02-12-2021 11:34 AM | Source: Motilal Oswal Financial Services Ltd
Buy Alkem Laboratoies Ltd For Target Rs.3,430 - Motilal Oswal
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Increased opex leads to earnings miss

Outlook better for DF as well as US

* Alkem Lab (ALKEM) delivered a 3QFY21 performance below our expectation, weighed by considerable return of operational cost in the Domestic Formulations (DF) segment. The US Generics segment sales run-rate is expected to pick up, led by new launches, in the near term.

* We reduce our EPS estimate by 3%/5%/2%, factoring in an increase in marketing and promotional spend with the easing of the lockdown in the DF segment. We continue to value ALKEM at 23x 12M forward earnings to arrive at TP of INR3,430. We remain positive on ALKEM’s outperformance (v/s industry) in DF, led by a) outperformance in the Chronic therapy, b) gradual recovery in the Acute segment, c) the introduction of biosimilars in India/EMs, and d) a healthy ANDA pipeline for US generics. Maintain Buy.

 

DF sales growth on uptrend, while US moderates on YoY basis

* ALKEM’s 3QFY21 sales grew 6.2% YoY to INR23.2b (our estimate: INR23.6b).

* DF sales grew 6.3% on a YoY basis to INR15.1b (65% of sales). The International business reported growth of 6.7% YoY to INR7.8b. In the International business, US Generics sales were up 5.5% YoY to INR6.2b (27% of sales). The Other International business grew 12% YoY to INR1.6b (7% of sales).

* The gross margin was largely flat on a YoY basis at 61.7%.

* However, the EBITDA margin expanded ~210bp YoY to 22.8% (our est.: 25.6%), largely due to lower other/employee costs (down 190bps/40bp as a % of sales).

* EBITDA grew 17% YoY to INR5.3b (v/s est. of INR6.1b).

* ALKEM received INR350m on account of the assignment of trademark (together with goodwill/business/commercial) rights – recognized in other income.

* Adjusted for the same, PAT grew 21% YoY to INR4.2b (v/s est. of INR4.7b).

* For 9MFY21, revenue / EBITDA / adj. PAT grew 6%/37%/39% YoY to INR66.6/INR16.4b/INR12.9b.

 

Highlights from management commentary

* Trade Generics outperformed the Branded business significantly in 9MFY21, contributing 20–25% to DF sales.

* ALKEM received marketing authorization from DCGI for biosimilar products that would be launched in India soon. ALKEM is already selling the molecule (INR150m in sales currently). The market size is about INR20b. Two of the three products are peptides and one is a monoclonal antibody.

* ALKEM plans to file 10–12 ANDAs and launch 8–10 products on an annual basis in the US over the next 2–3 years.

* From net debt of INR3.5b, ALKEM has turned cash-positive with INR7.8b.

* ALKEM incurred capex of INR1.3b for the quarter.

 

Valuation and view

* We lower our EPS estimates for FY21/FY22/FY23E by 3%/5%/2%, factoring in increase opex for the DF business. We value ALKEM on 23x 12M forward earnings to arrive at Target Price of INR3,430.

* We expect a 17% earnings CAGR over FY20–23E, led by a 15%/9% sales CAGR in the US/DF Generics segment and 410bp margin expansion – on account of new launches / better traction in existing products in the US and recovery in Hospital Injectables in DF. Maintain Buy.

 

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