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Published on 23/09/2019 9:38:20 AM | Source: HDFC Securities Ltd

Buy Alkem Labs Ltd For Target Rs.2,180 - HDFC Securities

On recovery path

We maintain BUY on ALKEM despite a big miss on our 1QFY20 estimates. Our TP is 2,180 (22x FY21E EPS) with estimates largely unchanged owing to a sharp recovery expected in the next two quarters following a shift in the seasonally strong quarters (from 1Q earlier to 2Q now).

 

HIGHLIGHTS OF THE QUARTER

* Following a change in the channel filling strategy, we believe 1Q has now become the seasonally weakest quarter for Alkem’s India business, while 2Q and 3Q have become the strongest quarters. This was the key reason for sub-par performance in 1QFY20. India revenues grew 12% YoY to Rs 12.2bn, leading to a 6% miss on our total revenues estimates. We expect India business to grow in double-digits over FY20/21E, in-line with the management’s expectations, driven by sustained growth in both acute and chronic therapies.

* US revenue at ~US$ 69mn was up 14% YoY, despite incremental competition in gMycophenolate during the last quarter. This was largely driven by higher market share in existing products and continued momentum in new product launches over the last six months. Our FY20 revenue estimates with 6-7% growth are much lower due to the fall we expect in gMycophenolate revenues, albeit the management is confident of achieving double-digit growth for the year.

* EBITDA at Rs 2.6bn, up 30% YoY was affected by lower India sales and higher than expected bonus component in the employee cost. The margin at 14.3% was up 202/163bps YoY/QoQ. The sequential improvement in gross margin on account of alleviated pricing pressure in raw materials was a key positive takeaway. On a favorable base, PAT grew 36% YoY in 1QFY20.

* Near-term outlook: Expect the stock to recover with strong 2QFY20 numbers.

 

STANCE

With a lower than expected impact of gMycophenolate competition in the US, coupled with the highest top-line growth in India business among large-cap peers (1QFY20), we maintain our FY20/21E revenue estimates for Alkem and model a 13% CAGR over FY19-21E. The profitability, too, is likely to expand by 100-120bps YoY with lower raw material prices and improving business mix. With moderated tax expectations, we model 25% EPS CAGR over FY19-21E. Alkem remains among the fastest-growing companies in the Indian market while its performance in the US also stands out. At CMP, Alkem is available at 18x FY21E EPS. Considering its stable branded business, healthy cashflows (~Rs 8bn annual FCFF over FY20/21E), and reasonable return ratios (22% RoIC in FY21E), we believe this is unjustified.

 

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HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475

 

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