Alembic Pharma rating – Hold: India sales bright spot of Q3FY21

Total revenues at Rs 13.1 bn grew 8.7% y-o-y (-9.8% q-o-q) in Q3 with India formulations being the only segment to see sequential sales growth. India sales at Rs 4.2 bn grew 13.6% y-o-y (+0.7% q-o-q) and growth was supported by recovery in broader market as well as by a pick-up in sales for focused therapies (cardiac, antidiabetic, gastrology etc), new launches and operating efficiencies resulting from business restructuring efforts of past few years. Demand for azithromycin (key brand Azithral) has tapered from highs of Q2; nonetheless, it reported better than market growth for anti-infectives segment.

Its US sales at Rs 5.1 bn (c$70 m) declined 12% q-o-q on lower sartans sales (blood pressure lowering drugs). It benefitted from supplies of sartans at better pricing for almost 8 quarters in a row as many players temporarily exited the market due to discovery of alleged carcinogenic impurities. However, pricing attractiveness has now declined with return of competitors.

Q3 Ebitda margins at 27.8% declined 266bp q-o-q on diminished pricing benefits for sartans and reversal in operating costs to pre-COVID-19 levels. PAT at Rs 2.9 bn declined 12.2% q-o-q (+24.9% y-o-y).

Execution is key for India and US sales
After a strong showing in Q2 and Q3, Alembic expects to sustain momentum for India sales, and execution will be key amid rising competition in focused segments, in our view. Despite normalised sales for sartans, it maintains a positive outlook for US sales and aims for sales of $400-500 m in the next 2-3 years (from c$300 m in FY21e). Although Alembic has started ANDA filings from new plants (F2, F3 and F4), approvals and commercial supplies are contingent on pre-Approval Inspection (PAI) and facility clearance by the FDA. It expects FDA inspection of these new plants in the next two quarters; however, timelines remain uncertain. It maintains its guidance for EPS of Rs 60 for FY21 and Rs 50 for FY22.

Maintain Hold with unchanged TP of Rs 1,135
We think near-to medium-term earnings visibility is currently priced in and see limited clarity on factors that can yield positive surprises to current estimates. Ongoing R&D spend for its US pipeline and other costs, including pre-operative costs for new plants, could cap Ebitda margins at 24-25% in FY22-23e. We remain positive on R&D and capex investments as long-term US growth drivers. But we assume a gradual scaling up of supplies of non-oral solids formulations, where it has limited experience and execution is unproven. Post Q3, we adjust our estimates in line with the current outlook, resulting in minor (1-3%) changes to our FY21-23e EPS. We maintain our Hold and Rs 1,135 TP.