Stock Fundamentals

Why you should hold the stock of Alembic Pharma

Maulik Madhu | Updated on November 22, 2020

Reap the benefit of the company’s planned expansions

The stock of Alembic Pharmaceuticals (Alembic Pharma) has more than doubled since the low of ₹449 on March 23, 2020. During this time, the S&P BSE Healthcare Index has gained 78 per cent.

After the recent rise, at ₹971, the stock trades at a one-year forward price-to-earnings (P/E) multiple of around 18 times. This is higher than its three-year historical average forward P/E ratio of 14 times. While the stock looks expensive relative to its own past valuations, it looks reasonably priced when compared with other pharma stocks on a trailing 12-month P/E basis. The peer valuations are most likely factoring in the differences in the companies’ product portfolios.

Alembic Pharma derives nearly 54 per cent of its revenue from regular generic products. Companies with complex generics in their portfolio command higher valuations.

However, Alembic Pharma has made considerable investments in capacity expansions in the last few years. Incremental revenue from some of the new capacities, which also include the more remunerative complex generic products, is expected to start flowing in from FY 2022. The impact of this is expected to translate into higher earnings only from FY 2023, once the company is able to meaningfully ramp up the capacity utilisation of the new formulation plants.

Existing investors in Alembic Pharmaceuticals can, therefore, continue to hold the stock to reap the benefit of the planned expansions. Given the current expensive valuations and a wait of around 1.5-2 years for this to play out, new investors can give the stock a go-by.

The business

Alembic Pharma’s operations comprise manufacturing generic formulations for international markets (US and other countries), branded formulations for the Indian market and APIs (Active Pharmaceutical Ingredients) for global markets. The company derived 54 per cent, 31 per cent and 15 per cent of its revenue from the three segments, respectively in FY20. The company has five manufacturing facilities in Gujarat and Sikkim, all USFDA-approved, and is setting up three new formulation plants in Gujarat.

After a 25 per cent (year-on-year) decline in revenue in FY17, the US generics business picked up, registering a strong performance of 29 per cent CAGR, from FY17 to FY20. The US market accounts for 80 per cent of the company’s international generics business. The ex-US generics business which caters to Europe, Canada, Australia and South Africa too bounced back in the June 2020 quarter after adhering to the new stricter EU norms for pharma companies.

The Indian branded formulations business has been growing at a slower but steadier pace of 4.6 per cent (CAGR) from FY17 to FY20. More recently, impacted by the nationwide lockdown, revenue in the June 2020 quarter fell 6 per cent compared to the same period last year.

Helped by significant growth in sales of Azithral Oral Solid, which also resulted in the company gaining market share in this product, the Indian business revenue grew 6 per cent year-on-year in the September 2020 quarter.

 

At the overall level, Alembic Pharma has grown its revenue 14 per cent CAGR and operating profit (EBIDTA) nearly 26 per cent CAGR from FY17 to FY20. The revenue and operating profit growth for the half-year ended September 2020 was 28 per cent and 49 per cent year-on-year, respectively. The company has expanded its operating profit margin from 20 per cent in FY17 to 27 per cent by FY20 and further to 30 per cent in H1FY20.

Strong backward integration to the extent of 80 per cent of its operations and cost restructuring efforts last year have helped. However, as new formulation facilities are being set up, the extent of backward integration is expected to go down.

Growth drivers

Alembic Pharma’s existing product portfolio in the competitive US market comprises largely regular generics which have faced pricing pressures. The company has been launching new products to counter the price erosion in its existing products. It launched six new products in H1FY20 and plans to launch a total of 15-20 products both this year and next. Going forward, new products will include injectables and other specialty products in dermatology and ophthalmics, thereby enriching the product portfolio.

In India, Alembic Pharma has a diversified portfolio, spanning several chronic therapeutic areas such as diabetology, gastro, gynecology, urology and nephrology. Here too, the strategy is to launch new products as they go off-patent. Cold & cough and pediatrics are, however, two therapeutic areas where the company has been underperforming.

Going by the company’s guidance, after taking into account the revenue from the new products (including the relatively complex ones), Alembic Pharma’s earnings per share (EPS) will be ₹50 in FY 2022.

This is lower than the forecast EPS of ₹ 60 for FY2021 as the former considers the additional operational expense of ₹450 crore annually on account of the commercialisation of the three new formulation plants from FY 2022.

As the company ramps up capacity utilisation from the new plants, earnings are expected to move up from FY 2023.

In the September 2020 quarter, Alembic Pharma raised around ₹750 crore through a QIP (qualified institutional placement) route.

The funds have been used partially for debt repayment and will also be used for future growth opportunities. Alembic Pharma had a negligible net debt-to-equity ratio of 0.07 times as of September 2020.

 

Published on November 22, 2020

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