2QFY2011 Result Update | Pharmaceutical

October 28, 2010

Alembic
Performance Highlights
Y/E March (` cr) Net Sales Other Income Operating Profit Interest Net Profit 2QFY2011 363 2 43 7 22 1QFY2010 % chg (qoq) 279 1 28 4 11 29.9 16.2 57.0 50.6 89.9 2QFY2010 % chg (yoy) 284 1.5 33.8 9.0 13.3 27.8 6.0 28.3 (26.3) 64.3

NEUTRAL
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Pharmaceutical 959 0.5 74/40 194822 2 19,243 5,988 ALMC.BO ALBC@IN

`72 -

Source: Company, Angel Research

Alembic reported strong set of numbers for 2QFY2011 driven by its domestic formulation business, as restructuring of the business has now started showing results. The company expects to list Alembic Pharma by March 2011. In the last three months, post the de-merger announcement, the stock has rallied 25% and outperformed the BSE Healthcare (HC) index by 9%. Owing to fair valuations, we recommend Neutral on the stock. Revenue beats estimates, domestic segment surprises: Alembic reported strong 27.8% yoy growth in revenues at `363cr (`284cr). The domestic formulation business grew by a stellar 27.3% due to strong growth on the anti-infective and gastro therapeutic segments. Exports were however, subdued during the quarter at `100cr (`97cr), up a mere 3.4% impacted by the API segment. Alembic reported flat OPM of 11.9% yoy on account of higher contribution by the low-margin domestic API business. Net profit stood at `22cr (`13cr) primarily driven by revenue growth and lower interest charges. Outlook and Valuation: We have valued Alembic on SOTP basis. Our Target Price for stock works out to Rs74 wherein we have valued Alembic Pharma at Rs47/share, Alembics 30% stake in Alembic Pharma fetches Rs11/share and the loss-making API business fetches Rs5/share. We have conservatively valued the land asset of 70 acres at Rs500/sq. ft resulting in Rs11/share. We recommend Neutral on the stock at current levels. Key Financials (Consolidated)
Y/E March (Rs. cr) Net Sales % chg Net Profit % chg EPS (Rs) EBITDA Margin (%) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/Sales (x) EV/EBITDA (x) FY2009 1,116 11.2 11 (90.3) 0.8 11.2 91.2 16.0 11.1 3.0 1.3 11.6 FY2010 1,127 2.0 40 265.1 3.0 9.9 24.3 11.3 7.3 2.6 1.2 13.6 FY2011E 1,266 11.2 75 89.2 5.6 12.4 12.8 18.9 14.3 2.3 1.1 8.5 FY2012E 1,393 10.0 85 13.3 6.4 12.0 11.3 18.5 14.8 2.0 0.9 7.8

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 63.5 5.3 9.9 22.1

Abs. (%) Sensex Alembic

3m 11.0 24.6

1yr 22.5 54.8

3yr 3.6 (29.7)

Sarabjit Kour Nangra

+91 22 4040 3800 Ext: 343 sarabjit@angelbroking.com

Sushant Dalmia, CFA

+91 22 4040 3800 Ext: 320 sushant.dalmia@angelbroking.com

Source: Company, Angel Research; Note: Estimates include the de-merged Pharma business

Please refer to important disclosures at the end of this report

Alembic | 2QFY2011 Result Update

Exhibit 1: 2QFY2011 performance

Y/E March (` cr) Net sales Other income Total Income Gross profit Gross margin Operating profit Operating margin (%) Interest Depreciation PBT Provision for taxation PAT before Extra-ordinary item Extra-Ordinary Expenses PAT after Extra-ordinary item & MI EPS (`)
Source: Company, Angel Research

2QFY2011 363 2 364 187 51.5 43 11.9 7 12 27 5 22 0 22 1.6

1QFY2011 279 1 280 134 47.4 28 9.8 4 11 14 2 11 0 11 0.8

% chg (qoq) 29.9 16.2 39.3 57.0 50.6 4.7 97.7 141.7 89.9 89.9

2QFY2010 284 1 285 153 53.9 34 11.9 9 11 16 2 13 0 13 1.0

% chg (yoy) 27.8 27.7 22.0 28.3 (26.3) 7.5 72.2 64.3 64.3

1HFY2011 642 3 645 320 49.8 71 11.0 11 23 40 7 33 0 33 2.4

1HFY2010 574 2 577 287 49.9 64 11.1

% chg 11.7 34.9 11.8 11.5 11.1

17 (35.3) 21 28 2 26 0 26 1.9 30.3 6.7 44.8 30.3

Exhibit 2: 2QFY2011 Actual v/s Angel estimates

(` cr) Net Sales Other Income Operating Profit Interest Tax Net Profit
Source: Company, Angel Research

Actual 363 2 43 7 5 22

Estimates 297 1 38 5 3 19

Variation (%) 22.1 31.7 14.0 32.8 64.3 14.6

Revenue beats estimates, domestic segment surprises: Alembic reported strong 27.8% yoy growth in revenues at `363cr (`284cr) driven by the domestic formulation business. During the quarter, the companys domestic formulation business grew by a stellar 27.3% to `207cr (`163cr) due to strong growth in the anti-infective and gastro therapeutic segments. The company witnessed traction across key brands - Azithral, Wikoryl and Zeet. The company expects momentum in its domestic formulation business to continue going ahead too as the restructuring exercise is now showing positive results. During the quarter, the low-margin domestic API sales grew by a strong 126.7% yoy to `55cr (`24cr) driven by volume off-take.

October 28, 2010

Alembic | 2QFY2011 Result Update

Exhibit 3: Domestic sales trend

250 207 200 163 154 131 145

` cr

150 100 50 0 2QFY2010 3QFY2010 24 35

39

37

55

4QFY2010 API

1QFY2011

2QFY2011

Formulations
Source: Company, Angel Research

Exports were subdued during the quarter with sales coming in at `100cr (`97cr), up a mere 3.4% impacted by the API segment. API exports de-grew by 10.7% yoy to `45cr (`51cr) on the back of pricing pressure and sluggish volume off-take in the regulated markets. However, formulation export sales grew by a healthy 18.8% to `55cr (`46cr) driven by the semi-regulated markets. The company has cumulative ANDA filings of 31 in the US with 9 approvals.

Exhibit 4: Export sales trend

100 80 78 65 46 51 34 40 53 34 55 45

` cr

60 40 20 0

2QFY2010

3QFY2010

4QFY2010 API

1QFY2011

2QFY2011

Formulations
Source: Company, Angel Research

OPM impacted by higher contribution from domestic API business: Alembic reported flat OPM of 11.9% yoy despite strong growth on the domestic formulation business, which we believe was on account of higher contribution by the low-margin domestic API business, which increased to 15.1% of net sales from 8.5% a year ago. Employee expenses increased 19.6% yoy to `46cr (`39cr).

October 28, 2010

Alembic | 2QFY2011 Result Update

Exhibit 5: OPM trend

14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2QFY2010 3QFY2010 4QFY2010 1QFY2011 2QFY2011 6.7 11.9 10.3 9.9 11.9

Source: Company, Angel Research

Net profit rises 64% driven by revenue growth and lower interest charges: Alembic recorded net profit of `22cr (`13cr) primarily driven by revenue growth (OPM remained flat yoy) and lower interest charges. Interest expenses declined 26.3% yoy to `7cr (`9cr) on the back of lower interest rate.

Exhibit 6: Net profit trend

25 20 15 10 5 0.4 0 2QFY2010 3QFY2010 4QFY2010 1QFY2011 2QFY2011 13 13 22

Source: Company, Angel Research

Other takeaways
During the quarter, approval for the de-merger was received from the shareholders, creditors and fixed deposit holders. Alembic has now filed a petition in the Gujarat high court for approval of the de-merger. The company plans to list Alembic Pharma by March 2011.

October 28, 2010

` cr

11

Alembic | 2QFY2011 Result Update

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. Managements 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 loss-making Pen-G business (loss of `24.2cr in FY2010), which 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 FY2012 with productivity of the field force improving going ahead. The company plans to reduce debt (currently at `339cr) 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. We have arrived at a Target Price of `74 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 multiple assigned to Alembic as a whole previously. We have valued the 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 `500/sq. ft. In the last three months, post the de-merger announcement, the stock has rallied 25% and outperformed the BSE HC index by 9%. Owing to fair valuations, we recommend Neutral on the stock.

October 28, 2010

Alembic | 2QFY2011 Result Update

Exhibit 7: SOTP valuation

` Alembic Pharma (PE 10x FY2012E EPS) Alembic's 30% stake in Alembic Pharma (20% discount) Alembic API business (EV/Sales @ 0.6x FY2012E Sales) Land bank (70 acre @ `2.2cr per acre) Per Share Value
Source: Company, Angel Research

47 11 5 11 74

Exhibit 8: Key assumptions

FY2011E Domestic Sales Growth (%) Export Sales Growth (%) Growth in Employee Expenses (%) R&D as % of Sales Operating Margins (%) Capex (`cr) Net Debt/Equity (x)
Source: Company, Angel Research

FY2012E 11.2 8.6 10.0 4.0 12.0 38.6 0.7

10.3 9.6 13.1 4.0 12.4 38.5 0.9

Exhibit 9: One-year forward PE band

160 140 120 100 80 60 40 20 6x 18x 14x 10x

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jul-05

Jul-06

Jul-07

Jul-08

Jul-09

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Oct-05

Oct-06

Oct-07

Oct-08

Oct-09

Jul-10

Source: Company, Angel Research

October 28, 2010

Oct-10

Alembic | 2QFY2011 Result Update

Exhibit 10: Recommendation summary

Company Alembic Aurobindo Pharma Aventis* Cadila Healthcare Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Orchid Chemicals Piramal Healthcare Ranbaxy* Sun Pharma Reco Neutral Accumulate Neutral Neutral Neutral Neutral Buy Under review Accumulate Neutral Neutral Neutral Neutral Neutral Neutral CMP (`) 72 1,192 1,792 710 350 1,645 186 2,262 504 325 442 305 474 582 2,117 Tgt Price (`) 1,330 279 541 Upside % 11.6 49.9 7.3 PE (x) 11.3 10.9 20.5 17.9 20.4 21.1 8.7 30.6 9.3 14.1 19.0 17.9 14.0 20.2 25.0 FY2012E EV/Sales (x) 0.9 1.8 2.9 2.9 4.0 2.7 1.6 7.0 1.1 2.0 3.0 2.1 2.2 2.4 6.9 EV/EBITDA (x) 7.8 9.0 16.7 13.9 18.6 13.7 6.3 19.7 6.6 9.6 15.6 11.3 10.4 12.8 20.6 FY10-12E CAGR in EPS (%) 46.4 4.7 13.0 26.6 12.8 99.8 21.7 11.0 25.7 18.7 23.2 21.1 102.0 14.0 FY2012E RoCE 14.8 15.5 16.9 26.0 16.0 23.8 12.5 38.7 16.8 23.3 23.9 7.0 25.4 18.8 16.4 ROE 18.5 24.1 18.2 34.7 18.9 25.5 16.8 28.9 18.2 25.1 31.2 13.0 32.7 20.2 17.7

Source: Company, Angel Research. Note: * December year ending.

October 28, 2010

Alembic | 2QFY2011 Result Update

Profit & Loss Statement (Consolidated)

Y/E March (`cr) Gross sales Less: Excise duty Net Sales Other operating income Total operating income % chg Total Expenditure Net Raw Materials Other Mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation& Amortisation EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Recurring PBT % chg Extraordinary Expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E 719 27 692 4.6 696 (53.1) 579 318 40 87 134 113 9.5 16.3 29 84 13.1 12.1 8 7 8 88 19.5 18 71 (0.1) 71 71 88 13.0 10.2 5.1 5.1 (8.9) 1,027 23 1,003 1,003 44.1 858 492 71 98 197 145 28.7 14.5 33 112 34.2 11.2 33 12 13 91 3.3 (23) 114 1.4 1.2 112 112 90 1.6 11.2 8.1 8.1 58.8 1,134 18 1,116 1,116 11.2 991 559 90 132 210 125 (13.7) 11.2 38 87 (22.6) 7.8 40 5 10 52 (42.9) 43 9 (1.7) 11 11 54 (40.1) 1.0 0.8 0.8 (90.3) 1,137 11 1,127 11.3 1,138 2.0 1,026 569 78 145 233 101 (19.2) 9.0 43 58 (33.0) 5.2 30 4 10 44 (15.8) 44 4.3 9.7 40 40 40 (26.4) 3.5 2.9 2.9 271.2 1,280 14 1,266 1,266 11.2 1,109 635 33 165 276 157 55.1 12.4 43 115 96.6 9.0 32 6 6 88 100.7 88 13.2 15.0 75 75 75 89.2 5.9 5.6 5.6 91.3 1,408 16 1,393 1,393 10.0 1,225 699 36 181 309 167 6.5 12.0 45 122 6.9 8.8 29 6 6 99 12.9 99 14.5 14.6 85 85 85 13.3 6.1 6.4 6.4 13.3

October 28, 2010

Alembic | 2QFY2011 Result Update

Balance Sheet (Consolidated)

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

Cash Flow Statement (Consolidated)

Y/E March (`cr) Profit before tax Depreciation (Inc)/Dec in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec.in Fixed Assets (Inc.)/Dec. in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E 88 29 (18) 7 2 90 (76) (5) 7 (74) 155 (16) (5) 135 151 1 152 91 33 (110) 12 10 (8) (65) (12) 12 (64) 90 (16) (135) (61) (133) 152 19 17 38 (4) 5 3 42 (61) 2 5 (55) 4 (24) 30 9 (3) 19 16 44 43 14 4 5 92 (38) (3) 4 (36) (1) (54) (9) (64) (9) 16 7 88 43 (25) 6 11 89 (39) (0) 6 (33) (41) (18) (59) (3) 7 4 99 45 (34) 6 12 93 (39) (0) 6 (33) (32) (20) (52) 8 4 13

October 28, 2010

Alembic | 2QFY2011 Result Update

Key Ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage (EBIT / Interest) 0.5 1.6 11.1 1.2 2.8 3.4 1.4 3.7 2.2 1.1 4.1 1.9 0.9 2.4 3.6 0.7 2.0 4.2 1.3 69 83 61 150 1.8 59 72 49 104 1.7 72 73 56 117 1.6 72 69 62 118 1.7 65 66 62 108 1.8 65 66 62 106 13.1 15.6 24.5 14.8 17.6 24.7 11.1 11.5 16.0 7.3 7.4 11.3 14.3 14.6 18.9 14.8 15.1 18.5 12.1 1.2 0.5 11.2 (24.1) 1.5 0.8 7.8 1.5 1.3 5.2 90.3 1.4 6.7 6.1 1.3 7.6 9.0 85.0 1.6 12.3 6.8 1.0 17.8 8.8 85.4 1.7 12.8 6.8 0.8 17.4 5.1 5.1 7.2 1.0 27.8 8.1 8.1 10.5 1.5 24.7 0.8 0.8 3.6 0.4 24.1 2.9 2.9 6.2 0.6 27.5 5.6 5.6 8.8 1.1 31.8 6.4 6.4 9.7 1.3 36.7
14.1 10.0 2.6 1.4 1.7 10.5 1.6 8.9 6.9 2.9 2.1 1.4 9.7 1.8 91.2 20.1 3.0 0.6 1.3 11.6 1.8 24.6 11.6 2.6 0.8 1.2 13.6 1.7 12.8 8.2 2.3 1.6 1.1 8.5 1.7 11.3 7.4 2.0 1.8 0.9 7.8 1.5

FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E

October 28, 2010

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Alembic | 2QFY2011 Result Update

Research Team Tel: 022 - 4040 3800 DISCLAIMER

E-mail: research@angeltrade.com

Website: www.angeltrade.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Alembic No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors.

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

October 28, 2010

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