Alembic: Retain ‘buy’; lower TP to RS 925 from Rs 975

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November 16, 2021 12:45 AM

ALPM remains confident about the long-term outlook for the US business, where it has invested significantly in recent years.

alembic, alembic share price, alembic shares, share marketAlembic has done major cost rationalisation for its international business and benefits should show in 3Q and beyond (notably in employee costs)

Key updates from 2QFY22: a) The new general injectable plant (F3) at Karkhadi was re-inspected by the US FDA during 20 October-11 November 2021 and the agency issued a Form 483 with 10 observations (the FDA issued an ‘EIR’ or closure letter on 11 October 2021 for the previous inspection in January-February 2021). Per ALPM, the quick re-inspection was to reaffirm the EIR status of F3 and for two of its filed ANDAs; b) ALPM’s US segment remains under pressure on elevated price erosion and reported US sales of Rs3.5billion in 2Q (c$47m), down 40.2% y-o-y, down 5.7% q-o-q. Management expects similar pricing trends to continue for another six-eight months, although higher supplies should help improve sales starting in 3QFY22; c) Alembic has done major cost rationalisation for its international business and benefits should show in 3Q and beyond (notably in employee costs); d) it is yet to see the impact of higher commodity prices in gross margins, although it remains watchful here and is focused on prudent inventory management to offset any impact; e) India sales of Rs5.1billion (up 22.7% y-o-y, up 5.8% q-o-q) was the silver lining for 2Q results.

India sales provide support during the US build-up phase: ALPM has maintained healthy sales trends for its India formulations segment on growth across focus segments, and better productivity and efficiencies resulting from measures implemented in recent years. Management remains confident about sustaining outperformance to the broader market and this, in turn, should back the overall business during the US build-up phase. For the US segment, while pricing worries remain in the near term, the focus is on costs optimisation and new launches (15-20 pa) to offset some of the impact of pricing hits. It continues to file 20-25 ANDAs pa to expand its US portfolio. Despite short-term challenges, ALPM remains confident about the long-term outlook for the US business, where it has invested significantly in recent years. The fresh Form 483 for F3 came as a lesson though, and ALPM believes all the observations are addressable (none indicate data integrity issues, according to management).

Retain ‘buy’; lower TP to Rs925 (from Rs 975): We retain our ‘buy’ rating as we believe ALPM is set to reap benefits from R&D and capex investments in the US over the past few years, despite some near-term hiccups, and we remain confident about management execution to navigate through challenges. Post 2Q, we cut our FY22/23/24e EPS estimates by 1.8%/5.5%/5% to account for lower US sales, partially offset by higher India sales and costs rationalisations in the international segment. Our revised fair value target is Rs 925 (from Rs 975).

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