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MOSL: ALEMBIC PHARMA: Successful compliance at its Injectables site key to an earnings revival

.  ALEMBIC PHARMA: Successful compliance at its Injectables site key to an earnings revival

(ALPM IN, Mkt Cap USD1.7b, CMP INR702, TP INR590, 16% Downside, Downgrade to Sell)

• ALPM delivered a sharp miss in its 1QFY23 earnings due to lower US sales and considerably smaller operating leverage. EBITDA margin will historically be the lowest in 1QFY23. The Specialty portfolio within Domestic Formulations (DF) witnessed robust growth in 1QFY23.
• We cut our FY23/FY24 EPS estimate by 49%/26%, factoring in: a) an adverse impact from price erosion in the US base portfolio, and b) prolonged delays in achieving USFDA compliance at its Injectables plant. While the scope of business remains low in the US Generics segment, operational cost remains steady, thereby affecting overall profitability. We value ALPM at 18x 12M forward earnings to arrive at our TP of INR590.
• We downgrade the stock to SELL as return ratios are significantly impacted by a slowdown in the base business, an increased gestation period for benefits to accrue from investments in the Injectables segment, and expensive valuation.

 

Inferior product mix and higher operational cost reduce margin to single-digits in 1QFY23

• Sales fell 5% YoY to INR12.6b (est. INR13.6b). Sales in the DF space were almost flat YoY at INR4.8b (est. INR4.6b) as the robust (+21%) growth in the Specialty portfolio (INR2.9b) was offset by a 37% decline in the Acute segment (INR1.1b).
• International sales fell 3% to INR5.5b (est. INR6b) led by almost flat YoY US sales to INR3.7b (USD48m; est. INR4.1b) and an 8% decline in non-US sales to INR1.8b (est. INR2b).
• API sales fell 16.5% YoY to INR2.3b (est. INR3b).
• Gross margin contracted by 90bp YoY to 70% YoY largely due to the product mix and price hikes in raw materials.
• The one-time R&D expenses (INR1b) related to Aleor Dermaceuticals has been charged off in 1QFY23, considering the changing business prospects in the US Generics segment. Adjusting for the same, EBITDA margin contracted at a higher rate of 870bp to 9.1% YoY (est. 19.7%) due to higher other expenses (up 770bp YoY as a percentage of sales).
• Consequently, EBITDA declined by 51% YoY to INR1.1b (est. INR2.7b).
• Adjusted profit declined by 72% YoY to INR463m (est. INR1.8b).