Alkem Laboratories - Strong operational performance - ICICI Securities

Alkem Laboratories (Alkem) reported Q2FY21 performance significantly above our estimates on profitability front with beat of 2/17/25% on revenue/EBITDA/PAT front. Revenue growth stood at 4.4% YoY to Rs23.6bn (I-Sec: Rs23.1bn) driven by 12.2% increase in US sales. India business contributed ~66% to the revenues and we believe it would be the key value driver for Alkem, though sales grew just 0.5% in Q2FY21, impacted by lockdown. EBITDA margin improved 540bps YoY to 25.4% largely driven by impressive cost control with 550bps decline in S,G&A expenses. We remain positive on the long-term outlook given sustainable growth in the domestic market, which should start improving Q3FY21 onwards, continued scale-up in US generic business and potential for operating leverage. Reiterate BUY with a revised target price of Rs3,566.

- India growth positive despite acute heavy portfolio: Domestic revenues reported a growth of 0.5% YoY, vs estimated 5% decline, despite acute heavy portfolio which was impacted during lockdown. Strong traction in trade generics business and outperformance in large brands helped. The decline in secondary sales (IQVIA) was 2.0% in Q2FY21 vs industry growth of 4.0%, due to higher acute concentration which was the worst affected during lockdown. US revenues declined 4.8% QoQ to US$85mn (+12.2% YoY). Successful USFDA audits at company's key facilities in past twelve months would ensure filing and launch of new products that would help maintain the growth momentum in US.

- EBITDA margin continues to surprise: EBITDA margin improved 5400bps to 25.4% on back of lower S,G&A expenses. Gross margin improved 40bps YoY led by better product mix and favorable currency. We believe improvement in gross margin and EBITDA margin is partially sustainable. Overall, we expect EBITDA margin improvement of 350bps over FY20-FY23E to be driven by increasing contribution from chronic segments in India, improving MR productivity and controlled costs.

- Outlook: We expect Alkem to register 9.4% revenue and 15.7% PAT CAGRs over FY20-FY23E with margin expansion of 350bps to 21.2%. Strong earnings growth along with limited capex requirement would help in high free cashflow generation of ~Rs40bn over FY21E-FY23E. It would also drive the return ratios, RoE and RoCE higher to 19.6% and 18.1% respectively by FY23E. 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 raise earnings estimates by 1-3% for FY21E-FY23E to factor in lower S,G&A expenses. We reiterate BUY on the stock with a revised target of Rs3,566/share based on 26xSep'22E EPS (earlier Rs3,536/share). Key downside risks: regulatory hurdles, addition of products in NLEM and delay in product approvals in the US.

Shares of Alkem Laboratories Ltd was last trading in BSE at Rs.2708.8 as compared to the previous close of Rs. 2680.2. The total number of shares traded during the day was 555 in over 87 trades.

The stock hit an intraday high of Rs. 2710 and intraday low of 2695.7. The net turnover during the day was Rs. 1502409.

Source : Equity Bulls

Keywords