MOSL: ALEMBIC PHARMACEUTICALS (Neutral)-Weak results-GST implementation impacts domestic growth

​Alembic Pharmaceuticals: Weak results; GST implementation impacts domestic growth

(ALPM IN, Mkt Cap USD1.6b, CMP INR558, TP INR510, 9% Upside, Neutral)

• 1Q results below expectations: Sales declined 11% YoY to INR6.5b (~15% below estimate) in 1QFY18 due to muted growth in India business (-21% YoY). EBITDA margin contracted ~580bp YoY to 15.6% due to lower domestic sales and high R&D expense (14% of sales). PAT declined 35% YoY to INR667m due to weak operating profit. We expect a recovery in 2QFY18, driven by channel refilling in the domestic markets (post GST implementation) and ramp-up in US sales (on the back of Pristiq launch).
• GST impacts domestic business; US business up sequentially: Domestic business declined 21% YoY, primarily due to channel destocking in the run up to GST implementation. Industry has lost almost one month of sales due to inventory destocking at the channel partner level. Although a recovery is expected in the coming quarters, it would be key to watch if channel partners refill inventory to old levels. International business sales declined 9% YoY - US business fell ~5% YoY (+>10%QoQ), while non-US business declined ~17% YoY. US sales included one month of Pristiq sales. We expect the US business to grow sequentially, led by the ramp-up of six products launched in 1Q.