F

Alembic Ltd
C.M.P: Rs.48.50 Target Price: Rs.58.00

BUY
April 19, 2010

I R S T C A L L

SYNOPSIS
1 Year Comparative Graph We initiated the coverage of Alembic Ltd and set a target price of Rs.58.00 Alembic (ALEMBICLTD) is a leading pharmaceutical company in India. The company is vertically integrated with the ability to develop, manufacture and market pharmaceutical products, pharmaceutical substances and Intermediates.
Alembic Ltd BSE SENSEX

Stock Data
Sector Face Value (Rs.) 52 wk. High/Low (Rs.) Volume (2 wk. Avg.) BSE Code Market Cap (Rs.mn.) Pharmaceuticals 2.00 56.25/34.20 247000 506235 6474.75

The company is the market leader in the macrolides segment of anti-infective drugs in India. Zero (sugar free), Glycodin (cough syrup) and Althrocin (erythromycin estolate) are some of the leading brands of the company. Total Export sales for the third quarter were Rs 115 crores vis--vis Rs 96 crores in the corresponding period last year. This growth has come from the Formulation sales to the regulated markets which increased by 127%. Domestic formulations sales for the third quarter are Rs.154 crore against Rs. 171 crores last year. The companys net sales and net profit are expected to grow at a CAGR of 8% and 125% over FY09 to FY11E.

R E S E

Share Holding Pattern

Financials (Rs. in mn.) V.S.R. Sastry Equity Research Desk vsrsastry@firstcallindiaequity.com Dr. V.V.L.N. Sastry Ph.D. Chief Research Officer drsastry@firstcallindia.com Net Sales EBIDTA Net profit EPS P/E

A
FY09 11201.60 1303.80 108.20 0.79 61.50 FY10E 11928.25 1272.63 485.89 3.64 13.33 FY11E 13121.08 1399.89 573.12 4.29 11.30

R C H

Table of Content
Content 1. Peer Group Comparison 2. Investment Highlights 3. Company profile 4. Financials 5. Charts & Graph 6. Outlook and Conclusion 7. Industry Overview Page No. 03 03 06 08 10 12 13

Peer Group Comparison

Name of the company Alembic Ltd Ranbaxy Lab Glenmark Pharma Nectar Lifesciences

CMP(Rs.) 48.50 440.05 267.30 37.95

Market Cap.(Rs.Mn.) 6474.75 185115.00 72127.60 8510.70

EPS(Rs.) 1.15 13.60 5.84 3.26

P/E(x) 41.78 32.36 45.77 11.64

P/Bv(x) 1.97 5.23 5.86 2.74

Dividend (%) 20.00 0.00 40.00 10.00

Investment Highlights Results Updates (Q3 FY10)

For the third quarter, the top line of the company increased 6%YoY and stood at Rs.3009.00mn against Rs.2835.60mn of the same period of the last year. The bottom line of the company for the quarter stood at Rs.135.80mn from Rs.19.50mn of the corresponding period of the previous year i.e. an increase of 596%YoY.

EPS of the company for the quarter stood at Rs.1.02 for equity share of Rs.2.00 each.

Expenditure for the quarter stood at Rs.2692.40mn, which is around 6% higher than the corresponding period of the previous year. Raw material cost of the company for the quarter accounts for 30% of the sales of the company and stood at Rs.907.20mn. Employee cost stood at Rs.381.30mn from Rs.343.80mn. and accounts for 13% of the revenue of the company for the quarter i.e., an increase of 11%YoY.

OPM and NPM for the quarter stood at 11% and 5% respectively from 10% and 1% respectively of the same period of the last year.

International Business:Total Export sales for the third quarter were Rs 115 crores vis--vis Rs 96 crores in the corresponding period last year. This growth has come from the Formulation sales to the regulated markets which increased by 127%. The growth was mainly due to the ANDA launches in the US market. Growth also came from formulation dossier supplies to Canada as well as Europe. API supplies to regulated markets had a relatively subdued growth at 8% to Rs.60crores. Domestic Business:Domestic formulations sales for the third quarter are Rs.154 crore against Rs. 171 crores last year. Post restructuring, business is now stabilizing. Most of the business health parameters are in check and we are confident of growth in the future. As per ORG rankings the industry grew by 17% while Alembic grew at 24.7% (As per ORG, MAT Dec 2009). This growth is the second highest among Top 25 Corporates in the Indian Pharma Industry. Azithral moved up to 16th rank (Dec MAT 09) with Rs 96cr sales from 29th rank (Dec MAT 08) with Rs 73cr sales. Domestic API sales were Rs. 35 crores against Rs. 19 crores. The Penicillin prices continue to be a drag on the companys profits and the quarters numbers have been adversely affected by the low prices originating from China. Buyback of Shares: Till 13/11/2009 (completion date of buy back programme), the Company bought back 49,38,991 equity shares (about 82% of targeted buyback of 60,00,000 shares) at an average price of Rs.39.94 for a total consideration of Rs.1972.4 lacs which is about 60% of the total buy-back size of Rs.3300 lacs.

Dividend The company has declared Dividend on Equity Shares at Rs. 0.40 per share (i.e. 20%) of face value of Rs. 2/- per share for the year ended on 31st March, 2009 as against Rs. 1.50 per share (i.e. 75%) for the year ended 31st March, 2008. Alembic acquires API manufacturing Unit The company has acquired the API manufacturing facility of Nirayu Private Limited. This unit is located on the outskirts of Vadodara and will be used by Alembic to increase its API business and regulatory filings.

Company Profile
Alembic was incorporated in 1907 as Alembic Chemical Works Company, primarily engaged in production of tinctures and alcohol at Baroda. Later the company set up distillery plant for pharmaceutical purposes at Baroda. It started manufacturing of cough syrup, vitamins, tonics and sulphur drugs. In 1952, the company set up its research and development activity. Currently the company has developed research activity in area of chemistry, microbiology, pharmaceutical technology and bio-equivalence. The companys manufacturing units are located in Baroda and Baddi. Companys plant has received various certifications such as ISO-9002, ISO-14001 and ISO 27001 and also follows WHO-GMP guidelines. The company has presence in 75 countries globally. Business area

APIs Bulk Pharmaceuticals Formulation Herbal and Nutraceuticals

APIs The Company is engaged in manufacturing of active pharmaceutical ingredients for anti-parkinsons, anti-depressants, cephalosporins, macrolides and others. Bulk Pharmaceuticals Under this the company manufactures bulk drugs that are phosgene based and intermediates. Formulation The company manufactures around 150 products under this segment in therapeutic areas such as anti-infective, cough and cold products to cardiovascular and oral antidiabetics. Herbal and Nutraceuticals The company manufactures herbal and Nutraceuticals and has created brands like Isovon, Protinules, ALA-100, Diax and many more. Alembic also provides contract research services in area of chemistry, bioequivalence and bioanalytical. It also manufactures products for animal care such as Antibioticsinjections, Analgesics, Antipyretics, antidiarrhoeals, Vitamins-Oral and injectable, Tonics and Nutritional feed supplements.

Plants Location Alembic Road, Vadodara - 390 003, Gujarat. Panelav, Tal. Halol, Dist. Panchmahal - 389 350, Gujarat. Plot No. 21, 22, EPIP Phase I, Jharmajri, Baddi, Tehsil - Nalagarh, Dist. Solan, Himachal Pradesh. Village Karakhadi, Tal. Padra, Dist. Vadodara, Gujarat.

Financials Results 12 Months Ended Profit & Loss Account (Consolidated)

Value(Rs.in.mn) Description Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross profit Depreciation Profit Before Tax Tax Profit After Tax Exceptional Items Net Profit Equity capital Reserves Face Value Total No. of Shares EPS FY09 12m 11201.60 10.40 11212.00 -9908.20 1303.80 -400.60 903.20 -383.10 520.10 16.90 537.00 -428.80 108.20 274.40 3030.90 2.00 137.20 0.79 485.89 267.00 3516.79 2.00 133.50 3.64 FY10E 12m 11928.25 17.18 11945.43 -10672.80 1272.63 -309.69 962.95 -434.23 528.72 -42.82 485.89 573.12 267.00 4089.91 2.00 133.50 4.29 FY11E 12m 13121.08 18.90 13139.97 -11740.08 1399.89 -315.99 1083.91 -460.28 623.62 -50.51 573.12

Quarterly Ended Profit & Loss Account (Consolidated)

Value(Rs.in.mn) Description Net sales Other income Total Income Expenditure Operating profit Interest Gross profit Depreciation Profit Before Tax Tax Net Profit Equity capital Face Value Total No. of Shares EPS

30-Jun-09 3m 2910.80 2.50 2913.30 -2605.70 307.60 -80.80 226.80 -104.20 122.60 -0.10 122.50 272.90 2.00 136.45 0.90

30-Sep-09 3m 2849.00 3.50 2852.50 -2499.60 352.90 -90.10 262.80 -107.40 155.40 -22.50 132.90 269.80 2.00 134.90 0.99

31-Dec-09 3m 3009.00 5.20 3014.20 -2692.40 321.80 -67.70 254.10 -108.60 145.50 -9.70 135.80 267.00 2.00 133.50 1.02

31-Mar-10E 3m 3159.45 5.98 3165.43 -2875.10 290.33 -71.09 219.25 -114.03 105.22 -10.52 94.69 267.00 2.00 133.50 0.71

Key Ratio

Particulars EBIDTA % PAT % P/E ratio (x) ROE - % ROCE - % EV/EBIDITA (x) Debt Equity Ratio Price/Book Value

FY09 A 12% 5% 61.50 3% 11% 3.90 1.44 2.01

FY10 E 11% 4% 13.33 13% 9% 5.70 1.38 1.71

FY11 E 11% 4% 11.30 13% 9% 5.78 1.32 1.49

Charts:
Net sales & Net Profit

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P/E Ratio (x)

P/BV (X)

11

EV/EBITDA(X)

Outlook and Conclusion

At the market price of Rs.48.50 the stock is trading at 13.33 x and 11.30 x for FY10E and FY11E respectively. On the basis of EV/EBDITA, the stock trades at 5.70 x for FY10E and 5.78 x for FY11E. Price to book value of the company is expected to be at 1.71 x for FY10E and 1.49 x for FY11E respectively. EPS of the company is expected to be at Rs.3.64 and Rs.4.29 for the earnings of FY10E and FY11E respectively. Total Export sales for the third quarter were Rs 115 crores vis--vis Rs 96 crores in the corresponding period last year. This growth has come from the Formulation sales to the regulated markets which increased by 127%. The growth was mainly due to the ANDA launches in the US market. Growth also came from formulation dossier supplies to Canada as well as Europe. API supplies to regulated markets had a relatively subdued growth at 8% to Rs.60crores. Domestic formulations sales for the third quarter are Rs.154 crore against Rs. 171 crores last year. Post restructuring, business is now stabilizing. The company has acquired the API manufacturing facility of Nirayu Private Limited. This unit is located on the outskirts of Vadodara and will be used by Alembic to increase its API business and regulatory filings.

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We recommend BUY this stock with a target price of Rs.58.00 for medium to long term investment.

Industry Overview
The Indian pharmaceutical industry is driving product development and breaking new grounds in medicine research worldwide. The Indian domestic pharmaceutical market was estimated to be US$ 10.76 billion in 2008 and is expected to grow at a high compound annual growth rate (CAGR) of 9.9 per cent till 2010 and thereafter at a CAGR of 9.5 per cent till 2015. According to a detailed research by Angel Broking, by 2015, India is expected to rank among the top 10 global pharmaceutical markets. The industry is typically growing at around 1.5-1.6 times the countrys GDP growth. Moreover, according to a FICCI-Ernst & Young study, the increasing population of higher-income group in the country will open a potential US$ 8 billion market for multinational companies selling costly drugs by 2015. Besides, the report said the domestic pharma market is likely to touch US$ 20 billion by 2015, making India a lucrative destination for clinical trials for global giants. The Indian pharmaceutical offshoring industry is slated to become a US$ 2.5 billion opportunity by 2012, thanks to lower R&D costs and a high-talent pool in India. Exports India's exports of drugs, pharmaceuticals and fine chemicals grew by 29 per cent in 2008-09 to US$ 8.25 billion compared to 2007-08. According to Mr. Anand Sharma, Union Commerce and Industry Minister, the Indian pharmaceutical sector has emerged as one of the major contributors to Indian exports with export earnings rising from a negligible amount in early 1990s to US$ 6.08 billion by 2007-08. A report by industry research firm, RNCOS forecasts that pharmaceutical exports will grow at a CAGR of 18.5 per cent between 2007-08 and 2011-12. This growth will be fuelled by multi-billion dollar patent expirations and growth in the global generics market. Growth The domestic pharma market will outshine the global market, growing at a compounded annual rate of 12-15 per cent as against a global average of 4-7 per cent during 2008-2013; according to a latest study by market research firm IMS. The domestic pharma retail market posted a healthy growth of 10 per cent in May over the previous month. On a moving annual total basis (April 2008 to May 2009), the

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organized pharma retail market grew by 10.4 per cent to US$ 7.40 billion, which was slightly higher than the previous month's value of US$ 7.32 billion, according to consulting company, ORG-IMS. According to a detailed research by Angel Broking, socio-economic factors such as rising income levels, increasing affordability, gradual penetration of health insurance and the rise in chronic diseases would see the Indian formulation market touch US$ 13.7 billion by 2013 with a CAGR of 12.2 per cent. The domestic formulation industry had registered a CAGR of 14 per cent during FY2003-08 from around US$ 3.9 billion to US$ 7.7 billion, outpacing the global pharma industry growth rate of 7 per cent, said the research. In addition to that, a projected CAGR of 10.5 per cent in the global generics market and a growing involvement of Indian companies into clinical research services will further add to the growth momentum, according to the research. The Indian vaccine market was worth US$ 665 million in 2007-08 and is growing at over 20 per cent. Exports contribute over US$ 360 million, while the domestic market for vaccines is US$ 300 million. Rural Market According to estimates rural areas account for 21 per cent of the country's pharmaceuticals market. In 2006-07, the rural Indian pharmaceuticals market was estimated at around US$ 1.4 billion, having grown at about 40 per cent in 2006-07 against 21 per cent in the previous year. Pharmaceutical Retail India has 5.5 million chemists and druggists, and the organized retail market accounts for just 2 per cent of the industry but is posting a year-on-year growth of 3040 per cent. The country's pharmaceutical retail market is expected to cross the US$ 10 billion mark in 2010 and be worth an estimated US$ 12 billion- US$ 13 billion by 2012. Generics According to a report by IMS Health, the Indian generic manufacturers will grow to more than US$ 70 billion as drugs worth approximately US$ 20 billion in annual sales faced patent expiry in 2008. With nearly US$ 80 billion worth of patent-protected drugs to go off patent by 2012, Indian generic manufacturers are positioning themselves to offer generic versions of these drugs. Indian drug maker Dr Reddy's Laboratories has partnered with GlaxoSmithKline to develop and market generics and formulations in emerging markets abroad. Mumbaibased pharmaceutical firm Lupin is gearing to tap opportunities to the tune of up to US$ 200 million in the US oral contraceptives market. Diagnostics Outsourcing/Clinical Trials The Indian diagnostics and pathology laboratory business is presently around US$ 864 million and is growing at a rate of 20 per cent annually.

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Moreover, the US$ 200 million Indian clinical research outsourcing market will reach up to US$ 600 million by 2010, according to a joint study done by KPMG and the Confederation of Indian Industry (CII). Research & Development The search for innovative drug molecules and better technologies by pharmaceutical MNCs is expected to offer a windfall for the smaller research-oriented Indian firms. MNCs, whose drug pipelines are drying up and more blockbuster drugs going offpatent, are looking for alliances for drug co-development, buying or licensing out innovative molecules which can further be developed into finished drugs. Moreover, in a bid to boost R&D in the pharmaceutical sector, the government will provide US$ 422.96 million for establishing six National Institutes of Pharmaceutical Education and Research over the next five years. Biotechnology major, Biocon, will be investing US$ 20.11 million in the next fiscal in enhancing its R&D. Piramal Lifesciences, the drug research company of the Piramal Group; will invest US$ 43.4 million in the next two years for developing new medicines. Government Initiative The Government has taken various policy initiatives for the pharmaceutical sector

Government has offered tax-breaks to the pharmaceutical sector. Units are eligible for weighted tax deduction at 150 per cent for the R&D expenditure incurred. Steps have been taken to streamline procedures covering development of new drug molecules, clinical research etc. Government has launched two new schemesNew Millennium Indian Technology Leadership Initiative and the Drugs and Pharmaceuticals Research Programmeespecially targetted at drugs and pharmaceutical research.

In a bid to promote new drug research in the country, the government is mulling creating special purpose vehicles (SPV) with insurance cover which will be used to fund new drug research. The Department of Pharmaceuticals is also toying with the idea of creating drug research facilities and centres that can be used by private companies for such research work on a pay-and-use basis. Investment

According to Ministry of Commerce, domestic investment in the pharmaceutical sector is estimated at US$ 6.31 billion. The drugs and pharmaceuticals sector has attracted FDI worth US$ 1.43 billion from April 2000 to December 2008.

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Road Ahead The Indian pharmaceutical industry will see tremendous growth in the coming years as consumer spending on healthcare is increasing in India. Consumer spending on healthcare is expected to increase from 7 per cent of GDP in 2007 to 13 per cent of GDP by 2015.

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Disclaimer:

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This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of its affiliates 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. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision.

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