988 ALMC.BO ALBC@IN
`72 -
Alembic reported strong set of numbers for 2QFY2011 driven by its domestic formulation business, as restructuring of the business has now started showing results. The company expects to list Alembic Pharma by March 2011. In the last three months, post the de-merger announcement, the stock has rallied 25% and outperformed the BSE Healthcare (HC) index by 9%. Owing to fair valuations, we recommend Neutral on the stock. Revenue beats estimates, domestic segment surprises: Alembic reported strong 27.8% yoy growth in revenues at `363cr (`284cr). The domestic formulation business grew by a stellar 27.3% due to strong growth on the anti-infective and gastro therapeutic segments. Exports were however, subdued during the quarter at `100cr (`97cr), up a mere 3.4% impacted by the API segment. Alembic reported flat OPM of 11.9% yoy on account of higher contribution by the low-margin domestic API business. Net profit stood at `22cr (`13cr) primarily driven by revenue growth and lower interest charges. Outlook and Valuation: We have valued Alembic on SOTP basis. Our Target Price for stock works out to Rs74 wherein we have valued Alembic Pharma at Rs47/share, Alembics 30% stake in Alembic Pharma fetches Rs11/share and the loss-making API business fetches Rs5/share. We have conservatively valued the land asset of 70 acres at Rs500/sq. ft resulting in Rs11/share. We recommend Neutral on the stock at current levels. Key Financials (Consolidated)
Y/E March (Rs. cr) Net Sales % chg Net Profit % chg EPS (Rs) EBITDA Margin (%) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/Sales (x) EV/EBITDA (x) FY2009 1,116 11.2 11 (90.3) 0.8 11.2 91.2 16.0 11.1 3.0 1.3 11.6 FY2010 1,127 2.0 40 265.1 3.0 9.9 24.3 11.3 7.3 2.6 1.2 13.6 FY2011E 1,266 11.2 75 89.2 5.6 12.4 12.8 18.9 14.3 2.3 1.1 8.5 FY2012E 1,393 10.0 85 13.3 6.4 12.0 11.3 18.5 14.8 2.0 0.9 7.8
Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 63.5 5.3 9.9 22.1
3m 11.0 24.6
Source: Company, Angel Research; Note: Estimates include the de-merged Pharma business
% chg (qoq) 29.9 16.2 39.3 57.0 50.6 4.7 97.7 141.7 89.9 89.9
% chg (yoy) 27.8 27.7 22.0 28.3 (26.3) 7.5 72.2 64.3 64.3
Actual 363 2 43 7 5 22
Estimates 297 1 38 5 3 19
Revenue beats estimates, domestic segment surprises: Alembic reported strong 27.8% yoy growth in revenues at `363cr (`284cr) driven by the domestic formulation business. During the quarter, the companys domestic formulation business grew by a stellar 27.3% to `207cr (`163cr) due to strong growth in the anti-infective and gastro therapeutic segments. The company witnessed traction across key brands - Azithral, Wikoryl and Zeet. The company expects momentum in its domestic formulation business to continue going ahead too as the restructuring exercise is now showing positive results. During the quarter, the low-margin domestic API sales grew by a strong 126.7% yoy to `55cr (`24cr) driven by volume off-take.
` cr
39
37
55
4QFY2010 API
1QFY2011
2QFY2011
Formulations
Source: Company, Angel Research
Exports were subdued during the quarter with sales coming in at `100cr (`97cr), up a mere 3.4% impacted by the API segment. API exports de-grew by 10.7% yoy to `45cr (`51cr) on the back of pricing pressure and sluggish volume off-take in the regulated markets. However, formulation export sales grew by a healthy 18.8% to `55cr (`46cr) driven by the semi-regulated markets. The company has cumulative ANDA filings of 31 in the US with 9 approvals.
` cr
60 40 20 0
2QFY2010
3QFY2010
4QFY2010 API
1QFY2011
2QFY2011
Formulations
Source: Company, Angel Research
OPM impacted by higher contribution from domestic API business: Alembic reported flat OPM of 11.9% yoy despite strong growth on the domestic formulation business, which we believe was on account of higher contribution by the low-margin domestic API business, which increased to 15.1% of net sales from 8.5% a year ago. Employee expenses increased 19.6% yoy to `46cr (`39cr).
Net profit rises 64% driven by revenue growth and lower interest charges: Alembic recorded net profit of `22cr (`13cr) primarily driven by revenue growth (OPM remained flat yoy) and lower interest charges. Interest expenses declined 26.3% yoy to `7cr (`9cr) on the back of lower interest rate.
Other takeaways
During the quarter, approval for the de-merger was received from the shareholders, creditors and fixed deposit holders. Alembic has now filed a petition in the Gujarat high court for approval of the de-merger. The company plans to list Alembic Pharma by March 2011.
` cr
11
Recommendation rationale
De-merger to unlock value: Alembic has announced de-merger of its pharma business (comprises its domestic formulation, international generic and API businesses) into a separate company named Alembic Pharma. With this, Alembic plans to insulate its pharma business from the high loss-making Pen-G business (API facility at Vadodara). Alembic also plans to develop its 70 acre land asset. Managements decision to demerge the relatively high-margin pharma business is a positive as it will allow the two companies to focus on their respective core businesses, insulate the pharma business from the loss-making Pen-G business (loss of `24.2cr in FY2010), which could attract a distinct set of investors for the different businesses and potentially unlock value of the 70 acre land bank at Vadodara. Alembic Pharma profitability and return ratios to improve: The domestic formulation business of Alembic Pharma contributed 57% of total sales in FY2010 with 75% of its revenues coming from the anti-infective, respiratory, gynaecological and gastro therapeutic space. The company has a strong field force of 2,700 medical representatives (MRs). On the export front, the formulation business contributed 14% to the total turnover with majority of the contribution coming from Europe and US. In the US, the company has filed for 31 ANDAs and received 9 approvals. The international API business contributes 28% to total turnover. Going forward, the company expects its domestic formulation business to grow at industry pace and revenues from the US generic market are expected to scale up on the back of product approvals. On the OPM front, we expect the Alembic Pharma's margins to improve from current levels of 12.4% to 13.5% by FY2012 with productivity of the field force improving going ahead. The company plans to reduce debt (currently at `339cr) going ahead as it does not foresee any major capital expenditure requirements except the normal capex. Hence, it would be utilising its operating cash flows to repay debt. Valuation: We have valued Alembic on SOTP basis. We have arrived at a Target Price of `74 wherein we have valued Alembic Pharma at 10x FY2012E earnings on the back of improving growth prospects and better return ratios as compared to the 8x PE multiple assigned to Alembic as a whole previously. We have valued the loss-making API business at 0.6x FY2012E EV/Sales. On the land asset front, management could develop the land for residential and/or commercial purposes though the timeline is still unclear. We have conservatively valued the land asset at `500/sq. ft. In the last three months, post the de-merger announcement, the stock has rallied 25% and outperformed the BSE HC index by 9%. Owing to fair valuations, we recommend Neutral on the stock.
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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) 0.5 1.6 11.1 1.2 2.8 3.4 1.4 3.7 2.2 1.1 4.1 1.9 0.9 2.4 3.6 0.7 2.0 4.2 1.3 69 83 61 150 1.8 59 72 49 104 1.7 72 73 56 117 1.6 72 69 62 118 1.7 65 66 62 108 1.8 65 66 62 106 13.1 15.6 24.5 14.8 17.6 24.7 11.1 11.5 16.0 7.3 7.4 11.3 14.3 14.6 18.9 14.8 15.1 18.5 12.1 1.2 0.5 11.2 (24.1) 1.5 0.8 7.8 1.5 1.3 5.2 90.3 1.4 6.7 6.1 1.3 7.6 9.0 85.0 1.6 12.3 6.8 1.0 17.8 8.8 85.4 1.7 12.8 6.8 0.8 17.4 5.1 5.1 7.2 1.0 27.8 8.1 8.1 10.5 1.5 24.7 0.8 0.8 3.6 0.4 24.1 2.9 2.9 6.2 0.6 27.5 5.6 5.6 8.8 1.1 31.8 6.4 6.4 9.7 1.3 36.7
14.1 10.0 2.6 1.4 1.7 10.5 1.6 8.9 6.9 2.9 2.1 1.4 9.7 1.8 91.2 20.1 3.0 0.6 1.3 11.6 1.8 24.6 11.6 2.6 0.8 1.2 13.6 1.7 12.8 8.2 2.3 1.6 1.1 8.5 1.7 11.3 7.4 2.0 1.8 0.9 7.8 1.5
10
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 No No No No
Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors.
Ratings (Returns):
11