MOSL: ALEMBIC PHARMACEUTICALS (Neutral)-Margins surprise positively-US biz remains under pressure

​Alembic Pharmaceuticals: Margins surprise positively; US biz remains under pressure

(ALPM IN, Mkt Cap USD1.5b, CMP INR513, TP INR540, 5% Upside, Neutral)

• Strong 2Q results: Alembic’s 2QFY18 revenue declined 9% YoY to INR7.9b (~7% miss). EBITDA grew marginally by 1.2% YoY to INR1.8b (20% beat), with the margin expanding to 22.7% (v/s 20.3% in 2QFY17 and 15.6% in 1QFY18). Although the gross margin was largely flat, operating leverage led to a significant improvement in the margin (employee cost in absolute terms remained flat sequentially, but as % of sales, it rose by >400bp). PAT increased 2% YoY to INR1.2b (23% beat).
• Strong recovery in domestic business; US remains under pressure: Domestic business grew 6% YoY, driven by ~10% YoY growth in Specialty business. Top-line growth in domestic market was impacted by treatment of excise duty post GST implementation. On a like-to-like basis, domestic business grew ~13% YoY. International business sales declined 26% YoY. US business declined by ~29% YoY and non-US business by ~13% YoY. We expect US sales to pick up from 4QFY18 due to the absence of Abilify sales in the base.
• Concall takeaways: (a) R&D expense to remain at ~INR4-4.5b in FY18E. (b) EBITDA margins will remain at ~20% in FY18E. (c) Orit acquisition to be EPS-accretive in first year. (d) Derma facility will be ready by 2HFY18. (e) Injectable and Oral facility will be ready in FY19E. (f) Debt has gone up by ~INR2.9b in 1H, mainly to fund capex. (g) Peak borrowing by 1HFY19E will be ~INR6-7b. (h) Derma filings will start from 2HFY18. (i) Fire in Algeria plant will derail growth in that geography by at least two quarters (current contribution is not meaningful). (j) Oncology oral facility is ready now.