Alkem Laboratories - Strong performance and outlook - ICICI Securities

Alkem Laboratories (Alkem) reported Q1FY21 performance significantly above our estimates on profitability front with beat of 2/85/112% on revenue/EBITDA/PAT front. Revenue growth was heathy at 8.3% YoY to Rs20.0bn (I-Sec: Rs19.6bn) driven by 38.3% increase in US sales. India business contributed ~58% to the revenues and we believe it would be the key value driver for Alkem, though India sales were down 5.5% in Q1FY21 impacted by lockdown. EBITDA margin improved 1,230bps YoY to 26.6% largely driven by impressive cost control with 930bps decline in S,G&A expenses. We remain positive on the long-term outlook given sustainable growth in the domestic market and continued scale-up in US generic business, though near term outlook remains uncertain considering its large acute portfolio. Reiterate BUY.

- Steady revenue growth despite drop in India sales: Domestic revenues reported a decline of 5.5% YoY mainly due to nationwide lockdown. There was a spillover of sales from Q4FY20, adjusting for the same the decline would be ~15%. The decline in secondary sales (IQVIA) was 11.8% in Q1FY21 vs industry decline of 4.9%, due to higher acute concentration which was the worst affected during lockdown. US revenues grew 5.1% QoQ to US$89mn (+29.1% YoY). New launches and market share gain in key products aided the higher than estimated performance. 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 surprised positively: EBITDA margin improved 1,230bps to 26.6% on back of improved gross margin and lower S,G&A expenses. Gross margin improved 190bps 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 330bps over FY20-FY22E to be driven by increasing contribution from chronic segments in India, improving MR productivity and controlled costs.

- Outlook: We expect Alkem to register 10.6% revenue and 19.5% PAT CAGRs over FY20-FY22E with margin expansion of 330bps to 21.0%. Strong earnings growth along with reduced capex requirement would help in high free cashflow generation of ~Rs25bn over FY21E-FY22E. It would also drive the return ratios, RoE and RoCE higher to 20.8% and 18.1% respectively by FY22E.

- Valuations and risks: We raise earnings estimates by 11-22% for FY21E-FY22E to factor in higher US sales, better gross margin profile and lower S,G&A expenses. We raise target P/E to 26x from 24x considering strong India business and improving margin profile leading to better return ratios. We maintain BUY with a revised target of Rs3,500/share based on 26xFY22E EPS (earlier Rs2,902/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.2784.5 as compared to the previous close of Rs. 2977.5. The total number of shares traded during the day was 14694 in over 2930 trades.

The stock hit an intraday high of Rs. 3038 and intraday low of 2769.85. The net turnover during the day was Rs. 41964391.

Source : Equity Bulls

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