Maintain BUY on Alkem Labs - Strong recovery ahead - HDFC Securities

Mr. Bansi Desai, CFA, HDFC Securities and Mr. Karan Vora, Institutional Research Analyst, HDFC Securities

Alkem's Q4 results were below expectations. Adjusting for one-offs, EBITDA margin declined to 16.9% (+214bps YoY, -590bps QoQ), owing to lower-than- anticipated gross margin and front ending of marketing spends. The outlook for India business remains strong, driven by recovery in acute segment (given its leadership position in the space), steady market share gains in chronic and tailwinds in vitamins. In the US, while Q4 disappointed (-12% QoQ), the launch momentum is expected to improve (double-digit launches planned), which should drive 10% CAGR over the next two years. We trim our EPS estimates by 3%/2% for FY22/23e to factor in the lower gross margin. Revise TP to INR 3,320/sh. Maintain BUY.

Revenue in-line, EBITDA / PAT miss: Revenue grew 7% YoY to INR22bn as strong growth in India (+17% YoY) offset muted performance in the US (- 12% QoQ, decline in acute, fewer launches). EBITDA margin declined to 16.9% (-590bps QoQ), primarily on account of lower gross margin (-107bps QoQ, higher API prices and packaging costs), and higher other expenses (+318bps QoQ, front ending of marketing spends).

Robust outlook for India business: India business grew by 17% YoY vs. IPM growth of ~9% in Q4, driven by outperformance in anti-infectives, pain, vitamins, CNS, cardiac and diabetes. The company gained ranks in vitamins and diabetes segments. Alkem guides for mid-teen growth in FY22. It expects chronic business (16% of revenues) to double in the next 3-4 years, driven by new launches and market share gains.

Strong launch momentum in the US to drive 10% CAGR over the next two years: Q4 revenue declined to ~USD73mn (-12% YoY/QoQ), primarily on account of decline in acute portfolio, market share loss in some products, and fewer launches (backended). Price erosion was elevated in FY21 at high single digit and is expected to moderate in FY22. We expect revenue to grow at ~10% CAGR over FY21-23e as launch momentum improves in FY22 (double digit launches planned vs. 8-10 guided earlier).

Key call takeaways: a) India - MR strength - 12,000, with 600 being added in the acute segment; launched first biosimilar (peptide) in India, trade generic is 20% of revenue and expected to grow in line with other businesses; b) US business - gDuexis (Ibuprofen and Famotidine) - litigation ongoing, other players - FTF and possibly an AG; inventory write-off of INR800mn in Q4 largely pertains to Ibuprofen; c) EBITDA margin: targets 19-20% in FY22, ETR: 13-15% for the next three years; d) net cash - INR5bn+;e) Indore facility - started filing, awaiting FDA audit; f) dividend policy and capex plans remain unchanged.

Shares of Alkem Laboratories Ltd was last trading in BSE at Rs.2925 as compared to the previous close of Rs. 2905.55. The total number of shares traded during the day was 15996 in over 2648 trades.

The stock hit an intraday high of Rs. 2967.85 and intraday low of 2904. The net turnover during the day was Rs. 47044596.

Source : Equity Bulls

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