Alkem Laboratories' (Alkem) has underperformed BSE Healthcare Index in the last one year mainly due to acute heavy portfolio which was impacted by COVID-19. In our view, this temporary impact on acute portfolio caused by the lockdown has already been captured in the stock's underperformance. However, as per AIOCD (secondary sales) data, anti-infectives and gastro-intestinal, the two largest therapeutic segments for Alkem, have witnessed healthy ramp-up in growth. Additionally, growth in FY22E may hold room for some positive surprise considering the low base of FY21. 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.
- Expect valuations to improve with ramp-up in growth: The stock price underperformance over the last one year has been primarily due to weak growth resulting from lockdown, which in our view, is temporary and does not have any structural or fundamental impact on the company's business. Alkem, relative to its peers, was more severely impacted as its product mix is dominated by the acute portfolio. However, growth turned positive in Sep'20 and recovered well in Q3FY21 as per AIOCD (secondary sales) data. Further, the company's top brands - Pan, Pan D, etc. have outperformed the respective segments indicating faster recovery, which would also lead to margin improvement.
- Recovery to continue in India business: India formulations business contributes ~67% of total revenues and Alkem has consistently outperformed industry growth over the years. However, FY21 is likely to be an underperforming year for Alkem due to high dependence on acute portfolio. However, we expect growth to recover from Q3FY21 and reach double-digit Q4FY21 onwards. Additionally, growth in FY22E may hold room for some positive surprise considering the low base of FY21. We estimate 3.5% growth in Alkem's India business in FY21E and ~12% growth in FY22E and FY23E each. We believe, cost savings witnessed in H1FY21 would be partially sustainable and benefit Alkem more vs peers given its higher proportion of India sales.
- 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%. We expect EBITDA margin to rebase at 20%+ for Alkem vs ~17% earlier. Strong earnings growth coupled with reduced capex would aid free cashflow generation of ~Rs40bn over FY21E-FY23E. It would also drive RoE/RoCE higher to 19.6%/18.1% respectively by FY23E.
- Valuation and risks: We remain positive on Alkem considering strong India business model, growth recovery and improving margin profile. We maintain Alkem as one of our top picks and reiterate BUY with a target price of Rs3,566/share based on 26xSep'22E EPS. 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.3038.45 as compared to the previous close of Rs. 3012.2. The total number of shares traded during the day was 6149 in over 934 trades.
The stock hit an intraday high of Rs. 3068.9 and intraday low of 2997.9. The net turnover during the day was Rs. 18690992.