Alembic BUY. Performance Highlights. Target Price. 1QFY2011 Result Update Pharmaceutical. Investment Period 12 months

Transcription

1 1QFY2011 Result Update Pharmaceutical August 2, 2010 Alembic Performance Highlights Y/E March (Rs cr) 1QFY2011 4QFY2010 % chg (qoq) 1QFY2010 % chg (yoy) Net Sales (4.0) Other Income Operating Profit (8.2) Interest 4 6 (28.8) 8 (45.4) Net Profit (6.4) 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 FY2012E Net Sales 1,116 1,138 1,266 1,393 % chg Net Profit % chg (90.3) EPS (Rs) EBITDA Margin (%) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/Sales (x) EV/EBITDA (x) ; Note: Estimates include the demerged pharma business BUY CMP Rs57 Target Price Rs74 Investment Period 12 months Stock Info Sector Pharmaceutical Market Cap (Rs cr) Beta 52 Week High / Low Avg. Daily Volume / Face Value (Rs) BSE Sensex Nifty Reuters Code 2 18,081 5,432 ALMC.BO 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 Alembic (19.9) Sarabjit Kour Nangra Tel: Ext: 343 sarabjit@angeltrade.com Sushant Dalmia Tel: Ext: 320 sushant.dalmia@angeltrade.com Please refer to important disclosures at the end of this report 1

2 Exhibit 1: 1QFY2011 performance Y/E March (Rs cr) 1QFY2011 4QFY2010 % chg (qoq) 1QFY2010 % chg (yoy) FY2010 FY2009 % chg Net Sales (4.0) Other Income (15.0) Total Income (3.7) Gross Profit (2.1) Gross margin Operating profit (8.2) (14.6) Operating Margin (%) Interest 4 6 (28.8) 8 (45.4) (27.5) Depreciation PBT (21.0) Provision for Taxation PAT before Extra-ordinary item (6.4) (27.1) Extra-Ordinary Expenses PAT after Extra-ordinary item & MI (6.4) EPS (Rs) Exhibit 2: 1QFY2011- Actual v/s Angel estimates Rs cr Actual Estimates Variation Net Sales (7.0) Other Income Operating Profit (14.8) Interest 4 5 (11.8) Tax Net Profit (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,

3 Exhibit 3: Domestic market sales trend Rs cr QFY2010 2QFY2010 3QFY2010 4QFY2010 1QFY2011 Formulations API 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 Rs cr QFY2010 2QFY2010 3QFY2010 4QFY2010 1QFY2011 Formulations API 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). August 2,

4 Exhibit 5: OPM trend % QFY2010 2QFY2010 3QFY2010 4QFY2010 1QFY2011 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 Rs cr QFY2010 2QFY2010 3QFY2010 4QFY2010 1QFY2011 Exhibit 7: 1Q FY2011 as per proposed de-merger Alembic Pharma Alembic Rs cr 1QFY2011 1QFY2010 1QFY2011 1QFY2010 Net sales % growth (3.7) (0.1) PBT (5.6) (8.8) % growth (9.7) 36.7 August 2,

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 with productivity 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 commercial purposes though the timeline is still unclear. We have conservatively valued the land asset at Rs500/sq. ft. August 2,

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 0.6x FY2012E Sales) 5 Land bank (70 Rs2.2cr per acre) 11 Per Share Value 74 Exhibit 9: Key assumptions FY2011E FY2012E Domestic Sales Growth (%) Export Sales Growth (%) Growth in Employee Expenses (%) R&D as % of Sales Operating Margins (%) Capex (Rs) Net Debt/Equity (x) Exhibit 10: One-year forward PE band Rs x 14x 10x 6x Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 August 2,

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 (%) Alembic Buy Aventis* Reduce 1,869 1,658 (11) Cadila Healthcare Accumulate Cipla Accumulate Dr Reddy's# Neutral 1, Dishman Pharma Buy GSK Pharma* Sell 2,014 1,700 (16) Indoco Remedies Buy Ipca Labs Neutral Lupin Accumulate 1,903 2, Orchid Chemicals Neutral Piramal Healthcare Neutral Ranbaxy* Neutral Sun Pharma Neutral 1, ; Note: # The current estimates are as per IGAAP; *December year ending RoCE (%) RoE (%) August 2,

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 Net Sales 692 1,003 1,116 1,127 1,266 1,393 Other operating income Total operating income 696 1,003 1,116 1,138 1,266 1,393 % chg (53.1) Total Expenditure ,026 1,109 1,225 Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (13.7) (19.2) (% of Net Sales) Depreciation& Amortisation EBIT % chg (22.6) (33.0) (% of Net Sales) Interest & other Charges Other Income (% of PBT) Recurring PBT % chg (42.9) (15.8) Extraordinary Expense/(Inc.) 18 (23) PBT (reported) Tax (0.1) 1.4 (1.7) (% of PBT) PAT (reported) PAT after MI (reported) ADJ. PAT % chg (40.1) (26.8) (% of Net Sales) Basic EPS (Rs) Fully Diluted EPS (Rs) % chg (8.9) 58.8 (90.3) August 2,

9 Balance Sheet (Consolidated) Y/E March (Rs cr) FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E SOURCES OF FUNDS Equity Share Capital Reserves& Surplus Shareholders Funds Total Loans Deferred Tax Liability 40 (5) Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Investments Current Assets Cash Loans & Advances Other Current liabilities Net Current Assets Total Assets August 2,

10 Cash Flow Statement (Consolidated) Y/E March (Rs cr) FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E Profit before tax Depreciation (Inc)/Dec in Working Capital (18) (110) (4) 14 (25) (34) Less: Other income Direct taxes paid Cash Flow from Operations 90 (8) (Inc.)/Dec.in Fixed Assets (76) (65) (61) (38) (39) (39) (Inc.)/Dec. in Investments (5) (12) 2 (3) (0) (0) Other income Cash Flow from Investing (74) (64) (55) (39) (33) (33) Issue of Equity (1) - - Inc./(Dec.) in loans (54) (41) (32) Dividend Paid (Incl. Tax) (16) (16) (24) (9) (18) (20) Others (5) (135) Cash Flow from Financing 135 (61) 9 (64) (59) (52) Inc./(Dec.) in Cash 151 (133) (3) (9) (3) 8 Opening Cash balances Closing Cash balances August 2,

11 Key Ratios Y/E March Valuation Ratio (x) FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (Rs) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio - (24.1) Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) Working capital cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Interest) August 2,

12 Research Team Tel: Website: DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. 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%) August 2,