Alembic Angel 020810

8/8/2019 Alembic Angel 020810

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Please refer to important disclosures at the end of this report 1

Y/E March(Rs cr)

1QFY2011 4QFY2010% chg(qoq)

1QFY2010% chg(yoy)

Net Sales 279 267 4.6 291 (4.0)

Other Income 1 1 28.3 1 -

Operating Profit 28 18 56.9 30 (8.2)

Interest 4 6 (28.8) 8 (45.4)

Net Profit 11 0 - 12 (6.4)

Source: Company, Angel Research

Alembic reported below expectation numbers for 1QFY2011 impacted by

de-growth on the export API front. The domestic formulation sales grew by 5.5% yoy on the back of the restructuring exercise undertaken by the

company over the last one year, which improved working capital

management resulting in lower debt levels. We maintain a Buy on the stock as

de-merger of the company into - Alembic and Alembic Pharma - is a long-term

positive as it will unlock value for both the businesses and pave the way to rope in

future investors.

Results below estimates: Alembic reported revenues of Rs279.1cr (Rs290.6cr),

down 4.0% yoy on the back of subdued performance in the export API segment

and lower-than-expected growth in the domestic formulations segment. Alembic

reported lower-than-estimated OPM of 9.9% (10.3%). Net profit came in at

Rs11.5cr (Rs12.3cr), down 6.4% yoy on account of lower sales during the quarter.

On a positive note, interest cost decreased by 45.4% yoy to Rs4.4cr (Rs8.1cr) as

debt levels stood lower at Rs360cr from Rs408cr in FY2010.

Outlook and Valuation: We have valued Alembic on SOTP basis, with a Target

Price of Rs74 valuing Alembic Pharma at Rs47 per share. Alembic’s 30% stake in

Alembic Pharma has been taken at Rs11 per share and the loss-making API

business at Rs5 per share. We have conservatively valued the land asset of 70

acre at Rs500/sq. ft resulting in Rs11 per share.

Key Financials

Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012ENet Sales 1,116 1,138 1,266 1,393

% chg 11.2 2.0 11.2 10.0

Net Profit 11 40 75 85

% chg (90.3) 265.1 89.2 13.3

EPS (Rs) 0.8 2.9 5.6 6.4

EBITDA Margin (%) 11.2 9.9 12.4 12.0

P/E (x) 72.2 19.2 10.2 9.0

RoE (%) 16.0 11.3 18.9 18.5

RoCE (%) 11.1 7.3 14.3 14.8

P/BV (x) 2.4 2.1 1.8 1.6EV/Sales (x) 1.1 1.0 0.9 0.8

EV/EBITDA (x) 9.9 11.6 7.2 6.6

Source: Company, Angel Research; Note: Estimates include the demerged pharma business

BUYCMP Rs57

Target Price Rs74

Investment Period 12 months

Stock Info

Sector

Bloomberg Code ALBC@IN

Shareholding Pattern (%)

Promoters 63.4

MF / Banks / Indian Fls 5.3

FII / NRIs / OCBs 8.3

Indian Public / Others 23.0

Abs. (%) 3m 1yr 3yr

Sensex 3.0 15.4 20.7

Alembic 13.9 41.9 (19.9)

2

18,081

5,432

ALMC.BO

759

0.6

64/38

210008

Pharmaceutical

Avg. Daily Volume

Market Cap (Rs cr)

Beta

52 Week High / Low

Face Value (Rs)

BSE Sensex

Nifty

Reuters Code

Sarabjit Kour Nangra

Tel: 022 – 4040 3800 Ext: 343

[email protected]

Sushant DalmiaTel: 022 – 4040 3800 Ext: 320

[email protected]

Alembic

Performance Highlights

1QFY2011 Result Update | Pharmaceutical

August 2, 2010



Alembic | 1QFY2011 Result Update

August 2, 2010 2

Exhibit 1: 1QFY2011 performance

Y/E March (Rs cr) 1QFY2011 4QFY2010 % chg (qoq) 1QFY2010 % chg (yoy) FY2010 FY2009 % chg

Net Sales 279 267 4.6 291 (4.0) 875 860 1.7

Other Income 1 1 28.3 1 - 3 4 (15.0)

Total Income 280 268 291 (3.7) 878 864 1.6

Gross Profit 132 131 0.7 135 (2.1) 436 429 1.5

Gross margin 47.4 49.2 46.5 49.8 49.9

Operating profit 28 18 56.9 30 (8.2) 95 111 (14.6)

Operating Margin (%) 9.9 6.6 10.3 10.9 12.9

Interest 4 6 (28.8) 8 (45.4) 24 33 (27.5)

Depreciation 11 11 0.3 10 5.9 32 28 12.4

PBT 14 1 831.7 12 10.2 42 53 (21.0)

Provision for Taxation 2 1 88.9 0 3 0 -

PAT before Extra-ordinary item 11 0 - 12 (6.4) 39 53 (27.1)Extra-Ordinary Expenses 0 0 0 0 42

PAT after Extra-ordinary item & MI 11 0 - 12 (6.4) 39 11 244.2

EPS (Rs) 0.8 - 0.9 2.9 0.8


Exhibit 2: 1QFY2011- Actual v/s Angel estimates

Rs cr Actual Estimates Variation

Net Sales 279 300 (7.0)

Other Income 1 1 13.3

Operating Profit 28 32 (14.8)

Interest 4 5 (11.8)

Tax 2 1 140.0

Net Profit 11 14 (15.0)


Revenues below estimates, impacted by export API segment: Alembic reported

revenues of Rs279.1cr (Rs290.6cr), down 4.0% yoy on the back of subdued

performance by the export API segment. The domestic formulation sales grew by a

mere 5.5% to Rs145.0cr (Rs137.4cr) on account of the restructuring exercise

undertaken by the company last year. As a result, debtor days of the segment fell

from 80 days last year to 40 days currently. The company expects the domestic

formulation sales to grow in line with the industry average from next quarter

onwards. During the quarter, the domestic API sales grew by a strong 76.3% yoy to

Rs37.2cr (Rs21.1cr).




August 2, 2010 3

Exhibit 3: Domestic market sales trend


Exports were subdued during the quarter with sales coming in at Rs98.5cr

(Rs132.0cr), down 25.4% impacted by the API segment. The export API segment

de-grew by 37.6% to Rs65.0cr (Rs104.1cr) on the back of pricing pressure and

slower volume off-take in the regulated markets. However, formulation sales grew

by a healthy 20.0% to Rs33.6cr (Rs28.0cr) driven by the regulated markets. The

company filed 3 ANDAs during the quarter taking its cumulative filings to 31

ANDAs with 9 approvals in the US.

Exhibit 4: Export market sales trend


OPM impacted by lower sales: Alembic reported OPM of 9.9% (10.3%), which was

lower than estimated due to lower-than-expected sales on the domestic

formulation front. The company clocked gross margins of 47.4% (46.5%) on the

back of lower raw material cost (including purchase of traded goods), while

employee expenses increased by 6.7% yoy to Rs35.0cr (Rs32.8cr).

137

163154

131

145

21 2435 39 37

0

30

60

90

120

150

180

1QFY2010 2QFY2010 3QFY2010 4QFY2010 1QFY2011

Formulations API

R s c r

28

46

3440

34

104

51

78

53

65

0

20

40

60

80

100

120


Formulations API

R s c r




August 2, 2010 4

Exhibit 5: OPM trend


Net profit down 6%: Alembic reported net profit of Rs11.5cr (Rs 12.3cr), down

6.4% yoy on the back of lower sales during the quarter. On the positive front,

interest cost decreased by 45.4% yoy to Rs4.4cr (Rs8.1cr) as debt levels have

reduced to Rs360cr from Rs408cr in FY2010 following improvement in working

capital management.

Exhibit 6: Net profit trend


Exhibit 7: 1Q FY2011 as per proposed de-merger

Alembic Pharma Alembic

Rs cr 1QFY2011 1QFY2010 1QFY2011 1QFY2010

Net sales 256.3 266.04 264.2 264.5

% growth (3.7) (0.1)

PBT 19.1 21.1 (5.6) (8.8)

% growth (9.7) 36.7


10.3

11.9

10.3

6.7

9.9

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0


%

1213 13

0.4

11

0

3

6

9

12

15


R s c r




August 2, 2010 5

Recommendation Rationale

De-merger to unlock value: Alembic has announced de-merger of its pharma

business (comprises its domestic formulation, international generic and API

businesses) into a separate company named Alembic Pharma. With this, Alembic

plans to insulate its pharma business from the high loss-making Pen-G business

(API facility at Vadodara). Alembic also plans to develop its 70 acre land asset.

Management decision to demerge the relatively high-margin pharma business is a

positive as it will allow the two companies to focus on their respective core

businesses, insulate the pharma business from the high loss-making Pen-G

business (loss of Rs24.2cr in FY2010), could attract a distinct set of investors for the

different businesses and potentially unlock value of the 70 acre land bank at

Vadodara.

Alembic Pharma profitability and return ratios to improve: The domestic

formulation business of Alembic Pharma contributed 57% of total sales in FY2010

with 75% of its revenues coming from the anti-infective, respiratory, gynaecological

and gastro therapeutic space. The company has a strong field force of 2,700

medical representatives (MRs). On the export front, the formulation business

contributed 14% to the total turnover with majority of the contribution coming from

Europe and US. In the US, the company has filed for 31 ANDAs and received 9

approvals. The international API business contributes 28% to total turnover. Going

forward, the company expects its domestic formulation business to grow at industry

pace and revenues from the US generic market are expected to scale up on the

back of product approvals. On the OPM front, we expect the Alembic Pharma's

margins to improve from current levels of 12.4% to 13.5% by FY2012E withproductivity of the field force improving going ahead. The company plans to

reduce debt (currently at Rs339cr) going ahead as it does not foresee any major

capital expenditure requirements except the normal capex. Hence, it would be

utilising its operating cash flows to repay debt.

Valuation: We have valued Alembic on SOTP basis with a Target Price of Rs74

wherein we have valued Alembic Pharma at 10x FY2012E earnings on the back of

improving growth prospects and better return ratios as compared to the 8x PE

assigned to Alembic as a whole previously. On the other hand, we have valued

Alembic's loss-making API business at 0.6x FY2012E EV/Sales. On the land asset

front, management could develop the land for residential and/or commercialpurposes though the timeline is still unclear. We have conservatively valued the

land asset at Rs500/sq. ft.




August 2, 2010 6

Exhibit 8: SOTP valuation

Rs

Alembic Pharma (PE 10x FY2012E EPS) 47

Alembic's 30% stake in Alembic Pharma (20% discount) 11

Alembic API business (EV/Sales @ 0.6x FY2012E Sales) 5

Land bank (70 acre @ Rs2.2cr per acre) 11

Per Share Value 74


Exhibit 9: Key assumptions

FY2011E FY2012E

Domestic Sales Growth (%) 11.5 11.1

Export Sales Growth (%) 10.2 8.6Growth in Employee Expenses (%) 13.1 10.0

R&D as % of Sales 4.0 4.0

Operating Margins (%) 12.4 12.0

Capex (Rs) 39 38

Net Debt/Equity (x) 0.9 0.7


Exhibit 10: One-year forward PE band


-

20

40

60

80

100

120

140

160

A p r - 0 5

J u l - 0 5

O c t - 0 5

J a n - 0

6

A p r - 0 6

J u l - 0 6

O c t - 0 6

J a n - 0

7

A p r - 0 7

J u l - 0 7

O c t - 0 7

J a n - 0

8

A p r - 0 8

J u l - 0 8

O c t - 0 8

J a n - 0

9

A p r - 0 9

J u l - 0 9

O c t - 0 9

J a n - 1

0

A p r - 1 0

J u l - 1 0

18x

6x

14x

10x

R s




August 2, 2010 7

Exhibit 11: Recommendation Summary

Company Reco CMP Tgt Price Upside FY2012E FY10-12E FY2012E

(Rs) (Rs) %PE

(x)

EV/Sales

(x)

EV/EBITDA

(x)

CAGR in

EPS (%)

RoCE

(%)

RoE

(%) Alembic Buy 57 74 30 9.0 0.8 6.6 46.4 14.8 18.5

Aventis* Reduce 1,869 1,658 (11) 20.3 2.9 15.8 16.1 0.2 18.9

Cadila Healthcare Accumulate 629 714 14 15.9 2.6 12.4 26.6 26.0 34.7

Cipla Accumulate 326 360 10 19.0 3.8 18.2 12.7 15.3 19.1

Dr Reddy's# Neutral 1,351 - - 17.3 2.3 11.7 93.5 24.7 25.2

Dishman Pharma Buy 216 279 29 10.1 1.8 7.0 21.7 12.5 16.8

GSK Pharma* Sell 2,014 1,700 (16) 27.3 6.1 17.3 11.0 38.7 28.9

Indoco Remedies Buy 414 541 31 7.6 1.0 6.2 25.7 14.6 18.7

Ipca Labs Neutral 278 - - 11.7 1.8 8.4 20.0 23.9 27.1

Lupin Accumulate 1,903 2,099 10 16.3 2.6 13.5 23.2 23.9 31.2

Orchid Chemicals Neutral 189 - - 11.1 1.6 8.5 - 7.0 13.0

Piramal Healthcare Neutral 486 - - 14.4 2.2 10.7 21.1 25.4 32.7

Ranbaxy* Neutral 453 - - 15.8 1.9 10.0 100.9 19.9 21.6

Sun Pharma Neutral 1,773 - - 20.9 5.6 16.8 14.0 16.4 17.7

Source: Company, Angel Research; Note: # The current estimates are as per IGAAP; *December year ending




August 2, 2010 8

Profit & Loss Statement (Consolidated)

Y/E March (Rs cr) FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E

Gross sales 719 1,027 1,134 1,137 1,280 1,408

Less: Excise duty 27 23 18 11 14 16

Net Sales 692 1,003 1,116 1,127 1,266 1,393

Other operating income 4.6 - - 11.3 - -

Total operating income 696 1,003 1,116 1,138 1,266 1,393

% chg (53.1) 44.1 11.2 2.0 11.2 10.0

Total Expenditure 579 858 991 1,026 1,109 1,225

Net Raw Materials 318 492 559 569 635 699

Other Mfg costs 40 71 90 78 33 36

Personnel 87 98 132 145 165 181

Other 134 197 210 233 276 309

EBITDA 113 145 125 101 157 167% chg 9.5 28.7 (13.7) (19.2) 55.1 6.5

(% of Net Sales) 16.3 14.5 11.2 9.0 12.4 12.0

Depreciation& Amortisation 29 33 38 43 43 45

EBIT 84 112 87 58 115 122

% chg 13.1 34.2 (22.6) (33.0) 96.6 6.9

(% of Net Sales) 12.1 11.2 7.8 5.2 9.0 8.8

Interest & other Charges 8 33 40 30 32 29

Other Income 7 12 5 4 6 6

(% of PBT) 8 13 10 10 6 6

Recurring PBT 88 91 52 44 88 99

% chg 19.5 3.3 (42.9) (15.8) 100.7 12.9

Extraordinary Expense/(Inc.) 18 (23) 43 - - -

PBT (reported) 71 114 9 44 88 99

Tax (0.1) 1.4 (1.7) 4.3 13.2 14.5

(% of PBT) - 1.2 - 9.7 15.0 14.6

PAT (reported) 71 112 11 40 75 85

PAT after MI (reported) 71 112 11 40 75 85

ADJ. PAT 88 90 54 40 75 85

% chg 13.0 1.6 (40.1) (26.8) 89.2 13.3

(% of Net Sales) 10.2 11.2 1.0 3.5 5.9 6.1

Basic EPS (Rs) 5.1 8.1 0.8 2.9 5.6 6.4

Fully Diluted EPS (Rs) 5.1 8.1 0.8 2.9 5.6 6.4

% chg (8.9) 58.8 (90.3) 271.2 91.3 13.3




August 2, 2010 9

Balance Sheet (Consolidated)

Y/E March (Rs cr) FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E

SOURCES OF FUNDS

Equity Share Capital 28 28 27 27 27 27

Reserves& Surplus 357 314 304 341 398 463

Shareholders Funds 385 341 331 368 425 490

Total Loans 335 423 475 421 380 348

Deferred Tax Liability 40 (5) 6 1 4 6

Total Liabilities 760 760 812 790 808 844

APPLICATION OF FUNDS

Gross Block 514 605 682 719 758 796

Less: Acc. Depreciation 209 239 277 317 360 405

Net Block 305 367 405 402 398 392

Capital Work-in-Progress 51 22 7 7 7 7Investments 21 14 8 12 12 12

Current Assets 508 538 594 580 637 704

Cash 152 19 16 7 4 13

Loans & Advances 67 86 127 144 155 166

Other 289 433 451 429 477 525

Current liabilities 125 181 202 211 245 270

Net Current Assets 383 357 392 369 392 434

Total Assets 760 760 812 790 808 844




August 2, 2010 10

Cash Flow Statement (Consolidated)

Y/E March (Rs cr) FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E

Profit before tax 88 91 17 44 88 99

Depreciation 29 33 38 43 43 45

(Inc)/Dec in Working Capital (18) (110) (4) 14 (25) (34)

Less: Other income 7 12 5 2 6 6

Direct taxes paid 2 10 3 5 11 12

Cash Flow from Operations 90 (8) 42 94 89 93

(Inc.)/Dec.in Fixed Assets (76) (65) (61) (38) (39) (39)

(Inc.)/Dec. in Investments (5) (12) 2 (3) (0) (0)

Other income 7 12 5 2 6 6

Cash Flow from Investing (74) (64) (55) (39) (33) (33)

Issue of Equity - - - (1) - -

Inc./(Dec.) in loans 155 90 4 (54) (41) (32)Dividend Paid (Incl. Tax) (16) (16) (24) (9) (18) (20)

Others (5) (135) 30 - - -

Cash Flow from Financing 135 (61) 9 (64) (59) (52)

Inc./(Dec.) in Cash 151 (133) (3) (9) (3) 8

Opening Cash balances 1 152 19 16 7 4

Closing Cash balances 152 19 16 7 4 13




August 2, 2010 11

Key Ratios

Y/E March FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E

Valuation Ratio (x)

P/E (on FDEPS) 11.2 7.0 72.2 19.5 10.2 9.0

P/CEPS 7.9 5.4 15.9 9.2 6.5 5.9

P/BV 2.1 2.3 2.4 2.1 1.8 1.6

Dividend yield (%) 1.8 2.6 0.7 1.0 2.0 2.2

EV/Sales 1.4 1.2 1.1 1.0 0.9 0.8

EV/EBITDA 8.6 8.2 9.9 11.6 7.2 6.6

EV / Total Assets 1.3 1.6 1.5 1.5 1.4 1.3

Per Share Data (Rs)

EPS (Basic) 5.1 8.1 0.8 2.9 5.6 6.4

EPS (fully diluted) 5.1 8.1 0.8 2.9 5.6 6.4

Cash EPS 7.2 10.5 3.6 6.2 8.8 9.7DPS 1.0 1.5 0.4 0.6 1.1 1.3

Book Value 27.8 24.7 24.1 27.5 31.8 36.7

Dupont Analysis

EBIT margin 12.1 11.2 7.8 5.2 9.0 8.8

Tax retention ratio - (24.1) - 90.3 85.0 85.4

Asset turnover (x) 1.2 1.5 1.5 1.4 1.6 1.7

ROIC (Post-tax) - - - 6.7 12.3 12.8

Cost of Debt (Post Tax) - - - 6.1 6.8 6.8

Leverage (x) 0.5 0.8 1.3 1.3 1.0 0.8

Operating ROE - - - 7.6 17.8 17.4Returns (%)

ROCE (Pre-tax) 13.1 14.8 11.1 7.3 14.3 14.8

Angel ROIC (Pre-tax) 15.6 17.6 11.5 7.4 14.6 15.1

ROE 24.5 24.7 16.0 11.3 18.9 18.5

Turnover ratios (x)

Asset Turnover (GrossBlock)

1.3 1.8 1.7 1.6 1.7 1.8

Inventory / Sales (days) 69 59 72 72 65 65

Receivables (days) 83 72 73 69 66 66

Payables (days) 61 49 56 62 62 62

Working capital cycle(ex-cash) (days) 150 104 117 118 108 106

Solvency ratios (x)

Net debt to equity 0.5 1.2 1.4 1.1 0.9 0.7

Net debt to EBITDA 1.6 2.8 3.7 4.1 2.4 2.0

Interest Coverage (EBIT/ Interest)

11.1 3.4 2.2 1.9 3.6 4.2




August 2 2010 12

Disclosure of Interest Statement Alembic

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock Yes

3. Angel and its Group companies' Directors ownership of the stock No

4. Broking relationship with company covered No

Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors.

Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to 15%) Sell (< -15%)

Research Team Tel: 022 - 4040 3800 E-mail: [email protected] Website: www.angeltrade.com

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decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make

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Documents

Alembic Angel 020810