Recommendation From Pharmaceuticals Sector
This section gives a recommendation of a stock having stock price below Rs 100 with sound fundamentals and expected to give handsome returns over a one-year time horizon.
ALEMBIC LIMITED : ‘ESSENTIALLY’, ALL IS WELL!
HERE IS WHY
☛Good growth in associate
☛Debt-free status
☛Value stock.
Alembic Limited is primarily engaged in two businesses – API manufacturing (70 per cent of revenue) and real estate (leasing and selling with 30 per cent of revenue). The company has API manufacturing facilities at Vadodara. Additionally, it has 29.46 per cent stake in Alembic Pharmaceuticals Limited (APL), the flagship company of the Alembic Group. The market value of the company’s share in APL is greater than Alembic Limited’s own market capitalisation. As of September 8, 2020, the total market capitalisation of Alembic Pharmaceuticals stood at Rs 18,220 crore. Thereby, the value of Alembic Limited’s share of 29 per cent comes to around Rs 5,280 crore . This is more than twice the total market capitalisation of Alembic Limited, which stood at around Rs 2,467 crore.
The company has turned debt-free since FY 2015. Thereby it has limited downside risk as it has no interest payments for its real estate business. Additionally, the company has sizeable unused land of around 102 acres. The ongoing pandemic has not materially impacted the company’s API business as it is classified as essential services.In order to insulate the Company from risks associated with price fluctuations of key raw materials, the Company has moved from outright sale to job-work model for some of its products. Associate company, APL, is also into essential items’ business, which is hardly affected by the pandemic. Hence, the company will navigate well this year even with slowdown in its real estate business. Furthermore, dividend income from Alembic Pharmaceuticals helps cushion the revenue slowdown in real estate business. In FY20 the company received a dividend of around Rs 87 crore.
The Company’s third real estate project, VEDA II is in its initial stage of construction. The Company is also in the process of upgrading its campus Alembic City, by improving infrastructure, landscape and roads. Commercial Real estate rental assets will continue to be a vertical for Alembic Real Estate. The rental income stream from its real estate business is relatively stable too.
The company has seen its consolidated net profit almost double from Rs 162 crore in FY18 to Rs 329 crore in FY20 on the back of significantly strong growth in share of associates in the profit. The share of associates in profit has increased from Rs 121.2 crore in FY18 to Rs 236 crore in FY20. For the quarter ended June 2020, the company’s gross sales decreased by 48.56 per cent to Rs 13.39 crore in Q1FY21 from Rs 26.03 crore in Q1FY20. Total expenditure for Q1FY21 stood at Rs 12.65 crore as against Rs 24.62 crore in Q1FY20, showing a decrease of 48.62 per cent. The operating profit showed an increase of 23.18 per cent to Rs 3.56 crore in Q1FY21 from Rs 2.89 crore in the same quarter last year.
Operating profit margin for Q1FY21 stood at 26.59 per cent as against 11.10 per cent in the same quarter last year. The share of its associate in consolidated profit for Q1FY21 stood at Rs 86.41 crore as against Rs 35.29 crore in the same quarter last year, showing an increase of 144.86 per cent. The consolidated net profit for Q1FY21 stood at Rs 88.52 crore as against 36.78 crore in the same quarter last, showing an increase of 140.67 per cent. ROCE for FY20 stood at 7.12 per cent whereas the RONW for the same period is at 7.08 per cent as against 3.91 per cent and 3.58 per cent last year, respectively. The company is trading at a PE of 26x. By virtue of these factors, our recommendation to reader-investors is to BUY this stock.
