Alkem Laboratories' (Alkem) stock price has recently corrected ~10% despite strong Q1FY21 performance. We believe the correction was mainly due to reported decline in secondary sales data for Q2FY21 and dominance of acute portfolio (~85% of India sales), which would take longer to recover. In our view, this temporary situation caused by the lockdown has already been captured in the price. There remains a probability of positive surprise considering the strong traction in trade generics and relative outperformance against the industry in top brands like Pan, Pan D, etc. We remain positive on the long-term outlook based on sustainable growth in the domestic market and continuous scale-up in US generic business coupled with an improving margin profile. Reiterate BUY.
- Stock correction creates a value opportunity: The recent stock price correction by ~10% has been primarily due to weak growth resulting from lockdown, which however is temporary and does not have any structural or fundamental impact on the company' business, in our view. The lockdown effect over past six months (as per secondary sales data) is heightened for Alkem as its product mix is dominated by the acute portfolio. However, growth turned positive in Sep'20 and we expect it to improve in the coming months. Further, the company's top brands - Pan, Pan D, etc. - have outperformed the respective industries indicating faster recovery, which would also lead to margin improvement. Hence, we view the stock price correction as a value opportunity given the strong business fundamentals of the company.
- India business on strong footing: India formulations business contributes ~67% of total revenues and has consistently outperformed industry growth over the years. We believe FY21 could be a relatively underperforming year for Alkem due to its high dependence on acute portfolio (the most impacted by lockdown). However, there is an element of positive surprise with trade generics gaining strong traction and high demand in the vitamins portfolio. We estimate 4.4% growth in Alkem's India business in FY21E and ~12% growth in FY22E and FY23E each. We believe, cost savings witnessed in Q1FY21 would be partially sustainable and benefit Alkem more vs peers given its higher proportion of India sales.
- Outlook: We expect Alkem to register 10.0% revenue and 15.5% PAT CAGRs over FY20-FY23E with margin expansion of 280bps to 20.5%. Strong earnings growth coupled with reduced capex would aid free cashflow generation of ~Rs38bn over FY21E-FY23E. It would also drive RoE and RoCE higher to 19.7% and 18.1% respectively by FY23E.
- Valuation and risks: We marginally cut our earnings estimates by 2-4% for FY21E-
FY23E to factor-in weak India growth in FY21E. We maintain Alkem as one of our top picks and reiterate BUY with a revised target price of Rs3,536/share based on 26x Sep'22E EPS (earlier Rs3,679/share). Key downside risks: regulatory hurdles and delay in product approvals in the US.
Shares of Alkem Laboratories Ltd was last trading in BSE at Rs.2650.7 as compared to the previous close of Rs. 2657.55. The total number of shares traded during the day was 891 in over 229 trades.
The stock hit an intraday high of Rs. 2674.65 and intraday low of 2630. The net turnover during the day was Rs. 2357265. |
