Alembic would start expensing derma facility from Q3 even as another Rs5bn capex is still to be incurred in current fiscal. Cumulative capex including pre-operative expenditure is Rs15bn till date and we reckon company can achieve stated goal of US$450-500mn US sales over next few years. In domestic business, encouragingly, prescriptions and number of prescribers have expanded which rules out any structural concern behind no growth yoy in H1. While we remain convinced earnings growth would accelerate beyond FY21, even so H1 US performance has held the fort in the interim. Our ADD rating stays with unchanged 1-year TP of Rs600, as growth will follow a huge investment phase that should end in the current fiscal.
Q1 revenues were mainly driven by strong growth in the US. The company also reported one of the strongest gross margin performances although as the management asserted, these are unsustainable. Overall, US growth remains strong but opportunistic whereas India growth remains slightly insipid. With the aggressive R&D and capex, the management has signalled its long term strategy for the next five to six years, especially on the US front. This includes a foray into niche areas like oncology, injectables, derma, etc. We believe this is fraught with a new set of challenges. The benefits are most likely to be back-loaded. Immediate cash burn is likely to weigh on sentiments in the near term. Our target price arrives at Rs540 based on 22x FY21E EPS of Rs 25.4.
We expect 9% earnings CAGR over FY19-21, which appears moderate, partly due to the high base of FY19. We further expect earnings momentum to improve greatly, FY21 onwards, as ALPM starts reaping benefits from its new investments. We value ALPM at 18x 12M forward earnings and arrive at a PT of INR615. We remain positive on ALPM, on the back of its strong product pipeline in onco injectables/ derma/ oral solids dosages, creation of capacity/capability to support manufacturing and for its sound compliance record in the US market. Even the domestic branded formulation business is in good stead to outperform the industry. However, we maintain Neutral on limited upside from current levels.