Alembic Limited - Contrarian View

Alembic is a vertically integrated pharmaceutical company with over 100 years of presence in the domestic and international market (Russia, Africa and South East Asia). Alembic USFDA approved facility is involved in the research, development, manufacturing and to effectively market pharmaceutical products and services.Offlate Alembic is focusing on tapping the rapidly expanding generics markets in US and Europe. Global sales currently contribute approximately 20% of Alembic's revenues.

On the international front, Alembic recently entered into a licensing agreement with the Brussels-based UCB for its Novel Drug Delivery Platform for Keppra(Levetiracetam Extended Release Tablets). Under the terms of the agreement, Alembic will receive milestone payments of $11 million and royalty on future worldwide net sales of Keppra.

On the Domestic front, Alembic consolidated its leadership in the acute therapies. Rekool, Roxid, Azithral and Cepime all 4 brands retained or gained the No.1 brand rank amongst their category.

Xceft (Ceftiofur Sodium), part of the Alembic's Veterinary Division achieved the No. 1 position in its category.

Alembic made a foray into the hi-growth lifestyle therapeutic segments of Cardiovascular, Diabetic, Gastrointestinal and Gynaecology by acquiring Dabur Pharma's non-oncology domestic formulations business comprising of 24 brands which are active in the market. This provides Alembic an entry in new segments and reduce dependency on anti-infectives.

The company offlate is focusing on development of non-infringing processes for high value Active Pharmaceutical Ingredients (APIs) with a clear aim to gain a firm foothold in the international generics segment in the developed markets. Alembic filed Six US DMFs last year taking the cumulative figure to 14.

At the current market price of Rs. 45/- the stocks trades at less than 6 times it's trailing 12 month EPS of 8.35. We expect the API segment and Dabur Acquisition to be the key driver going forward and add to it's topline along with the domestic formulation which is expected to grow at 10% y-o-y. Investor with a medium to high risk profile can consider investment into this stock with a horizon of 18 to 24 months. Alembic valuation at the current price seems to be attractive in comparison to it's peers with a marketcap well below it's trailing 12 month sales. Alembic stays top on our multibagger list with a possibility of the stock doubling from the current levels over the next 18 months.

Positives

1) Opening up of health insurance sector and expected growth in per-capita income are key growth drivers from a domestic sales perspective.
2) Large number of drugs is going off-patent in Europe and US between 2005 and 2009. This offers a big opportunity for the Indian companies to capture this market.

Threats

1) Threats from other low cost countries like China and Israel exist.
2) High Crude Oil prices. This would affect bulk drug units due to increase in prices of solvents and energy cost.