Alembic Pharma: Further re-rating likely due to high growth rate, strong balance sheet
After remaining on the sidelines for a decade, Alembic Pharma’s stock has been in the limelight in the recent past.
Why are analysts still bullish on this counter? This is because they believe that a further re-rating of the stock is possible due to its improving earnings growth and expected rise in margin.
Alembic Pharma has shown decent growth in the recent past and is expected to report annualised earnings growth of more than 30% during the financial years 2013-16. By restricting the capex and maintaining a tight working capital cycle, it has been able to generate free cash flow consistently; the figure stood at Rs 188 crore in 2012-13.
It has also been able to pare its debt-equity ratio from 1.1 times in 2010-11 to 0.3 times in 2012-13, and is expected to become completely free of debt by 2015-16. The company also boasts high return ratios: the return on equity (RoE) figure stood at 36.8% for 2012-13.
The company has taken steps on two fronts that have started yielding results. First, it has increased the margin earned by its domestic business by improving its product mix. The management is now concentrating more on chronic therapies in areas like dermatology and oncology and less on remedies of acute diseases, which contribute around 85% to the domestic revenue at present.
Second, it plans to use its strong research pipeline to increase revenue from the US market. Alembic Pharma has a strong Abbreviated New Drug Application (ANDA) portfolio in the US, with more than 60 ANDA filings, of which more than 30 have already been approved.
This is allowing the company to accelerate sales in the US despite a late entry. Its US revenue has grown by more than 70% in the past nine months and now accounts for around 20% of the company’s total revenue, up from around 10% in 2012-13.
Analysts expect Alembic Pharma’s revenue from the US market to grow over 60% in the coming two years. The margin improvement in the domestic market, along with higher growth in the US, should help Alembic Pharma expand its margin by another 100 bps in the next two years.
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