India business saw strong growth; FY21/22e EPS up 7.5/7.3%; outlook for US is bright; TP raised to Rs 770.
Alembic continued to benefit from ongoing disruptions in the sartans market in the US. It reported US sales of ~$75 m in Q4 (vs Q3 sales of c$74 m). It expects no change in market dynamics for sartans for another 6-9 months; hence sartans’ benefit should continue in the near term. The company hopes to maintain the pace of new launches (10 launches planned for 1HFY21 after 22 launches in FY20) and keep benefitting from supplies opportunities emerging in the market on the back of its nimble manufacturing and supply infrastructure.
Shortly, it will launch azithromycin in the US which is seeing increasing demand due to COVID-19. On a robust US sales outlook and improving trend for India sales, it expects to maintain gross margins at the 70-75% range (Q4 gross margins at 78.1% benefitted from favourable mix and weaker INR vs USD).
India sales saw strong growth: After several quarters of lacklustre growth for its India formulations business, Alembic recorded strong sales growth of 13.2% yoy during Q4. It expects growth momentum to continue now after going through business hygiene initiatives. After facing initial disruptions due to the lockdown, Alembic states that its production capacity is now back to 70-80% of usual levels and glitches in transportation have been resolved. So far, there is no impact of the lockdown on its India formulations business. Per Alembic, its supplies to export markets are proceeding normally.
Investments continue for the US market: Alembic continues to invest towards R&D and capex projects in the US. It has completed construction of new plants for oncology injectables, general injectables, derma and new oral solid dosages and it has started/is preparing to start ANDA filings from these plants. While cost pressure will continue on ongoing R&D spend for its US pipeline and costs associated with new facilities, we believe scale-up in US sales will sustain steady margins of ~21% over FY21-22e.
Buy with higher TP: We believe the outlook remains strong for its US business. We change our FY21-22 estimates post Q4 which leads to 7.5%/7.3% increases in our FY21/FY22 EPS estimates. Our revised TP of Rs 770 (from Rs 715) is derived by discounting back the 1-yr forward fair value, which is based on 21x (Gordon growth-based PE, unchanged) March 2022e EPS of Rs 39.76 (earlier Rs 37.04).