Stock View on Alembic Pharma

WHEN A 100-year-old business undertakes restructuring to unlock its hidden value, it offers an attractive opportunity for investors to pick up assets at ‘value for money’ prices. Alembic is one such company that is transforming itself from a pure domestic pharmaceutical company to a ‘complete’ pharma company, with a presence across the entire pharma value chain.

BUSINESS:

With a turnover of Rs 1,000 crore, Vadodara-based Alembic is one of the oldest pharma companies. It lost out on growth to other players during the 1990s. The company, now managed by fourth-generation promoters, is restructuring its operations to catch up on lost opportunities. Alembic is an integrated manufacturer of formulations and active pharma ingredients (APIs) with 70% of its business coming from the domestic market. Its formulations business, consisting of generic as well as branded formulations, accounts for 70% of its total revenue, while APIs contribute the remaining. The company spends 4.5% of its sales towards R&D. It is involved in generic research, innovative research towards novel drug delivery systems (NDDS) and undertaking bio-equivalence studies. Recently, it entered into an out-licensing deal for its NDDS for Keppra XR, a leading anti-epileptic drug, with Belgium-based innovator company, UCB Pharma.

GROWTH STRATEGY:

Alembic has adopted a dual-pronged strategy of new products for existing geographies and existing products for new geographies. While anti-infectives contribute more than 50% to its domestic formulation sales, the company has broad-based its product portfolio to include products from high growth chronic therapeutic areas like respiratory, orthopaedic and gynaecology. The acquisition of Dabur Pharma’s non-oncology business in January ’07 helped the company to include more such products in its portfolio.

Alembic’s global strategy is to be the preferred supply chain partner to multinational pharma companies. Towards this, it has been investing in FDA-approved manufacturing facilities and research centres. Through these initiatives, the company aims to increase its share of international business to nearly half of its revenues over the next 2-3 years.

FINANCIALS:

The company’s net sales have seen a compound annual growth rate (CAGR) of 14.5% since ’03 to reach Rs 990 crore in FY08. Net profit during the same period grew over 29% to Rs 112.2 crore. This growth has been completely organic in nature. The stock currently offers a dividend yield of 4.8%, which is relatively higher than that of its similar-sized peers. On an average, the company distributes around 20% of its net profit as dividends and this ratio has remained constant over the years. Dividends have recorded a five-year CAGR of 45%, which is faster than the growth in the company’s profits. Alembic plans to hike its dividend payout to 35-40% in the next three years.

The company has restructured its domestic business and invested heavily in acquiring new products, building up field force and creating new business divisions. While this has had a negative impact on its profitability during the first two quarters of this fiscal, the company expects the full benefits of restructuring to be visible in FY10.

Alembic has land bank of 50 acres, which it plans to monetise in future to boost its cash flows. It is also considering acquisitions to expedite its growth.

VALUATIONS:

The company’s EPS is Rs 4.3. With an increase in products and production capacities, and emphasis on global business and R&D expertise, Alembic expects to achieve year-on-year growth of over 25% in its FY09 turnover to Rs 1,250 crore. Accordingly, considering the company’s estimated earnings for FY09, the stock is currently trading at a forward P/E of four times. This is quite attractive compared to the P/Es of similar-sized peers.

Beta: 0.8
Institutional Holding: 14.03%
Dividend Yield: 5.8%
P/E: 6 M-Cap:
Rs 354.4 cr