Alembic Pharma (Oral Solids ==> Injectables, Onco, Derma, Opthalmic)

Stock Opportunities Not-so-Hidden Gems
776

Ok, so eps will not look ugly because of this right? And also I wanted to know, since they are tapping general reserve for this, is their a possibility that this amount is being siphoned off from company in this way for their own use…? Just guessing, not good in all this…

777

  1. No changes will be there in EBIDTA. However EPS for the year will be negative. As the company has corrected a lot and the management is foreseeing significally less cash generation from the facilities, it makes prudent to do one time write of this year only.

  2. Writing off the identified CWIP will reduce the capital employed in the company, which can result in a higher ROCE in forthcoming years. This is because the capital employed will be lower due to the reduced CWIP whereas production and revenues will be generated from the said facilities.

  3. Asset turn over will be more in forth coming years.

  4. Now experienced investors like @harsh.beria93 and @Rafi_Syed will be able to answer how the management took such a big decision by investing in new P&M without doing a home work and where they went wrong.

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778

“However EPS for the year will be negative.”

Can you pl explain how you determined that the EPS for the year would be negative?

My reading of the proposal, particularly the highlighted text below, led me to understand that because the managemnt does not want to show a reduced EPS for the FY 2022-23, the CWIP write-off will be against accumulated balance in General Reserve.
image

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(i) In respect of the Manufacturing Facilities or part thereof, for which the
commercial operation commences during the financial year 2022-23 and
capable of being used in the manner as intended by the management of the
Company, the amount of Identified CWIP shall be written-off to the Statement
of Profit and Loss of the financial year 2022-23;
In my understanding if they write off to the the Statement of Profit and Loss of the financial year 2022-23, the company has to show losses and ultimately -ve EPS.

780

In whatever manner the management presents in the books, the fact doesn’t change that 1150 cr of shareholders money has gone down the drain!!!

The networth and fixed assets would stand reduced to the extent of write off

Business calls do go wrong, but the relative magnitude of assets written off and time (doesn’t reflect in balance sheet) show some serious weakness on part of management.

Disc.
Was invested earlier. Fortunately exited around 700 when asset turnover was not improving

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781

Q4 results are out (Link).

Key Takeaway for me: Provides a good example that why I must read the accounting notes!!!
An accounting decision by the management to write-off and provision the impaired assets under CWIP (snapshot shown below).

Net result: Net Loss of ~670 Cr. switched to Net Profit of 342 Cr. None of these figures showed up in the PnL as all is managed in the accounting notes. This led to Qualified Opinion from the auditor since it does not follow Ind AS accounting standards,

image
image1350×824 190 KB

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782

Alembic continues to do its thing, adjusting the CWIP directly through reserves and not passing it via P&L statement. It lowers their book value, improves ROE and P&L looks clean. On the business front, large number of launches will happen in the next few quarters. Concall notes below

FY23Q4

  • Wrote off 1150 cr. of CWIP (largely capitalized pre-operating expenses) without passing through P&L statement. Won’t be capitalizing any pre-operating expenses from now (65 cr. additional costs in Q4 P&L)
  • Received PLI benefits of 21 cr.
  • Price erosion is still in double digits
  • Launched 5 products in Q4FY23, will launch 10 products in Q1FY24 and 20-25 in FY24
  • R&D will be maintained at 500-525 cr.
  • 15-20 ANDA filings in FY24
  • Expect margins of 15% in FY24
  • Will have 17.5% tax rate in FY25
  • FY24 capex will be less than 250 cr.

Disclosure: Invested (position size here, no transactions in last-30 days)

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783

Alembic Pharma gets EIR from USFDA for its solid oral formulation facility at Jarod

Link

What is implication for the business? @harsh.beria93

784

Unnecessary & too much capex is called gold plating. This is done by promoters to take money out of the company for personal use. It is usually written off in the future.

I had mentioned this in October 2020 Alembic Pharma (Oral Solids ==> Injectables, Onco, Derma, Opthalmic) - #654 by vnktshb

But in the euphoria no one noticed I guess

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