Hold Alembic Pharma; target of Rs 560: ICICI Direct

ICICI Direct's research report on Alembic Pharma

Alembic Pharma’s Q2FY19 results were way above expectations on all front mainly due to one-off Valsartan (cardiovascular) opportunity in the US and 133% growth in the ex-US business to Rs 168 crore. This new ex-US base is likely to be sustainable, as per the management. Even ex one-off, US business grew 20%+ led by volume growth and price hike in select products Domestic formulations were flat owing to high base of re-stocking post GST implementation. The management has guided for 14-16% growth in domestic formulations for FY19 EBITDA margins improved 413 bps YoY to 26.8% (I-direct estimate: 18.0%) mainly due one-off opportunity in the US. Consequently, net profit grew 64.6% YoY to Rs 200.1 crore.

Outlook

Ex one-off, the financial performance was disappointing mainly on the margins front. Domestic growth was also lower than expected. With the aggressive R&D and capex plans, the management has signalled its long term strategy for the next five to six years, especially on the US front. This includes a foray into niche areas like oncology, injectables, derma, etc. We believe this is fraught with a new set of challenges. The benefits are most likely to be back-loaded. Immediate cash burn is likely to weigh on sentiments in the near term. Accordingly, we arrive at our new target price of Rs 560 based on 18x FY20E EPS of Rs 31.