Alembic Pharmaceuticals Ltd

NSE:APLLTD

Earnings Call Analysis

Alembic Pharma Q2 FY'24 Robust Performance

Alembic Pharmaceuticals Limited reported a solid quarter, with revenues climbing 8% to INR 1,595 crores. Effective utilization of new manufacturing units led to a substantial 47% profit growth before nonrecurring adjustments, reaching INR 257 crores for the first half-year. Earnings per share stood at INR 6.95. The Indian business saw a 5% increase, underperforming the industry growth rate, while the Animal Health care segment surged 32%. The US business improved by 6% year-over-year, with promising plans to introduce over 10 products in the latter half of the year. Additionally, a newly commissioned 12-megawatt solar plant is set to enhance energy efficiencies from the third quarter onwards.

Revenue and Profitability

For the quarter ended September 30, 2023, the company experienced an 8% growth in revenue, reaching INR 1,595 crores. EBITDA stood at INR 218 crores, translating to an EBITDA margin of 14% of sales. The net profit was recorded at INR 137 crores. If we extend the view to the half-year financials, revenues grew by 13% to INR 3,081 crores, with EBITDA also increasing by 27% and net revenue growing substantially by 47% before any nonrecurring items. This implies a strong undercurrent of profitability as the company continues to grow its financials. It is important to note that this year's profits have been impacted by cash expenses and depreciation associated with new manufacturing facilities, making direct comparisons with the previous year somewhat difficult.

Strategic Investments

The company highlighted the commissioning of a 12-megawatt solar plant, which commenced operation on October 4, 2023. This development marks a stride towards sustainable energy utilization, and the financial benefits of this move in terms of capitalization and energy savings are anticipated to be reflected from Q3 onwards.

Domestic vs. International Market Performance

The Indian market saw a lower growth at 5% compared to the industry growth of 7%, likely influenced by extended summers and subdued demand. Despite this slowdown, certain segments like gynecology, antidiabetic, and ophthalmology demonstrated remarkable growth. The Animal Health care business, being a critical part of the company's portfolio, grew at a stunning rate of 32% for the quarter. The U.S. business grew by 6% on a year-on-year basis and by 14% sequentially, and the plan is to launch over 10 new products in the second half of the year. Moreover, the ex-U.S. formulation business and the API business also grew by 17% and 10%, respectively. This sustained growth pattern in various markets and segments points to a well-diversified business model.

Cost Management and Margin Base

There was a notable quarter-on-quarter increase in other expenses, primarily due to new facilities costs being expensed. The management indicated that these current expenses should be seen as the new base, amounting to about INR 60-70 crores every quarter related to the new facilities. The gross margin remains consistent, and there is no guidance provided on margins; however, the company expressed contentment with continuing the current number for the time being.

Growth Projections and Market Trends

Looking ahead, the company is highly confident about returning to strong double-digit growth in the Indian market by Q3 and Q4, assuming stable market conditions. They have managed to outperform amid a slowdown and are eyeing at least high single-digit to double-digit growth across all product therapeutic segments moving forward.

Executive Summary

In sum, the company has displayed a robust financial performance with significant revenue growth and improved net profits, despite the impact of new manufacturing costs. Strategic investments like the solar plant showcase a long-term vision for sustainability and cost savings. While the domestic market presents challenges due to external factors, there is optimism for a rebound and gains in market share, especially in specialty therapies. Internationally, the U.S. market remains a key focus with plans for new product launches aimed at driving growth. Overall, the firm's diverse portfolio and proactive measures in managing costs set the stage for sustained growth and, perhaps more importantly, an enduring financial health.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to Q2 FY '24 Earnings Conference Call of Alembic Pharmaceuticals Limited. We have with us today Mr. Pranav Amin, Managing Director; Mr. Shaunak Amin, Managing Director; Mr. R.K. Baheti, Director, Finance and CFO; Mr. Mitanshu Shah, Head of Finance; and Mr. Ajay Kumar Desai, Senior VP, Finance.

[Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. R.K. Baheti. Thank you, and over to you, Mr. R.K. Baheti.

[Raj Kumar Baheti, executive]

Thanks. Good evening, everyone. Thank you all for joining the second quarter results conference call. I'm sure you would have got the results by now. Let me, however, briefly take you through the numbers for the quarter ended 30th of September 2023.

During the quarter, our revenue grew by 8% to INR 1,595 crores. EBITDA is INR 218 crores, which is 14% of sales. And net profit is INR 137 crores. During H1, the revenue grew by 13% to INR 3,081 crores. EBITDA is INR 428 crores, which is 14% of sales again and grew by 27%. Net revenue is INR 257 crores, grew by 47% before considering nonrecurring items of corresponding period.

EBITDA and net profit are not exactly comparable with previous year corresponding period as INR 61 crores and INR 116 crores for Q1 and H1, respectively, of cash expenses and INR 23 crores of depreciation has been expensed out in Q2 and H1, respectively, for the new manufacturing units, which were earlier being capitalized in previous corresponding period.

So the current year profits both at EBITDA level and at net profit level are after charging off all the expenses of facilities F2, F3 and F4. EPS for the quarter before nonreccuring items is INR 6.95 per share versus the INR 7.09 for the previous year and for H1, it is INR 13.08 per share versus INR 8.93 in the previous year.

Our gross borrowing is at -- consolidated level is at INR 784 crores versus INR 693 crores on September 2022, and the company has INR 141 crores as cash in hand versus INR 65 crores on September 2022. Net debt equity stands at 0.14, almost same as compared to the previous year.

Our new development for us this quarter has been a solar plant in solution. I'm happy to share with you that our 12-megawatt solar plant has been commissioned with the effect from 4th of October 2023 and is the operational at rated capacity.

The effect of capitalization and energy savings will be reflected in Q3 onwards. The project has a healthy ROI of 18% to 20% with payback of less than 5 years at the current electricity rate in the street.

I will now request Shaunak to take you through India business. Shaunak?

[Shaunak Amin, executive]

Yes. Thank you, Mr. Baheti. India business we chopped in INR 577 crores, which is a growth of 5% in Q2 versus an industry growth of 7% as at per IMS, partly due to extended summer and muted demand in [indiscernible] Energy markets.

Despite the slow growth, the specialty therapies in gynecology, antidiabetic, ophthalmology saw impressive growth, which were [indiscernible] In the antibiotic respiratory segments, which were heavily degrowth for the quarter, we did have a relative better performance in terms of growth numbers, which is there in the investor presentation.

We had significant new launches in the last 12 months and they continue to do well, and we have some strong new launches in the India business signed up in H2 across our key product segments.

The Animal Health care business, which is a significant part of our portfolio, grew at 32% for the quarter. And a highlight for this is we added manpower with the new division in livestock with a 350% headcount and along with this getting normalized, we expected -- we expect growth to get accelerated in the coming quarters and years.

I will now -- we will now move on to the international business.

[Unknown Executive]

Thank you. The U.S. business grew 6% year-on-year basis at 14% sequentially. As we mentioned, we are focused on launching new products in this year and improving efficiencies and execution in the midterm. Importantly, the ex U.S. formulation business, which grew by 17% as well as the API business, which grew by 10% have been doing very well the last couple of years.

We are confident of good performance in both these verticals in the current year. The R&D expense was INR 121 crores for the quarter, which is 8% of sales. We have been working at optimizing our R&D costs and improvements are on track. We filed 2 ANDAs during the quarter and cumulative ANDA filings at 252.

We received 6 approvals in the quarter and cumulatively have 190 ANDA approvals, including 25 tentative approvals. We launched 3 products in the U.S. during the quarter and plan to launch over 10 products during the second half of this year.

All our plants are in compliance and EIRs are in place. The U.S. generics was at INR 444 crores for the quarter. U.S. generics grew 17% to INR 252 crores for the quarter. Whereas the API business grew by 10% to INR 322 crores for the quarter.

Now I would like to open the floor for question and answers, please.

[Operator]

[Operator Instructions] Our first question is from the line of Rashmi Shetty from Dolat Capital.

[Rashmi Sancheti, analyst]

First question is on other expenses...

[Operator]

Sorry to interrupt, Ms. Shetty, may we request to use your handset, please?

[Rashmi Sancheti, analyst]

Yes. Just a moment. Am I audible now?

[Operator]

Yes, ma'am. Please go ahead.

[Rashmi Sancheti, analyst]

Yes. So first question is on other expenses. We have seen a sharp increase quarter-on-quarter. Is it -- this is because of expensing of the new facilities? And should we see this as a new base or it has got anything one-off included in it, excluding R&D, I'm talking about?

[Raj Kumar Baheti, executive]

Yes. So you are right. Actually, it's not quarter-on-quarter because quarter 1 also, we had charged off these expenses to P&L. This is more to do with the comparison in the previous year's quarter, where these expenses are charged INR 60 crores, INR 61 crores of expenses come into this part of the column and other expenses and of course on that.

As far as the comparison between quarter-on-quarter is concerned, I think Q3 always -- sorry, Q2 of financial hearing is always there, how we spend our quarter for the domestic business. So that rate is not compatible. But you are right, I mean, [indiscernible] come from expenses.

[Rashmi Sancheti, analyst]

So sir, this will be the new base now we should take it for the subsequent quarters?

[Raj Kumar Baheti, executive]

I mean with the little decline in sales expenses in Q -- Q3 will be saved, but i think...

[Unknown Executive]

So if you see the new facilities, yes, this is a new base because you have about INR 60 crores, INR 70 crores of cost of the new facility. So this will be the new base.

[Rashmi Sancheti, analyst]

INR 60 crores, INR 70 crores every quarter related to the new facility, right?

[Unknown Executive]

Condition that they're having. Yes, absolutely.

[Rashmi Sancheti, analyst]

Okay. And sir, what we see that in your U.S. business has improved quarter-on-quarter, then we are also seeing that the non-U.S. business is also better. In terms of India business, your acute therapies showed a lower growth, but your specialty and other therapies are doing well. And despite all this, we are also seeing a quarter-on-quarter dip in your gross margin. So any specific reason for it? Also, if you can call out related to the input cost, that is the cost for raw material, whether it is softening for you or stabilized?

[Raj Kumar Baheti, executive]

So actually speaking, there is no decline in gross margin. Gross margin has been consistent, slightly better than the previous year. And on a sequential basis as far as the current year very small minor change is maybe because the product mix otherwise gross margin is consistent.

[Rashmi Sancheti, analyst]

So it is only related to the product mix when we see quarter-on-quarter, right?

[Raj Kumar Baheti, executive]

Yes. Yes. Yes.

[Rashmi Sancheti, analyst]

Okay. Any ballpark guidance you would like to give on the gross margin as well as on the EBITDA margin front?

[Raj Kumar Baheti, executive]

So we don't give guidance but I think we have said in the past that just above 70%...

[Rashmi Sancheti, analyst]

Sorry, I didn't get it. 70%, you're talking about the gross margins?

[Raj Kumar Baheti, executive]

Yes. Couple of points. Yes.

[Rashmi Sancheti, analyst]

Okay. Yes. And nothing on the EBITDA margin guidance?

[Raj Kumar Baheti, executive]

No. I think we are not giving guidance. But current number, we'll be happy to continue the current number for the time being.

[Rashmi Sancheti, analyst]

Got it, sir. And sir, last on the U.S. business. If you can throw some light weather quarter-on-quarter growth is mainly because of new launches or you have seen some improvement in the base business, any stabilization in the price erosion, if you can talk more on that part?

[Unknown Executive]

So yes, it's a good question. I think the U.S. business, we've had a couple of launches from these facilities that came up. As you know, Alembic, we typically take some time to get market share. So it's there. So some of it is new launches. There is still erosion in the market. It depends on molecule to molecule. Some people are a little more aggressive. So as and when we see people come into the market, there may be some. But by and large, it's still a little lesser. As you know, the volumes and the demand for us is still quite strong. I think we're still getting a lot of volume. It's just not at the prices that we like, but the volume is still quite strong and some of the older products as well.

[Rashmi Sancheti, analyst]

Okay. So we are -- we will be able to maintain this kind of run rate in the subsequent quarters also?

[Unknown Executive]

I think let's wait and see how it goes. Unless there's significant erosion if there's a new entrant and they really dropped prices even further, we lose out. So yes, as of now status quo.

[Operator]

[Operator Instructions] Our next question is from the line of Damayanti Kerai from HSBC.

[Damayanti Kerai, analyst]

My question is on the U.S. business. So Pranav, you mentioned new launches have definitely helped the quarter. But can you specify how has been picked up on the injectable launches side? Like how many launches done? And what are your observation on market pickup for those products so far? And the kind of erosion in injectable, is it very different from what we see in the oral products?

[Pranav Amin, executive]

So it's still early days for us, to be honest, from L3, which is a general injectables, we've just launched 1 product, 2 actually 1 ophthalmic and injectable. So it's early days for us. On the onco side, we've launched a couple of products and the pickup has been pretty good. So we're pretty happy with it both on injectables as well as OSD side.

it's been pretty good. But I think for me to give a better answer, I'd still require a couple of quarters because these are just way few products. I don't want to have an opinion just based on a few products. But so far, it's pretty good on the pickup that we're seeing and the demand.

[Damayanti Kerai, analyst]

And the level of price erosion, maybe it's early days, but is it better than what we generally see in the oral launches?

[Pranav Amin, executive]

Yes. Again, it's a small subset of products from injectables, we only got a couple of products -- 3, 4 products in the market. So it's still early to say, but the particular products that we have, yes, the erosion is not there or not as much as that we've seen.

[Damayanti Kerai, analyst]

Okay. And very broadly say, like 2 to 3 years from now, how would you see your U.S. portfolio say between oral and non-oral products? Because I guess you are focusing more on a bit of differentiated launches to offset price erosion, et cetera?

[Pranav Amin, executive]

I think what will happen OSD is the part of it will always be there. So from being 100% OSD, if you see how we've moved as a company, we've got a bunch of ophthalmics now, we've got a bunch of derm -- 20-odd derm products, about 15-odd ophthalmic products, we've got 2 inhalation products. And now we'll have the injectables also coming through. So the OSD bit will gradually start coming down.

[Damayanti Kerai, analyst]

Okay. And on the derm portfolio, have you seen any improvement on pricing or is it still very challenging?

[Pranav Amin, executive]

It's -- the derm has been a good business for us in the first half of the year. predominantly due to some shortages in the market. So that business has been quite profitable for us for the first half of the year.

[Damayanti Kerai, analyst]

But the pricing challenges continue there, right? So one may have benefited from some demand, et cetera?

[Pranav Amin, executive]

Yes, we've seen some shortages in the market, which have benefited us for a couple of products.

[Damayanti Kerai, analyst]

Okay. And my last question is on India bit. So second quarter, obviously, muted seasonal impact, et cetera. But in coming quarters, how do you see growth picking up and what are the key drivers?

[Shaunak Amin, executive]

Yes. So I think on the India business, I think what gives us confidence of moving forward and if you have been copy of the investor presentation, I've put in a slide specifically for the slowdown. And if you see versus the slowdown, we've relatively performed better. So our net debt growth, I think it's plus 4% plus 3.5% plus 4% versus market. That also plus on the back of a very high base last year post COVID for azithromycin and a lot of liquid preparations.

Going forward, I think we're extremely confident we expect the market to stabilize coming into Q3, Q4. And I think you expect growth to return to strong double-digit growth. That said, if market shows no surprises in the future. I think we should be -- or rather we're very comfortable and if I look at it from a growth profile from a portfolio point of view, I think once the actual piece comes back on track, I think across the board, I think we will see at least high single-digit to double-digit growth in -- across all product therapeutic segments.

[Damayanti Kerai, analyst]

Okay. So it depends on our broader market trends, but you are comfortable with high single digit to double digits, given that there are no...

[Shaunak Amin, executive]

Yes. Yes. I mean that -- yes, as you're aware, I think the acute both oral antibiotic solid and liquid plus both are cough and cold were all at negative growth negative 5%, negative 7% for the quarter. So I think, yes, it's very challenging to grow in that. But going forward, like I said, it is -- and we don't see any base effect coming in -- going forward, I think we're quite comfortable to make that kind of deliver those kind of numbers consistently.

[Operator]

[Operator Instructions] Our next question is from the line of Chirag Dagli from DSP BlackRock.

[Chirag Dagli, analyst]

Sir, you have about 129 products in the U.S. In how many of these do you think do you have market share, which is lower than where you widely wanted to be and how soon can we expect that market share scale up?

[Pranav Amin, executive]

So it's not as simple as branded market, right? And the reason what we do is to pick market share really have to go and drop prices, and we won't be comfortable with dropping prices in most of these products. So I think the market share that we have is we take an opportunity base. If there's a shortage, we'd like to pick up market share because we can get it at a better price.

So pretty happy with where we are. I think on the newer products, as I mentioned, and much as now, I've always mentioned that we take a little time ramping up because we wait for good opportunities to get it. So on the last -- the launches that we would have done in the last couple of quarters, 2, 3 quarters, yes, I think there may be some potential in some of these products to increase the market share. Though I suggest, we're pretty happy with where we are. We do have a very good track record with supply. So we actively get solicited a lot by the buyers to participate in some bids, but if we only do so if the price is interesting. But on the volume side, we're pretty confident, so we want to get more market share, we can. It's just we have to be happy with the price that we want to get it at.

[Chirag Dagli, analyst]

Understood. So is it fair to say that between -- so you've launched over the last 6 months, maybe 10-odd products. Is it safe to say between 12 and 15 products is where your market share is still ramping up, which is probably suboptimal and where we...

[Pranav Amin, executive]

Yes. And some of it, especially with the new facilities, definitely it takes some time to ramp up, and we want to be more confident of supplies because we don't want to get into a situation where we take on orders and we can't supply and have shortages and penalties. So we normally do that gradually as we get more confident.

[Chirag Dagli, analyst]

Understood. And sir, generally, when you look at the -- this entire portfolio of 129 products, how have you seen -- I know price erosion is a difficult number. But in how many products would you have seen probably seen price increases and price declines, which are beyond the normal single-digit kind of erosion there?

[Pranav Amin, executive]

It's very tough to answer, Chirag, because it really depends product to product. If someone comes in aggressively on a product, then yes, you will see double-digit price erosion. At certain times, we give up the business; certain times, we match up. So it's very tough to give overview answer. There's still erosion in the market. But as we've seen, it's kind of bottoming out. But, yes, some people still do a little lower.

[Chirag Dagli, analyst]

Understood. And sir, do we -- how many pending ANDAs do we have at the moment?

[Pranav Amin, executive]

About 62. 62 pending, and this year, we'll file about 15 -- over 15 products. So I think our filing rate also will be reduced R&D spend from 2025 that we were doing it will come down to about 15-or-so.

[Chirag Dagli, analyst]

Understood. And sir, can you give some color around the quality of this pending ANDAs in terms of injectables, oncology, derma or as -- just some color, qualitative color?

[Pranav Amin, executive]

I think our aim is to get a little more complex filings. Just going to take some time. As you know, we've got a little delayed. But in the future, we should see more complex filings on the injectables side.

[Chirag Dagli, analyst]

No sir, my question was on the ones that you've already filed the 62 and probably the 15 that you will file in '24. Just some color around...

[Pranav Amin, executive]

Yes. Because out of the 62 years, some which are already OSD, some which are derm, some which are ophthalmic, and the balance are injectables. Injectable filings about 15-odd products or so.

[Chirag Dagli, analyst]

Of the 62. 12, 15 are injectables?

[Pranav Amin, executive]

Roughly, roughly, something like that, yes.

[Chirag Dagli, analyst]

Okay. And derm is how many, sir?

[Pranav Amin, executive]

Derm, I think must be about another 5 to 10.

[Chirag Dagli, analyst]

Understood. Understood. Okay, sir. And sir, just the last question, if I can. When do you really think the U.S. business will see a material change in the numbers. We are still in this $50 million to $60 million quarterly kind of run rate. But if you have to kind of think about this business longer term, when do you think this business really inflects from a absolute dollar million standpoint?

[Pranav Amin, executive]

There's not a variable. Ideally, this should grow. I think as we get more products, I think let's wait a couple of quarters to see how we do and how we do with the launches on the new products. And then I think it will be -- we'll get an idea. I think you'll see gradually ramping up as we get more products which are launched in the market.

[Operator]

Ladies and gentlemen, that is the last question of a question-and-answer session. As there are no further questions, I would now like to hand the conference over to Mr. R.K. Baheti for closing comments.

[Raj Kumar Baheti, executive]

Thanks. So thank you once again to all participants. And if anybody has any follow-up questions, they can be in touch with Mitanshu or Ajay. I wish you all a very happy Diwali and cheerful festive season. All the best. Thank you.

[Operator]

Thank you. On behalf of Alembic Pharmaceuticals Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.