Stock Pick From The Healthcare Sector

Here Is Why:

• The shift of focus towards high margin products, new drugs discovery, and its targeting of the US market have helped the company grow.
• It has a robust pipeline of 59 ANDA filings and is likely to file another three-four ANDAs in the December 2013 quarter.
• The stock is available at a reasonable TTM PE of 19.24x.

Pharmaceuticals have always been a ‘go-to’ sector for safe investments in volatile conditions. Alembic Pharmaceuticals is a proverbial dark horse from this sector that can provide stability to your portfolio. Alembic is the market leader in the macrolides segment of anti-infective drugs in India and has a presence in over 75 countries. Over the years, it transformed itself from a company selling cough syrups to a generics player in the US, the largest pharmaceutical market in the world. This was made possible by its concerted move towards new drugs discovery and its targeting of the US market. Also, the company’s pharmaceuticals business has been demerged from power and real estate, which has enabled the management to focus more on this lucrative and stable business.

One of the primary reasons for recommending this stock is the consistent growth in the company over the past three years, with the topline and bottomline witnessing a CAGR of 13 per cent and 39 per cent respectively. The icing on the cake is Alembic’s robust approved portfolio of 30 ANDAs/NDAs, which lends revenue visibility.

A valid question here is that when the topline has grown by 12 per cent in the past three years, what was the reason behind the robust 39 per cent growth in the bottomline? This can be put down to the shift in the company’s focus to high margin products. Moreover, if we look at the segmented result, the branded formulations business saw a CAGR of at 13 per cent, while that for international generics stands at 55 per cent over the elapsed three years. Apart from this, the company has some high yielding brands in its domestic portfolio which contribute to its topline, such as Azithral, Roxid, Glycodin, Wikoryl, Althrocin, etc.

On the ANDA front, the company has continued to ramp up its filings. At present, it has a pipeline of 59 ANDA filings and is likely to file another three to four ANDAs in the December quarter. Alembic is well placed when it comes to approvals also. The company presently has approvals for 30 ANDAs, of which it has already launched 16. The management is looking forward to 10-12 filings every year, which shows the confidence on its R&D expertise. In addition, Alembic has ramped up its capacity for Desvenlafaxine, an anti-depressant, for which it had seen high demand in the last quarter. The full benefits of this capacity addition will be visible only from the December quarter.

On the financial front, the company’s topline improved by 19.74 per cent on a YoY basis for Q2FY14 to stand at Rs 485.90 crore. Its exports, which contribute 41 per cent to the topline, have grown by 70 per cent on a YoY basis to stand at Rs 201 crore for Q2FY14. On the margins front, the company has posted an EBITDA margin of 19 per cent for Q2FY14, marking a growth of 313 basis points on a YoY basis. The PAT grew by 45 per cent on a YoY basis to stand at Rs 61.6 crore for Q2FY14. The company also managed to reduce its debt burden by Rs 165.93 crore in 2012-13, which resulted in a debt-to-equity ratio of 0.28x for FY13 as against 0.59x in FY12.

The scrip is currently trading at a PE of 19.24x its TTM earnings. It is likely to catch up with the valuations of its larger peers, which are in the range of 25x. We believe that this stock is an ideal candidate for long-term investors, and recommend buying it with a price target of Rs 237 for a one-year time horizon.