The $10-billion Indian pharmaceuticals industry is the fourth largest in the world by manufacturing capacity, and accounts for 8 per cent of the total global drug production. Century-old Alembic is one of the oldest companies in this industry. It makes and sells active pharmaceutical ingredients (APIs), bulk pharma chemicals, formulations, herbal nutraceuticals and veterinary products.
Among Alembic’s APIs are those for Parkinson’s disease, depression, and hypertension. It also has branded formulations: antibiotics and antibacterials, antihistamines, cough and cold medicines, and cardiovascular drugs. Its veterinary products include antibiotics and feed supplements.
The company spends about 5 per cent of its turnover on R&D. In fact, its research institute also services global pharma and biotech companies.
As part of its expansion plans, in January 2008, Alembic bought the API unit of the Vadodara-based Nirayu. Earlier, in 2007, the company made a foray into the high-growth area of drugs for lifestyle-related diseases when it took over Dabur Pharma’s non-oncology domestic formulations business along with its 24 brands. Annual revenues from this division are expected to be about Rs 75 crore. The products include therapeutic drugs for cardiovascular, diabetic, gastrointestinal and gynecological disorders.
Financials. In January-March 2008, Alembic earned a net profit of Rs 15.34 crore, up 38.82 per cent over the same quarter last year. Net sales, meanwhile, had grown faster at 60 per cent and were Rs 262 crore. The increasing profits also showed up in earnings per share (EPS) with figure for the March quarter at Rs 1.10 for 2008 compared with Rs 0.79 in the previous year.
The improvement was not just a one-quarter phenomenon. EPS for the year ending March 2008, too, improved to Rs 8.10 from Rs 5.10 in the previous year. The acquisition cost of of Dabur Pharma’s non-oncology domestic formulations business has been partly insulated from its operating results since it is being funded from the share premium account and general reserves. So, higher interest payments are unlikely to have a big impact on operating profits.
Share price. The company’s share price rose from Rs 56 in April 2007 to Rs 102 in December 2007. It remained in the Rs 90-100 range till markets crashed in early 2008. On 24 March it closed at a low of Rs 43.40, but has recovered 27 per cent since and is trading at around Rs 61.
Investment rationale. The four-year bull run that seems to have ended as of January 2008 almost entirely bypassed the pharmaceuticals industry. Compared with the BSE Capital Goods Index, which gained over 700 per cent during April 2004 and January 2008, the BSE Healthcare Index increased just 64 per cent. But when the markets fell sharply in January, healthcare remained largely unaffected. The BSE Healthcare index is the only index in green while the capital goods index has shed about 30 per cent between 10 January and 24 April.
Even when the sector as a whole was underperforming, Alembic outperformed the Sensex in 2007 gaining about 51 per cent against the Sensex’s 47 per cent. The stock was oversold during the correction. At Rs 61, it is available at 7.5 times earnings compared to 15 times in December 2007. Expansion in business will help the company grow both turnover and net profit. Couple that with the good valuation, and we expect the stock to outperform this turbulent market.
Rohit
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