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Strong show; outlook remains promising
2QFY19 results better-than-estimates:
Alkem Laboratories (ALKEM) reported muted growth of 3%YoY to INR19.2b (v/s est. of INR17.5b) on back of 6% YoY decline in domestic formulation (DF, 69% of sales), which was off-set by strong 55% YoY growth in the US business (25% of sales). Gross margins declined by ~180bp YoY (flat QoQ) to ~60.2% due to increased share of relatively low margin US business. Increased other expenses and employee cost (up ~270bp and ~60bp, as percentage of sales) led to contraction of ~570bp YoY in EBITDA margin to 19% (our est. 15.5%). Sequentially, EBITDA margin has expanded ~610bp due to improved operating leverage. R&D spend was INR1.1b, 5.5% of sales v/s 5.9% of sales in 1QFY19. PAT declined by ~21% YoY to INR2.5b (v/s est. of INR1.8b). For 1HFY19, sales stood at INR35.9b (+14% YoY), EBITDA at INR5.8b (+4% YoY) and PAT at INR3.9b (flat YoY).
* US on strong growth momentum:
ALKEM posted strong growth of 32% YoY to INR5.8b in international market. This was led by growth of ~55% YoY to INR4.7b in the the US market. Domestic business declined by ~6% YoY to INR13.2b on back of high base. Growth in the US was led by healthy traction in existing portfolio, new launches (Welchol and Ampyra) and also by favorable currency impact. Adjusting for impact of GST implementation, YoY growth is 13.3% in 1HFY19. ALKEM has guided for mid-teens growth in the DF for FY19.
Key concall takeaways:
(1) 2-3% of DF business is impacted by the recent FDC ban. ALKEM has strategy in place to recover lost business over the medium term, (2) Capex for FY19 is INR5.5-6b towards expansion of the Indore and Sikkim site, (3) ALKEM has guided for overall EBITDA margin of 16.5-17% for FY19, and ( 4) it has guided for 8-10 launches in the US for FY19.
We maintain our estimates for FY19/20 to INR74 and INR97. We roll our price target to 24x (unchanged) 12M forward earnings to INR2,500 (from INR2,475 earlier). We remain positive on ALKEM on the back of improving operating leverage in the US business, increased share of chronic portfolio/better MR productivity and outperforming domestic formulation industry, thereby driving return ratios over next 2-3 years. Maintain Buy.
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