1QFY2014 Result Update | Pharmaceutical

August 8, 2013

Alembic Pharma
Performance Highlights
Y/E March (` cr) Net Sales Other Income Operating Profit Interest Net Profit 1QFY2014 426 1 71 1 47 4QFY2013 375 2 64 2 44 % chg (qoq) 13.6 (62.4) 10.7 (19.7) 6.8 1QFY2013 366 0 52 6 31 % chg (yoy) 16.4 168.2 35.6 (74.4) 51.3

ACCUMULATE
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Pharmaceutical 2,901 171 0.9 168/58 100,270 2 18,665 5,519 ALEM.BO ALPM@IN

`154 `165
12 Months

Source: Company, Angel Research

Alembic Pharmaceuticals posted numbers in line with our expectations. The sales came in at `426cr, registering a growth of 16.4% yoy, but a tad lower than our expectation of `434cr. On the operating front, the company posted an OPM of 16.7% vs our expectation of 15.7%. This led the net profits to come in at `46.6cr (our expectation was of `46.4cr). We recommend Accumulate on the stock. Results in line with expectations: Alembic Pharmaceuticals posted numbers in line with our expectations for 1QFY2014. The sales came in at `426cr, registering a growth of 16.4% yoy, but a tad lower than our expectation of `434cr. The growth was led by the exports, which grew by 41.5% yoy, contributing around 43% of the overall sales of the company. The domestic market on the other hand grew by only 6.0% yoy. In spite of the same the OPM, came in at 16.7% vs our expectation of 15.7%, mainly on back of gross margin expansion, which came in at 59.5% vs 52.3% in 1QFY2013, on back of an improved sales mix. The formulations contributed around 75% to the sales mix in 1QFY2014 vs 68% in 1QFY2013. The net profit come in at `46.6cr vs our expectation of `46.4cr, registering a growth of 51.3% yoy. Outlook and valuation: Alembics growth and profitability profile has improved post the restructuring carried out by the Management. Over FY2013-15, we expect the company to post a CAGR of 15.1% and 25.5% in sales and net profit respectively. We recommend Accumulate on the stock. Key Financials (Consolidated)
Y/E March (` cr) Net Sales % chg Net Profit % chg EPS (`) EBITDA Margin (%) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/Sales (x) EV/EBITDA (x) FY2012 1,444 22.6 130 52.3 6.9 14.1 22.3 37.6 21.9 7.3 2.2 15.7 FY2013 1,516 5.0 165 26.7 8.8 16.4 17.6 36.8 29.6 5.8 2.0 12.3 FY2014E 1,736 14.5 198 19.9 10.5 17.1 14.7 34.4 29.9 4.5 1.7 10.1 FY2015E 2,008 15.7 260 31.3 13.8 18.9 11.2 34.7 34.2 3.4 1.4 7.6

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 74.1 2.6 8.1 15.2

Abs. (%) Sensex Alembic Pharma

3m (6.2)

1yr 6.0

3yr* 2.9 -

21.6 142.0

*Since listed on Septeber 20, 2011

Sarabjit Kour Nangra

+91- 22- 36357600 6806
sarabjit@angelbroking.com

Source: Company, Angel Research; Note: CMP as of August 7, 2013

Please refer to important disclosures at the end of this report

Alembic Pharma | 1QFY2014 Result Update

Exhibit 1: 1QFY2014 performance (Consolidated) Y/E March (` cr) Net sales Other income Total income Gross profit Gross margin Operating profit Operating margin (%) Interest Depreciation PBT Provision for taxation PAT before Extra-ordinary item Extra-Ordinary Expenses PAT after Extra-ordinary item & MI EPS (`) Source: Company, Angel Research 1QFY2014 426 1 367 253 59.5 71 16.7 1 10 61 14 47 0 47 2.5 4QFY2013 375 2 367 208 55.4 64 17.1 2 9 55 12 44 0 44 2.3 6.8 (19.7) 10.3 9.6 20.2 6.8 10.7 21.9 % chg(qoq) 13.6 (62.4) 1QFY2013 366 0 367 191 52.3 52 14.3 6 9 38 7 31 0 31 1.6 51.3 (74.4) 10.0 58.7 90.9 51.3 35.6 % chg (yoy) 16.4 168.2 0.0 32.5 FY2013 1,516 7 1,523 837 55.2 249 16.4 15 35 206 41 165 0 165 8.8 FY2012 1,462 4 1,467 754 51.6 216 14.8 26 34 161 31 130 0 130 6.9 27.0 (44.4) 3.9 28.2 33.2 27.0 15.0 10.9 % chg (yoy) 3.7 56.7

Exhibit 2: 1QFY2014 Actual vs Angel estimates

` cr Net Sales Other Income Operating Profit Interest Tax Net Profit
Source: Company, Angel Research

Actual 426 1 71 1 14 47

Estimates 434 0 68 2 10 46

Variation (%) (1.9) 168.2 4.1 (18.3) 33.3 0.5

Sales below expectations: Alembic Pharmaceuticals sales for the quarter came in at `426cr, registering a growth of 16.4% yoy, but a tad lower than our expectations of `434cr. The growth was led by exports, which grew by 41.5% yoy, contributing around 43% to the companys overall sales. The domestic markets on the other hand grew by only 6.0% yoy. The growth in the domestic market was impacted by a dip in API sales by 33.8% yoy. The domestic formulations on the other hand grew by 12% yoy during the period. The branded domestic formulations posted a yoy growth of 15% during the period, while the domestic generic business dipped by 5% during the period. The company has filed for 57 abbreviated new drug applications (ANDAs) in the US year till date and received 26 approvals. During the quarter, the company received 2 ANDA approvals.

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Alembic Pharma | 1QFY2014 Result Update

Exhibit 3: Sales trend

440 420 400 406 375 426

( ` cr)

380 360 340 320 300 280

366

369

1QFY2013

2QFY2013

3QFY2013

4QFY2013

1QFY2014

Source: Company, Angel Research

OPM came higher than expected: The OPM came in at 16.7% vs our expectation of 15.7%, mainly on back of expansion in gross margin, which came in at 59.5% vs 52.3% in 1QFY2013, on back of an improved sales mix. The formulations contributed around 75% to the sales mix in 1QFY2014 vs 68% in 1QFY2013. The key expense heads which restricted a significant expansion in the OPM in comparison to the gross margin expansion are R&D and other expenditure. R&D expenses as a percentage of sales stood at 5.3% vs 3.8% in 1QFY2013, while other expenditure grew by 29.4% yoy during the period.

Exhibit 4: OPM Trend

20.0 18.0 15.7 16.0

18.7

17.1 16.7

(%)
14.0 12.0 10.0 1QFY2013 2QFY2013 3QFY2013 4QFY2013 1QFY2014

14.3

Source: Company, Angel Research

Net profit above expectation: A higher than expected expansion in OPM along with the reduction in interest expenditure, aided the PBT to rise by 58.7% yoy. However, a higher tax expense during the period led the company to post a net profit of `46.6cr vs our expectations of `46.4cr, registering a growth of 51.3% yoy.

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Alembic Pharma | 1QFY2014 Result Update

Exhibit 5: Net profit trend

60 50 42 40 31 30 20 10 0 1QFY2013 2QFY2013 3QFY2013 4QFY2013 1QFY2014 48 44 47

Source: Company, Angel Research

Concall Highlights

( ` cr)

The company has partially commissioned its new Formulation facility. The full plant is expected to be operational by end of 1HFY2014 which will augment its capacity from 2.6 billion tablets /capsules to 5 billion. This will help the company drive its business in International Generics. The company filed 2 ANDAs in 1QFY2014. The share of Speciality segment went up from 44% in 1QFY2014 to 50% in 1QFY2013. The segment posted a yoy growth of 26% yoy, while the Acute segment posted a growth of 3% yoy. Desvenlafaxine Base Extended Releases US sales are expected to slowly ramp up in the next few quarters. EBDITA growth of 20% p.a. achievable on a sustainable basis.

Investment arguments
Focus on chronic segment to drive domestic formulation growth: Alembic has been restructuring its business portfolio, which would aid in improving the companys growth and operating performance. The companys domestic formulation business contributed 66% to its total sales in FY2013. The company has a strong field force of ~3,600 medical representatives. Going forward, the company expects its domestic formulation business to at least grow in line with the industry growth rate, before we see an improvement in the share of the high growth chronic segment. For FY2013-15, we expect the domestic formulation business to grow at 15.0% CAGR. Exports- US the key growth driver: On the exports front, the Formulation business contributed 20% to the total turnover, with majority of the contribution coming from Europe and the US. In the US, the company has filed for 57 ANDAs year till date and received 26 approvals. The company, going forward, expects to keep its momentum high in terms of number of filings, by filing around 12-18 ANDAs per annum. FY2013 would see modest growth in exports as compared to its historical
August 8, 2013

Alembic Pharma | 1QFY2014 Result Update

high growth rate on account of capacity constraints. However, FY2014 should witness the growth in exports to resume. For FY2013-15, we expect exports to register a CAGR of 20.0%.

Outlook and valuation:

Alembics growth and profitability profile has improved post the restructuring carried out by the Management. Over FY2013-15, we expect the company to post a CAGR of 15.1% and 25.5% in sales and net profit respectively. We recommend Accumulate on the stock.

Exhibit 6: Key assumptions

FY2014E Domestic formulation sales growth (%) Exports sales growth (%) R&D as % of sales Operating margins (%) Capex (` cr) Net Debt/Equity (x)
Source: Company, Angel Research

FY2015E 15.0 20.0 4.1 18.9 100 0.0

15.0 20.0 4.1 17.1 101 0.2

Exhibit 7: Recommendation summary

Company Alembic Pharma. Aurobindo Pharma Cadila Healthcare Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Ranbaxy* Sanofi India* Sun Pharma Reco. Accumulate Buy Buy Buy Accumulate Buy Neutral Buy Neutral Accumulate Buy Neutral Neutral CMP Tgt Price (`) 154 158 746 391 2,254 43 2,392 63 652 828 282 2,411 524 (`) 165 237 929 477 2,535 73 78 904 384 Upside (%) 8.1 50.0 24.5 21.9 12.5 69.7 23.8 9.2 36.2 11.2 7.7 16.1 16.4 17.8 2.6 40.1 8.3 14.5 19.2 11.4 23.7 26.3 FY2015E PE (x) EV/Sales (x) EV/EBITDA (x) 1.4 1.0 2.0 2.8 2.7 0.7 6.0 0.8 2.2 2.6 0.5 2.3 6.9 7.6 6.1 12.6 12.1 13.2 3.1 25.6 5.5 10.3 12.0 3.7 14.4 15.4 FY13-15E 25.5 26.4 20.5 12.1 10.8 16.3 (7.3) 28.0 29.1 21.3 (2.2) 15.0 8.8 FY2015E RoE (%) 34.7 18.9 23.5 16..8 21.8 11.0 27.5 14.4 25.7 25.8 19.2 17.1 22.0 34.2 13.1 15.7 16.8 18.3 11.4 30.6 15.0 25.1 29.0 9.7 14.7 29.4 CAGR in EPS (%) RoCE (%)

Source: Company, Angel Research; Note: *December year end

Background
Alembic Pharmaceuticals is a leading pharmaceutical company in India. The company is vertically integrated to develop pharmaceutical substances and intermediates. The company is the market leader in the Macrolides segment of anti-infective drugs in India. Its manufacturing facilities are located in Vadodara and Baddi in Himachal Pradesh (for the domestic and non-regulated export market).The Panelav facility houses the API and formulation manufacturing (both USFDA approved) plants.

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Alembic Pharma | 1QFY2014 Result Update

Profit & Loss Statement (Consolidated)

Y/E March (` cr) Gross sales Less: Excise duty Net sales Other operating income Total operating income % chg Total expenditure Net raw materials Other mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation& amortisation Interest & other charges Other income (% of PBT) Share in profit of Associates Recurring PBT % chg Extraordinary expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of asso. Less: Minority interest (MI) Prior period items PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY2011 1,192 14 1,177 15.6 1,193 1,035 590 59 141 244 142 12.1 30 24 3 2 107 0 107 21 20.1 85 85 85 7.2 4.5 4.5 FY2012 1,455 11 1,444 17.4 1,461 22.5 1,241 708 63 168 301 203 42.7 14.1 34 26 0 0 161 161 31 19.2 130 130 130 52.3 9.0 6.9 6.9 52.3 FY2013 1,526 10 1,516 3.1 1,519 4.0 1,267 681 67 194 326 249 22.5 16.4 35 15 4 2 206 206 41 19.9 165 165 165 26.7 10.9 8.8 8.8 26.7 FY2014E 1,746 10 1,736 15.7 1,751 15.3 1,439 824 76 182 356 296 19.1 17.1 39 15 0 0 243 243 45 18.6 198 198 198 19.9 11.4 10.5 10.5 19.9 FY2015E 2,020 12 2,008 18.5 2,026 15.7 1,627 953 88 161 425 380 28.3 18.9 45 11 0 0 324 324 65 19.9 260 260 260 31.3 12.9 13.8 13.8 31.3

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Alembic Pharma | 1QFY2014 Result Update

Balance Sheet (Consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity share capital Preference Capital Reserves & surplus Shareholders funds Minority Interest Other Long Term Liabilities Long Term Provisions Total loans Deferred tax liability Total liabilities APPLICATION OF FUNDS Gross block Less: acc. depreciation Net block Capital work-in-progress Goodwill Long Term Loans and Adv. Investments Current assets Cash Loans & advances Other Current liabilities Net current assets Mis. Exp. not written off Total assets 434 162 272 27 7 3.3 535 6 114 415 197 339 647 463 195 268 58 35 3.3 688 47 182 459 277 411 775 572 228 344 32 36 3.3 632 16 116 500 325 307 722 672 267 405 33 35 3.3 852 76 226 550 469 383 860 772 312 460 33 36 3.3 989 92 261 636 542 447 980 37.7 259 297 11.8 5.1 328 5 647 37.7 357 395 12.3 5.4 353 10 775 37.7 465 503 12.8 6.1 187 14 722 37.7 608 646 12.3 5.4 187 10 860 37.7 813 850 13.3 6.4 100 10 980 FY2011 FY2012 FY2013 FY2014E FY2015E

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Alembic Pharma | 1QFY2014 Result Update

Cash Flow Statement (Consolidated)

Y/E March (` cr) Profit before tax Depreciation (Inc)/Dec in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec.in Fixed Assets (Inc.)/Dec. in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2011 107 30 (49) 19 69 (61) (61) 11 (59) (22) 53 (17) (9) 15 6 FY2012 161 34 (11) 31 152 (76) (76) 26 (22) 91 95 41 6 47 FY2013 206 35 (78) 41 121 (84) (84) (165) (55) (39) (259) (31) 47 16 FY2014E 243 39 (84) 45 153 (101) (101) (1) (55) (34) (90) 60 16 76 FY2015E 324 45 (56) 65 248 (100) (100) (85) (55) (85) (225) 16 76 92

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Alembic Pharma | 1QFY2014 Result Update

Key Ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio 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) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Int.) 1.1 2.3 4.7 0.8 1.5 6.5 0.3 0.7 14.3 0.2 0.4 17.2 0.0 0.0 29.2 2.1 66.1 64.0 60.1 101.7 3.3 59.7 50.1 60.4 86.9 2.9 63.1 51.9 72.6 78.6 2.8 64.3 52.9 78.0 62.3 2.8 68.9 56.7 87.9 59.7 17.4 18.3 26.3 21.9 26.4 37.6 29.6 31.9 36.8 29.9 36.1 34.4 34.2 41.8 34.7 9.6 79.9 1.9 14.2 5.1 1.1 24.2 11.7 80.8 2.1 20.3 6.2 0.9 33.3 14.1 80.1 2.1 23.9 4.5 0.6 34.8 14.8 81.4 2.4 28.4 6.5 0.3 34.0 16.7 80.1 2.4 32.4 6.4 0.1 34.8 4.5 4.5 6.1 1.0 15.7 6.9 6.9 8.7 1.4 21.0 8.8 8.8 10.6 2.5 26.7 10.5 10.5 12.6 2.5 34.3 13.8 13.8 16.2 2.5 45.1 34.1 25.3 9.8 0.6 2.8 22.8 5.0 22.4 17.8 7.4 0.9 2.2 15.8 4.1 17.6 14.6 5.8 1.6 2.0 12.3 4.2 14.7 12.3 4.5 1.6 1.7 10.1 3.5 11.2 9.6 3.4 1.6 1.4 7.6 3.0 FY2011 FY2012 FY2013 FY2014E FY2015E

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Alembic Pharma | 1QFY2014 Result Update

Research Team Tel: 022 - 4040 3800 DISCLAIMER

E-mail: research@angeltrade.com

Website: www.angeltrade.com

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 Pvt. 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 Pvt. 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 Pvt. 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 Pvt. 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 Pvt. 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 Pvt. 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 Pvt. Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Alembic Pharma No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors.

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

August 8, 2013

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