March 5, 2023
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ALKEM LABORATORIES, ‘Flu-aid’(fluid) quarter; margins improve
Call & Research Report by ICICI Securities
Sector: Pharmaceuticals & Drugs
CMP Rs. 3293, Target Rs. 3844 (17% upside potential)
Target Period: 12 Months
Alkem Laboratories’ (Alkem) Q3FY23 performance beats our estimates on all fronts. Revenue grew 16.1% YoY to Rs30.4bn (I-Sec: Rs28.6bn) driven by US business. US revenue was up 26% QoQ, led by strong flu season sales. India business grew 9.7% YoY (-10.1% QoQ) to Rs.19.9bn. EBITDA margin expanded 70bps YoY and 500bps QoQ, partly on account of certain deferred expenses. We remain positive on the long term outlook, given sustainable growth in domestic market with consistent outperformance, gradual scale up in US business, and potential for operating leverage. However, near-term margins are likely to remain under pressure due to cost inflation and US pricing pressures. Reiterate BUY with a revised target price of Rs3,844/share.
● Business review: Domestic revenue grew 9.7% YoY led by strong growth in key acute therapies. Chronic and trade generics continued to deliver healthy growth in Q3. US revenue was up 26%, largely driven by strong flu season sales. Price erosion was in single digits during the quarter. We expect pricing pressures to normalise gradually, coupled with 8-10 launches, may drive gradual recovery in the US. RoW revenue grew 17.1% YoY led by Chile and Kazakstan. Gross margin stood at 58.9% (-300bps YoY, +130bps QoQ). Raw material prices are still at elevated level viz-a-viz pre-covid level, but are expected to normalise over medium term. EBITDA margin at 14.7% (+70bps YoY and +500bps QoQ) was optically higher as certain expenses were deferred to Q4FY23. Normalising raw material prices and benefits from identified cost savings are expected to elevate EBITDA margin to ~18-19% over the next two years.
● Key concall highlights: 1) Guidance: Maintain EBITDA margin guidance of ~15% for FY23 ii) R&D spend likely at 5-6% of sales. 2) Domestic business: i) Barring cardiology, all the other chronic therapies recorded double-digit growth, 3) Identified cost savings with ~200bps impact on margins
● Outlook: We expect Alkem to register 7.2% revenue and 6.2% EBITDA CAGRs over FY22-FY25E with margin reaching ~18-19%. Consistent growth, coupled with limited capex requirement, would help in high free cashflow generation of ~Rs41bn over FY23E-FY25E. We remain positive on the stock considering higher proportion of India sales with consistent track record of outperformance and potential for operating leverage.
● Valuations and risks: We marginally increase our revenue estimates by ~1% over FY23E-FY25E to factor in quarterly variances. We also raise our EPS estimates by 1-2% for FY24E-FY25E to factor in gross margin improvement and implementation of identified cost-saving measures. Reiterate BUY with a revised target price of Rs3,844/share based on 25xSep’24E earnings (earlier: Rs3,795/share based on 25xFY24E earnings). Key downside risks: Regulatory hurdles, addition of products in NLEM and delay in product approvals in the US.
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