Alembic

1QFY2011 Result Update | Pharmaceutical
August 2, 2010

Alembic BUY
CMP Rs57
Performance Highlights Target Price Rs74
Y/E March % chg % chg Investment Period 12 months
1QFY2011 4QFY2010 1QFY2010
(Rs cr) (qoq) (yoy)
Net Sales 279 267 4.6 291 (4.0) Stock Info
Other Income 1 1 28.3 1 - Sector Pharmaceutical
Operating Profit 28 18 56.9 30 (8.2) Market Cap (Rs cr) 759
Interest 4 6 (28.8) 8 (45.4) Beta 0.6
Net Profit 11 0 - 12 (6.4) 52 Week High / Low 64/38
Source: Company, Angel Research Avg. Daily Volume 210008
Alembic reported below expectation numbers for 1QFY2011 impacted by Face Value (Rs) 2
de-growth on the export API front. The domestic formulation sales grew by BSE Sensex 18,081
5.5% yoy on the back of the restructuring exercise undertaken by the Nifty 5,432
company over the last one year, which improved working capital Reuters Code ALMC.BO
management resulting in lower debt levels. We maintain a Buy on the stock as Bloomberg Code ALBC@IN
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. Shareholding Pattern (%)
Promoters 63.4
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 MF / Banks / Indian Fls 5.3
and lower-than-expected growth in the domestic formulations segment. Alembic FII / NRIs / OCBs 8.3
reported lower-than-estimated OPM of 9.9% (10.3%). Net profit came in at Indian Public / Others 23.0
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. Abs. (%) 3m 1yr 3yr
Sensex 3.0 15.4 20.7
Outlook and Valuation: We have valued Alembic on SOTP basis, with a Target Alembic 13.9 41.9 (19.9)
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 11.2 2.0 11.2 10.0
Net Profit 11 40 75 85
% chg (90.3) 265.1 89.2 13.3
EPS (Rs) 0.8 2.9 5.6 6.4
EBITDA Margin (%) 11.2 9.9 12.4 12.0
P/E (x) 72.2 19.2 10.2 9.0 Sarabjit Kour Nangra
RoE (%) 16.0 11.3 18.9 18.5 Tel: 022 – 4040 3800 Ext: 343
sarabjit@angeltrade.com
RoCE (%) 11.1 7.3 14.3 14.8
P/BV (x) 2.4 2.1 1.8 1.6
Sushant Dalmia
EV/Sales (x) 1.1 1.0 0.9 0.8 Tel: 022 – 4040 3800 Ext: 320
EV/EBITDA (x) 9.9 11.6 7.2 6.6 sushant.dalmia@angeltrade.com
Source: Company, Angel Research; Note: Estimates include the demerged pharma business

Please refer to important disclosures at the end of this report 1

Alembic | 1QFY2011 Result Update

Exhibit 1: 1QFY2011 performance
Y/E March (Rs cr) 1QFY2011 4QFY2010 % chg (qoq) 1QFY2010 % chg (yoy) FY2010 FY2009 % chg
Net Sales 279 267 4.6 291 (4.0) 875 860 1.7
Other Income 1 1 28.3 1 - 3 4 (15.0)
Total Income 280 268 291 (3.7) 878 864 1.6
Gross Profit 132 131 0.7 135 (2.1) 436 429 1.5
Gross margin 47.4 49.2 46.5 49.8 49.9
Operating profit 28 18 56.9 30 (8.2) 95 111 (14.6)
Operating Margin (%) 9.9 6.6 10.3 10.9 12.9
Interest 4 6 (28.8) 8 (45.4) 24 33 (27.5)
Depreciation 11 11 0.3 10 5.9 32 28 12.4
PBT 14 1 831.7 12 10.2 42 53 (21.0)
Provision for Taxation 2 1 88.9 0 3 0 -
PAT before Extra-ordinary item 11 0 - 12 (6.4) 39 53 (27.1)
Extra-Ordinary Expenses 0 0 0 0 42
PAT after Extra-ordinary item & MI 11 0 - 12 (6.4) 39 11 244.2
EPS (Rs) 0.8 - 0.9 2.9 0.8
Source: Company, Angel Research

Exhibit 2: 1QFY2011- Actual v/s Angel estimates
Rs cr Actual Estimates Variation
Net Sales 279 300 (7.0)
Other Income 1 1 13.3
Operating Profit 28 32 (14.8)
Interest 4 5 (11.8)
Tax 2 1 140.0
Net Profit 11 14 (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, 2010 2


Exhibit 3: Domestic market sales trend
180 163
154
145
150 137 131
120

Rs cr
90

60
35 39 37
21 24
30

0
1QFY2010 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
120
104
100
78
80
65
Rs cr

53
60 46 51
40
40 34 34
28
20

0
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, 2010 3


Exhibit 5: OPM trend

14.0
11.9
12.0

10.0 10.3 9.9
10.3
8.0

%
6.7
6.0

4.0

2.0

0.0


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

15 13 13
12
11
12

9
Rs cr

6

3
0.4
0


Exhibit 7: 1Q FY2011 as per proposed de-merger
Alembic Pharma Alembic
Rs cr 1QFY2011 1QFY2010 1QFY2011 1QFY2010
Net sales 256.3 266.04 264.2 264.5
% growth (3.7) (0.1)
PBT 19.1 21.1 (5.6) (8.8)
% growth (9.7) 36.7

August 2, 2010 4


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, 2010 5


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 (EV/Sales @ 0.6x FY2012E Sales) 5
Land bank (70 acre @ Rs2.2cr per acre) 11
Per Share Value 74

Exhibit 9: Key assumptions
FY2011E FY2012E
Domestic Sales Growth (%) 11.5 11.1
Export Sales Growth (%) 10.2 8.6
Growth in Employee Expenses (%) 13.1 10.0
R&D as % of Sales 4.0 4.0
Operating Margins (%) 12.4 12.0
Capex (Rs) 39 38
Net Debt/Equity (x) 0.9 0.7

Exhibit 10: One-year forward PE band

160
140
120
18x
100
Rs

80 14x
60 10x
40 6x
20
-
Jul-05

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10
Jan-06

Jan-07

Jan-08

Jan-09

Jan-10
Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10
Oct-05

Oct-06

Oct-07

Oct-08

Oct-09


August 2, 2010 6


Exhibit 11: Recommendation Summary
Company Reco CMP Tgt Price Upside FY2012E FY10-12E FY2012E
PE EV/Sales EV/EBITDA CAGR in RoCE RoE
(Rs) (Rs) %
(x) (x) (x) EPS (%) (%) (%)
Alembic Buy 57 74 30 9.0 0.8 6.6 46.4 14.8 18.5
Aventis* Reduce 1,869 1,658 (11) 20.3 2.9 15.8 16.1 0.2 18.9
Cadila Healthcare Accumulate 629 714 14 15.9 2.6 12.4 26.6 26.0 34.7
Cipla Accumulate 326 360 10 19.0 3.8 18.2 12.7 15.3 19.1
Dr Reddy's# Neutral 1,351 - - 17.3 2.3 11.7 93.5 24.7 25.2
Dishman Pharma Buy 216 279 29 10.1 1.8 7.0 21.7 12.5 16.8
GSK Pharma* Sell 2,014 1,700 (16) 27.3 6.1 17.3 11.0 38.7 28.9
Indoco Remedies Buy 414 541 31 7.6 1.0 6.2 25.7 14.6 18.7
Ipca Labs Neutral 278 - - 11.7 1.8 8.4 20.0 23.9 27.1
Lupin Accumulate 1,903 2,099 10 16.3 2.6 13.5 23.2 23.9 31.2
Orchid Chemicals Neutral 189 - - 11.1 1.6 8.5 - 7.0 13.0
Piramal Healthcare Neutral 486 - - 14.4 2.2 10.7 21.1 25.4 32.7
Ranbaxy* Neutral 453 - - 15.8 1.9 10.0 100.9 19.9 21.6
Sun Pharma Neutral 1,773 - - 20.9 5.6 16.8 14.0 16.4 17.7
Source: Company, Angel Research; Note: # The current estimates are as per IGAAP; *December year ending

August 2, 2010 7


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 27 23 18 11 14 16
Net Sales 692 1,003 1,116 1,127 1,266 1,393
Other operating income 4.6 - - 11.3 - -
Total operating income 696 1,003 1,116 1,138 1,266 1,393
% chg (53.1) 44.1 11.2 2.0 11.2 10.0
Total Expenditure 579 858 991 1,026 1,109 1,225
Net Raw Materials 318 492 559 569 635 699
Other Mfg costs 40 71 90 78 33 36
Personnel 87 98 132 145 165 181
Other 134 197 210 233 276 309
EBITDA 113 145 125 101 157 167
% chg 9.5 28.7 (13.7) (19.2) 55.1 6.5
(% of Net Sales) 16.3 14.5 11.2 9.0 12.4 12.0
Depreciation& Amortisation 29 33 38 43 43 45
EBIT 84 112 87 58 115 122
% chg 13.1 34.2 (22.6) (33.0) 96.6 6.9
(% of Net Sales) 12.1 11.2 7.8 5.2 9.0 8.8
Interest & other Charges 8 33 40 30 32 29
Other Income 7 12 5 4 6 6
(% of PBT) 8 13 10 10 6 6
Recurring PBT 88 91 52 44 88 99
% chg 19.5 3.3 (42.9) (15.8) 100.7 12.9
Extraordinary Expense/(Inc.) 18 (23) 43 - - -
PBT (reported) 71 114 9 44 88 99
Tax (0.1) 1.4 (1.7) 4.3 13.2 14.5
(% of PBT) - 1.2 - 9.7 15.0 14.6
PAT (reported) 71 112 11 40 75 85
PAT after MI (reported) 71 112 11 40 75 85
ADJ. PAT 88 90 54 40 75 85
% chg 13.0 1.6 (40.1) (26.8) 89.2 13.3
(% of Net Sales) 10.2 11.2 1.0 3.5 5.9 6.1
Basic EPS (Rs) 5.1 8.1 0.8 2.9 5.6 6.4
Fully Diluted EPS (Rs) 5.1 8.1 0.8 2.9 5.6 6.4
% chg (8.9) 58.8 (90.3) 271.2 91.3 13.3

August 2, 2010 8


Balance Sheet (Consolidated)
Y/E March (Rs cr) FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E
SOURCES OF FUNDS
Equity Share Capital 28 28 27 27 27 27
Reserves& Surplus 357 314 304 341 398 463
Shareholders Funds 385 341 331 368 425 490
Total Loans 335 423 475 421 380 348
Deferred Tax Liability 40 (5) 6 1 4 6
Total Liabilities 760 760 812 790 808 844
APPLICATION OF FUNDS
Gross Block 514 605 682 719 758 796
Less: Acc. Depreciation 209 239 277 317 360 405
Net Block 305 367 405 402 398 392
Capital Work-in-Progress 51 22 7 7 7 7
Investments 21 14 8 12 12 12
Current Assets 508 538 594 580 637 704
Cash 152 19 16 7 4 13
Loans & Advances 67 86 127 144 155 166
Other 289 433 451 429 477 525
Current liabilities 125 181 202 211 245 270
Net Current Assets 383 357 392 369 392 434
Total Assets 760 760 812 790 808 844

August 2, 2010 9


Cash Flow Statement (Consolidated)
Y/E March (Rs cr) FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E
Profit before tax 88 91 17 44 88 99
Depreciation 29 33 38 43 43 45
(Inc)/Dec in Working Capital (18) (110) (4) 14 (25) (34)
Less: Other income 7 12 5 2 6 6
Direct taxes paid 2 10 3 5 11 12
Cash Flow from Operations 90 (8) 42 94 89 93
(Inc.)/Dec.in Fixed Assets (76) (65) (61) (38) (39) (39)
(Inc.)/Dec. in Investments (5) (12) 2 (3) (0) (0)
Other income 7 12 5 2 6 6
Cash Flow from Investing (74) (64) (55) (39) (33) (33)
Issue of Equity - - - (1) - -
Inc./(Dec.) in loans 155 90 4 (54) (41) (32)
Dividend Paid (Incl. Tax) (16) (16) (24) (9) (18) (20)
Others (5) (135) 30 - - -
Cash Flow from Financing 135 (61) 9 (64) (59) (52)
Inc./(Dec.) in Cash 151 (133) (3) (9) (3) 8
Opening Cash balances 1 152 19 16 7 4
Closing Cash balances 152 19 16 7 4 13

August 2, 2010 10


Key Ratios
Y/E March FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E
Valuation Ratio (x)
P/E (on FDEPS) 11.2 7.0 72.2 19.5 10.2 9.0
P/CEPS 7.9 5.4 15.9 9.2 6.5 5.9
P/BV 2.1 2.3 2.4 2.1 1.8 1.6
Dividend yield (%) 1.8 2.6 0.7 1.0 2.0 2.2
EV/Sales 1.4 1.2 1.1 1.0 0.9 0.8
EV/EBITDA 8.6 8.2 9.9 11.6 7.2 6.6
EV / Total Assets 1.3 1.6 1.5 1.5 1.4 1.3
Per Share Data (Rs)
EPS (Basic) 5.1 8.1 0.8 2.9 5.6 6.4
EPS (fully diluted) 5.1 8.1 0.8 2.9 5.6 6.4
Cash EPS 7.2 10.5 3.6 6.2 8.8 9.7
DPS 1.0 1.5 0.4 0.6 1.1 1.3
Book Value 27.8 24.7 24.1 27.5 31.8 36.7
Dupont Analysis
EBIT margin 12.1 11.2 7.8 5.2 9.0 8.8
Tax retention ratio - (24.1) - 90.3 85.0 85.4
Asset turnover (x) 1.2 1.5 1.5 1.4 1.6 1.7
ROIC (Post-tax) - - - 6.7 12.3 12.8
Cost of Debt (Post Tax) - - - 6.1 6.8 6.8
Leverage (x) 0.5 0.8 1.3 1.3 1.0 0.8
Operating ROE - - - 7.6 17.8 17.4
Returns (%)
ROCE (Pre-tax) 13.1 14.8 11.1 7.3 14.3 14.8
Angel ROIC (Pre-tax) 15.6 17.6 11.5 7.4 14.6 15.1
ROE 24.5 24.7 16.0 11.3 18.9 18.5
Turnover ratios (x)
Asset Turnover (Gross
1.3 1.8 1.7 1.6 1.7 1.8
Block)
Inventory / Sales (days) 69 59 72 72 65 65
Receivables (days) 83 72 73 69 66 66
Payables (days) 61 49 56 62 62 62
Working capital cycle
150 104 117 118 108 106
(ex-cash) (days)
Solvency ratios (x)
Net debt to equity 0.5 1.2 1.4 1.1 0.9 0.7
Net debt to EBITDA 1.6 2.8 3.7 4.1 2.4 2.0
Interest Coverage (EBIT
11.1 3.4 2.2 1.9 3.6 4.2
/ Interest)

August 2, 2010 11


Research Team Tel: 022 - 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com

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, 2010 12

Alembic

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