Target: ₹875

CMP: ₹793.85

Alembic Pharmaceuticals (ALPM) Q1 revenues were 4 per cent ahead of JMFe driven by non-US formulations and API meanwhile EBITDA margin was weak due to new facility costs (₹600-650mn). PAT beat (19 per cent vs. JMFe) was led by lower depreciation costs and lower tax rates. Management guides to outperform the IPM by up to 4-5 ppt and the 9 per cent YoY growth was slower due to deferred seasonality.

However, US performance was below our estimates despite short-term opportunities and price erosion. ALPM impaired ₹1,150 crore CWIP pertaining to capitalised pre-op expenses of 3 new facilities with no net implication on P&L as General Reserve was transferred to P&L. As these new facilities have commenced operations, the increase in operating expenses is expected to be partly cushioned by Aleor write-offs in the base and new US launches (20 in FY24). Overall, we expect sequential margin improvement hereon.

As we expect improving performance hereon, we upgrade our rating to BUY with key triggers being meaningful US base improvement, margin expansion and re-calibration of ALPM’s capital allocation strategy. We value ALPM at 21x (vs. 18x) FY25 earnings to derive a Mar’24 Price Target of ₹875.