BUY on Alkem Labs - 3Q in line, outlook remains intact - HDFC Securities

Ms. Bansi Desai, Institutional Research Analyst, HDFC Securities

Alkem's Q3 revenue was largely in line as recovery in India business (+6% YoY) offset flattish growth in the US. EBITDA margin came in line at 22.8% (down 259bps QoQ) as costs normalised compared to 1H (field activity at 80- 85% of pre-Covid levels). The company expects margin to improve to ~19-20% in FY22 (+100bps improvement over FY20 levels) as part of cost savings are likely to sustain. We believe Alkem is a good bet on domestic recovery, given its dominant position in the acute segment and steady market share gains in chronic segment. Its rising scale in the US business (~USD300mn, expected to grow at 13% CAGR over next two years) will aid the overall margin expansion. Revise TP to Rs 3,370/sh.

Operationally inline: Revenue at Rs23.2bn (+6% YoY) was broadly in line as growth in India (+6% YoY, recovery in key therapies) and EMs (+12% YoY, good traction in Australia, Chile) offset muted performance in the US (flat QoQ, price erosion, fewer launches). EBITDA margin declined ~259bpsQoQ, driven by normalisation of other expenses (+355bps QoQ, -188bps YoY). Reported PAT (Rs4.5bn) was boosted by a one-time compensation of Rs351mn (towards assignment of trademark) included in other income.

India business to further consolidate: India business grew 6% YoY, driven by recovery in major acute therapies (Anti-Infectives, Gastro, Vitamins) and outperformance in key chronic segments (Cardiac, Anti-Diabetes). Alkem's key brands gained market share in respective categories. Trade Gx grew faster than branded business and contributed ~20-25% of sales in Q3. Alkem plans to restructure its acute division in FY22 - add MRs, de-clutter portfolio - which should aid further market share gains in this segment.

Key call takeaways: a)US business - single digit price erosion; scale up to USD500-600mn on the back of OSDs, controlled substance launches over the next few years; maintains 12-15 filings and 10-12 launches guidance per year; pending ANDAs: 47; b) Ibuprofen and Famotidine - to evaluate an at - risk launch, given it is the sole defendant; favourable ruling in district court, case is in appeals court; c) received first approval from DGCI for a biosimilar (tracking ~Rs150mn in revenues); Enzene can achieve Rs20bn over 3-5 years in India; d) Expect ~5-7% savings in other expenditure to sustain; e) Net cash- Rs8bn vs. net debt in Mar'20; f) Indore facility is awaiting PAI inspection.

Shares of Alkem Laboratories Ltd was last trading in BSE at Rs.2927 as compared to the previous close of Rs. 2975.9. The total number of shares traded during the day was 7031 in over 1042 trades.

The stock hit an intraday high of Rs. 3019.95 and intraday low of 2920. The net turnover during the day was Rs. 20848960.

Source : Equity Bulls

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