MOSL: ALEMBIC PHARMACEUTICALS (Neutral)-Margins surprise positively; robust sequential improvement in US biz

Alembic Pharmaceuticals: Margins surprise positively; robust sequential improvement in US biz

(ALPM IN, Mkt Cap USD1.5b, CMP INR570, TP INR555, 3% Downside, Neutral)

• Strong results; exceeds estimates on most fronts: 3QFY18 revenue rose 9% YoY to INR8.4b (~5% beat). EBITDA grew strongly by ~30% YoY to INR1.9b (28% beat), with the margin at 22.3% v/s 18.8% in 3QFY17 and 22.7% in 2QFY18. Margin improvement can be ascribed to a decline in R&D spend as % of sales to 11.7% v/s 15.2% in 3QFY17 (note that margin shrunk ~70bp QoQ, but was flat in absolute terms). PAT rose strongly by 52% YoY to INR1.3b (39% beat), mainly due to a lower tax rate of 18.5% v/s 31.8% in 3QFY17.
• Strong growth in domestic biz; US biz bounces back sequentially: Domestic business grew ~14% YoY, driven by ~16% growth in the acute segment and ~10% growth in the specialty segment. Adjusting for GST, domestic business growth was ~20%. International business sales increased marginally by ~3% YoY. US business grew ~4% YoY – sequential performance was much better (up 25%), led by market share expansion and volume growth. However, non-US business declined by ~2.6% YoY.
• Concall takeaways: (a) R&D expense to increase to INR5b in FY19 v/s INR4-4.2b in FY18 (9MFY18: ~INR2.9b; expect INR1.2-1.3b in 4QFY18). (b) EBITDA margin to remain at ~20% in FY19. (c) Injectable facility will be ready in 1HFY19; oral facility to be ready in 2HFY19. (d) Expects to launch 10-12 products in FY19. (e) Expects US business run-rate at INR2.3-2.4b (~USD150m annually). (f) Guided for ~15% growth in domestic business in FY19. (f) ANDA filings will increase from FY19 once the injectable and oral facilities commence operations.