3QFY2017 Result Update | Pharmaceutical

January 31, 2017

Alembic Pharmaceuticals

NEUTRAL

CMP

`575

Performance Highlights

Target Price

Y/E March (` cr)

3QFY2017 2QFY2017

% chg (qoq) 3QFY2016

% chg (yoy)

Investment Period

Net Sales

770

872

(11.7)

921

(16.4)

Other Income

0.0

(75.3)

Stock Info

Operating Profit

145

177

(18.4)

384

(62.4)

Pharmaceutical

Sector

Interest

(21.9)

2.7

10,837

Market Cap (` cr)

Adj. Net Profit

119

(27.1)

269

(67.8)

Net Debt (` cr)

814

Source: Company, Angel Research

0.4

Beta

52 Week High / Low

700/514

Alembic Pharma posted lower than expected numbers for 3QFY2017. In sales,

Avg. Daily Volume

16,761

the company posted revenues of

`770cr

(`872cr expected) v/s

`921cr in

3QFY2016, dip of 16.4% yoy. The dip in sales was mainly on the back of the

Face Value (`)

27,882

International sales, which came in at `303cr v/s `521cr in 3QFY2016, a dip of

BSE Sensex

41.8%. The Indian branded sales came in at `294cr v/s `288cr, a yoy growth of

Nifty

8,641

2.1%. On EBITDA front, the company posted an EBITDA of 18.8% (20.6%

Reuters Code

ALEM.BO

expected) v/s 41.7% in 3QFY2016. Consequently, PAT came in at `87cr (lower

Bloomberg Code

ALPM@IN

than expectations) v/s `270cr in 3QFY2016, de-growth of 67.8% yoy. We

maintain our Neutral rating.

Shareholding Pattern (%)

Results below expectations: In sales, the company posted revenues of `770cr

Promoters

72.7

(`872cr expected) v/s `921cr in 3QFY2016, dip of 16.4% yoy. The dip in sales

MF / Banks / Indian Fls

4.0

was mainly on back of the International sales, which came in at `303cr v/s

FII / NRIs / OCBs

11.0

`521cr in 3QFY2016, a dip of 41.8%. The Indian branded sales came in at

Indian Public / Others

12.3

`294cr v/s `288cr in 3QFY2016, a yoy growth of 2.1%. On EBITDA front, the

company posted an EBITDA of 18.8% (20.6% expected) v/s 41.7% in 3QFY2016.

The dip came in on the back of high R&D expenses, which came in at 15.2% of

Abs. (%)

3m 1yr

3yr

sales v/s 7.6% of sales in 3QFY2016. Consequently, PAT, came in at `87cr (lower

Sensex

(0.1)

13.8

34.6

than expectations) v/s `270cr in 3QFY2016, de-growth of 67.8% yoy.

Alembic Pharma

(13.6)

(4.5)

164.5

Outlook and valuation: Over FY2016-18E, we expect the company to post a

CAGR of 13.9% in sales, while profitability will be under pressure on the back of

3-year price chart

higher R&D spend, which is likely to reach 13-14% of sales in FY2017-FY2018E.

900

We maintain our Neutral rating on the stock.

750

Key Financials (Consolidated)

600

Y/E March (` cr)

FY2015

FY2016

FY2017E

FY2018E

450

Net Sales

2,053

3,145

3,483

4,083

300

% chg

10.2

53.2

10.8

17.2

150

Net Profit

283

720

459

572

% chg

20.0

154.1

(36.2)

24.7

EPS (`)

15.0

38.2

24.3

30.4

EBITDA Margin (%)

19.5

31.9

20.2

21.4

Source: Company, Angel Research

P/E (x)

38.3

15.1

23.6

18.9

RoE (%)

36.3

57.9

25.5

25.3

RoCE (%)

30.2

51.0

27.2

27.5

P/BV (x)

12.3

6.8

5.4

4.3

Sarabjit Kour Nangra

EV/Sales (x)

5.3

3.3

3.0

2.5

+91- 22- 36357600 - 6806

EV/EBITDA (x)

27.3

10.5

14.9

11.7

[email protected]

Source: Company, Angel Research; Note: CMP as of January 27, 2017

Please refer to important disclosures at the end of this report

Alembic Pharma | 3QFY2017 Result Update

Exhibit 1: 3QFY2017 performance (Consolidated)

Y/E March (` cr)

3QFY2017

2QFY2017

% chg (qoq) 3QFY2016

% chg (yoy) 9MFY2017 9MFY2016

% chg (yoy)

Net sales

770

872

(11.7)

921

(16.4)

2,365

2,511

(5.8)

Other income

(75.3)

(27.2)

Total income

771

872

(11.6)

925

(16.7)

2,368

2,516

Gross profit

565

632

(10.7)

715

(21.0)

1729

1866

(7.4)

Gross margin

73.3

72.5

77.6

73.1

74.3

Operating profit

145

177

(18.4)

384

(62.4)

478

860

(44.5)

Operating margin (%)

18.8

20.3

41.7

20.2

34.2

Interest

(21.9)

39.0

Depreciation

2.5

(4.0)

27.4

PBT

124

156

(20.5)

365

(66.2)

417

815

(48.8)

Provision for taxation

18.5

(58.7)

106

187

(43.5)

PAT before Extra-ordinary item

122

(29.3)

269

(67.8)

312

629

(50.5)

(Profit)/Loss of Associate Company

(0)

(1)

PAT after Extra-ordinary item & MI

119

(27.1)

269

(67.8)

310

630

(50.7)

EPS (`)

4.6

6.3

14.3

16.5

33.3

Source: Company, Angel Research

Exhibit 2: 3QFY2017 - Actual vs Angel estimates

(` cr)

Actual

Estimates

Variation (%)

Net Sales

770

872

(11.7)

Other Income

(71.9)

Operating Profit

145

180

(19.6)

Interest

(27.9)

Tax

45.6

Net Profit

134

(35.2)

Source: Company, Angel Research

Sales below expectation: In sales, the company posted revenues of `770cr (`872cr

expected) v/s `921cr in 3QFY2016, dip of 16.4% yoy. The dip in sales was mainly

on the back of the International sales, which came in at `303cr v/s `521cr in

3QFY2016, a dip of 41.8%. The Indian branded sales came in at `294cr v/s

`288cr, a yoy growth of 2.1%. API sales, on the other hand, came in at `166cr v/s

`101cr in 3QFY2016, a yoy growth of 66.0%.

International sales, during the quarter contributed around

39% of sales in

3QFY2017, while Indian branded formulation sales contributed around 37.9% of

sales in 3QFY2017. US markets sales were around `226cr in 3QFY2017. In

terms, of filling, the company has filed 4 products in US, while 3 products received

approval during the quarter.

January 31, 2017

Alembic Pharma | 3QFY2017 Result Update

Exhibit 3: Sales trend

1,080

921

872

880

770

680

626

480

280

3QFY2016

4QFY2016

1QFY2017

2QFY2017

3QFY2017

Source: Company, Angel Research

OPM lower than expectation: On EBITDA front, the company posted an EBITDA of

18.8% (20.6% expected) v/s 41.7% in 3QFY2016. The dip came in on the back of

the high R&D expenses, which came in at 15.2% of sales v/s 7.6% of sales in

3QFY2016. Also, other expenses came in higher - the employee expenses and

other expenses rose by 33.5% and 43.6% respectively.

Exhibit 4: OPM Trend (%)

(%)

45.0

41.7

40.0

35.0

30.0

25.0

22.7

20.3

20.0

20.3

18.8

15.0

3QFY2016

4QFY2016

1QFY2017

2QFY2017

3QFY2017

Source: Company, Angel Research

Net profit above expectation: Consequently, PAT came in at `87cr (lower than

expectations) v/s `270cr in 3QFY2016, de-growth of 67.8% yoy.

January 31, 2017

Alembic Pharma | 3QFY2017 Result Update

Exhibit 5: Net profit trend

350

269

300

250

200

150

119

100

3QFY2016

4QFY2016

1QFY2017

2QFY2017

3QFY2017

Source: Company, Angel Research

Concall highlights

 Oncology oral solids and injectable facilities to be operational by FY2017 end



~39 pending ANDAs, of which ~40% are Para IV/FTFs

 R&D expenses to be `400-450cr in FY2017

 General injectable and derma filings in the US will start from FY2019

 Capex for FY2017 to be `600cr

Investment arguments

Focus on chronic segment to drive domestic formulation growth: Alembic

Pharmaceuticals has been restructuring its business portfolio, which would aid in

improving its growth and operating performance. The company’s domestic

formulation business contributed 44% to its total sales in FY2016. The company

has a strong field force of ~3,600 medical representatives. Going forward, the

company expects its domestic formulation business to at least grow in-line with the

industry growth rate, before it sees an improvement in the share of the high growth

chronic segment. For FY2016-18E, we expect the domestic formulation business to

grow at a CAGR of 15%.

Exports - US the key growth driver: On the exports front, the formulation business

contributed 30% to the total turnover, with majority of the contribution coming

from Europe and the US. In the US, the company has filed for ~82 ANDAs till date

and received 49 approvals. The company, going forward, expects to keep its

momentum high in terms of number of filings, by filing around 10-12 ANDAs per

annum. For FY2016-18E, we expect exports to register a CAGR of 13.6%, mainly

on the back of base effect impact of FY2016 (sales grew by 46%, due to launch of

Abilify).

Outlook and valuation: Over FY2016-18E, we expect the company to post a

CAGR of 13.9% in sales, while profitability will be under pressure on back of

higher R&D spend, which is likely to reach 13-14% of sales in FY2017-FY2018E.

We maintain our Neutral rating on the stock.

January 31, 2017

Alembic Pharma | 3QFY2017 Result Update

Exhibit 6: Key assumptions

FY2017E

FY2018E

Domestic formulation sales growth (%)

16.0

14.0

Exports sales growth (%)

8.0

20.0

R&D as % of sales

14.0

13.0

Operating margins (%)

20.2

21.4

Capex (` cr)

400

200

Net Debt/Equity (x)

(0.1)

(0.2)

Source: Company, Angel Research

Exhibit 7: Recommendation summary

Reco.

CMP Tgt Price Upside

FY2018E

FY16-18E

FY2018E

(`)

(%) PE (x) EV/Sales (x) EV/EBITDA (x)

CAGR in EPS (%) RoCE (%) RoE (%)

Alembic Pharma

Neutral

575

18.9

2.5

11.8

(10.8)

27.5

25.3

Aurobindo Pharma Accumulate

713

877

22.9

15.1

2.5

10.5

18.1

22.5

26.1

Cadila Healthcare

Accumulate

363

400

10.3

18.9

2.9

13.2

13.4

22.7

25.7

Cipla

Sell

580

490

(15.6)

21.3

2.7

14.7

20.4

13.5

15.2

Dr Reddy's

Neutral

2,999

21.0

2.7

10.2

1.7

16.2

15.9

Dishman Pharma

Neutral

234

20.7

2.3

10.2

13.3

10.3

10.9

GSK Pharma

Neutral

2,732

44.9

6.8

33.0

17.3

35.3

32.1

Indoco Remedies

Reduce

275

240

(12.7)

17.2

2.0

11.0

33.2

19.1

20.1

Ipca labs

Accumulate

537

613

14.2

27.3

1.9

12.4

36.5

8.8

9.4

Lupin

Buy

1,492

1,809

21.3

21.5

3.5

13.3

17.2

24.4

20.9

Sanofi India*

Neutral

4,181

24.3

3.2

17.3

22.2

25.6

28.8

Sun Pharma

Buy

640

847

32.4

18.1

3.5

11.5

26.5

18.9

20.1

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

Company Background

Alembic Pharmaceuticals is a leading pharmaceutical company in India. The

company is vertically integrated to develop pharmaceutical substances and

intermediates. The company is a market leader in the Macrolides segment of

anti-infective drugs in India. Its manufacturing facilities are located in Vadodara

and in Baddi (Himachal Pradesh; for the domestic and non-regulated export

market). The Panelav facility houses the API and formulation manufacturing (both

USFDA approved) plants.

January 31, 2017

Alembic Pharma | 3QFY2017 Result Update

Profit & Loss Statement (Consolidated)

Y/E March (` cr)

FY2014

FY2015

FY2016

FY2017E

FY2018E

Gross sales

1,871

2,064

3,181

3,522

4,128

Less: Excise duty

Net sales

1,863

2,053

3,145

3,483

4,083

Other operating income

3.2

5.7

3.6

Total operating income

1,866

2,058

3,149

3,487

4,087

% chg

22.8

10.3

53.0

10.7

17.2

Total expenditure

1,506

1,653

2,143

2,779

3,210

Net raw materials

713

715

769

1,045

1,225

Other mfg costs

138

153

180

Personnel

247

307

421

506

607

Other

463

542

814

1,075

1,198

EBITDA

358

400

1,002

704

873

% chg

43.7

11.7

150.9

(29.7)

24.0

(% of Net Sales)

19.2

19.5

31.9

20.2

21.4

Depreciation& amortisation

120

Interest & other charges

Other income

(% of PBT)

Share in profit of Associates

Recurring PBT

308

360

936

596

743

% chg

49.4

16.8

160.2

(36.3)

24.7

Extraordinary expense/(Inc.)

PBT (reported)

308

360

936

596

743

Tax

216

137

171

(% of PBT)

24.4

21.2

23.1

23.0

PAT (reported)

236

283

720

459

572

Add: Share of earnings of asso.

(0)

Less: Minority interest (MI)

Prior period items

PAT after MI (reported)

236

283

720

459

572

ADJ. PAT

236

283

720

459

572

% chg

43.0

20.0

154.1

(36.2)

24.7

(% of Net Sales)

12.7

13.8

22.9

13.2

14.0

Basic EPS (`)

12.5

15.0

38.2

24.3

30.4

Fully Diluted EPS (`)

12.5

15.0

38.2

24.3

30.4

% chg

43.0

20.0

154.1

(36.2)

24.7

January 31, 2017

Alembic Pharma | 3QFY2017 Result Update

Balance Sheet (Consolidated)

Y/E March (` cr)

FY2014

FY2015

FY2016

FY2017E

FY2018E

SOURCES OF FUNDS

Equity share capital

37.7

Preference Capital

Reserves & surplus

638

847

1,563

1,967

2,485

Shareholders funds

676

885

1,601

2,005

2,523

Minority Interest

Other Long Term Liabilities

12.7

15.8

33.9

14.3

Long Term Provisions

6.7

6.4

7.4

Total loans

239

133

150

Deferred tax liability

Total liabilities

795

1,177

1,824

2,227

2,744

APPLICATION OF FUNDS

Gross block

665

907

1,208

1,608

1,808

Less: acc. depreciation

268

313

385

483

603

Net block

397

595

824

1,125

1,206

Capital work-in-progress

Goodwill

Long Term Loans and Adv.

118

Investments

3.4

2.3

2.1

3.3

Current assets

755

891

1,507

1,955

2,554

Cash

451

398

729

Loans & advances

147

120

409

453

531

Other

584

716

647

1,104

1,294

Current liabilities

422

464

635

940

1,102

Net current assets

333

426

872

1,015

1,452

Mis. Exp. not written off

Total assets

795

1,177

1,824

2,227

2,744

January 31, 2017

Alembic Pharma | 3QFY2017 Result Update

Cash Flow Statement (Consolidated)

Y/E March (` cr)

FY2014

FY2015

FY2016 FY2017E FY2018E

Profit before tax

308

360

936

596

743

Depreciation

120

(Inc)/Dec in Working Capital

(84)

191

(358)

169

Less: Other income

Direct taxes paid

216

137

171

Cash Flow from Operations

190

393

982

199

861

(Inc.)/Dec.in Fixed Assets

(81)

(222)

(301)

(400)

(200)

(Inc.)/Dec. in Investments

Other income

Cash Flow from Investing

(81)

(222)

(301)

(400)

(200)

Issue of Equity

Inc./(Dec.) in loans

(109)

164

(87)

(2)

Dividend Paid (Incl. Tax)

(55)

Others

(34)

184

160

Cash Flow from Financing

(197)

293

(6)

(4)

Inc./(Dec.) in Cash

396

(53)

331

Opening Cash balances

451

398

Closing Cash balances

451

398

729

January 31, 2017

Alembic Pharma | 3QFY2017 Result Update

Key Ratios

Y/E March

FY2014

FY2015

FY2016

FY2017E

FY2018E

Valuation Ratio (x)

P/E (on FDEPS)

45.9

38.3

15.1

23.6

18.9

P/CEPS

39.2

33.1

13.7

19.4

15.7

P/BV

16.0

12.3

6.8

5.4

4.3

Dividend yield (%)

0.4

EV/Sales

5.8

5.3

3.3

3.0

2.5

EV/EBITDA

30.4

27.3

10.5

14.9

11.7

EV / Total Assets

13.7

9.3

5.7

4.7

3.7

Per Share Data (`)

EPS (Basic)

12.5

15.0

38.2

18.7

23.7

EPS (fully diluted)

12.5

15.0

38.2

18.7

23.7

Cash EPS

14.7

17.4

42.0

23.9

30.0

DPS

2.5

Book Value

35.8

46.9

84.9

100.7

121.5

Dupont Analysis

EBIT margin

17.0

17.3

29.6

13.4

14.5

Tax retention ratio

75.6

78.8

76.9

77.0

Asset turnover (x)

2.5

2.2

2.5

2.2

2.1

ROIC (Post-tax)

32.5

29.6

57.4

22.5

23.7

Cost of Debt (Post Tax)

5.6

0.9

1.5

5.4

Leverage (x)

0.2

0.1

0.0

Operating ROE

38.2

33.8

57.6

22.5

23.7

Returns (%)

ROCE (Pre-tax)

39.9

30.2

51.0

22.0

23.5

Angel ROIC (Pre-tax)

44.5

38.7

77.0

29.5

30.7

ROE

40.0

36.3

57.9

20.1

21.3

Turnover ratios (x)

Asset Turnover (Gross Block)

3.0

2.6

3.0

2.5

2.4

Inventory / Sales (days)

56.5

61.5

54.1

68.4

72.5

Receivables (days)

49.5

56.3

43.5

56.3

62.3

Payables (days)

79.8

79.3

37.8

39.7

44.6

WC cycle (ex-cash) (days)

58.6

60.3

45.9

54.3

59.8

Solvency ratios (x)

Net debt to equity

0.1

0.2

(0.2)

(0.1)

(0.2)

Net debt to EBITDA

0.2

0.5

(0.3)

(0.2)

(0.5)

Interest Coverage (EBIT / Int.)

32.3

199.5

252.8

47.2

56.2

January 31, 2017

Alembic Pharma | 3QFY2017 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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offering of securities of the company covered by Analyst during the past twelve months.

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Disclosure of Interest Statement

Alembic Pharma

1. Financial interest of research analyst or Angel or his Associate or his relative

2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives

3. Served as an officer, director or employee of the company covered under Research

4. Broking relationship with company covered under Research

Ratings (Based on expected returns

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

over 12 months investment period):

Reduce (-5% to -15%)

Sell (< -15)

January 31, 2017