Preferred Play on India Recovery
We initiate coverage on Alkem with a BUY based on the following factors: (a) recovery in acute therapies is likely to benefit Alkem the most, given its dominant position in the segment (rank 1 in Anti-infective, rank 3 in Gastro, rank 3 in Vitamins); (b) steady market share gains in chronic (+50bps over the past five years) will contribute to higher growth and profitability; (c) rising scale in US generics (USD300mn, growing at double digit CAGR) will contribute ~20% to FY23 EBITDA vs. single digit in FY20. We value Alkem at 22x Sep 22 EPS and arrive at a target price of Rs3,315/sh.
Acute dominance, consolidating market share in top four therapies
Despite being acute focused, Alkem’s India business (~2/3rd of revenues and 85%+ profits) grew by 13% CAGR over FY15-20, outperforming the Indian pharma market (IPM) by ~340bps over the same period. Leadership in the acute segment (~4.6% market share, ranks 5th) with strong brands is expected to further drive market share gains. Our analysis of top six therapies which accounts for ~65% of IPM suggests that bigger companies with leading brands are outperforming the category average (Exhibit 20).
Chronic scale up is noteworthy, albeit on a low base
Alkem’s market share in the chronic segment has increased from 1.1% to 1.6% in the past five years. Its rank improved from 22nd in FY15 to 17th in FY20. Cardiac/Anti-diabetes/CNS therapies have outperformed the IPM by 13%/14%/9% in the same period.
US business to witness improved margin trajectory
Despite being a late entrant in the US market, Alkem has demonstrated good execution (fair market share in the products launched) in the past five years. With increasing scale, margins in US are expected to inch up to ~15-20% (from single digit in FY20) in the next three years. New product launches (10-12 p.a, c.56 pending ANDAs) would offset base business erosion (mid-single-digit) and drive 13% revenue CAGR during the same period
Levers for margin expansion in place
Higher profit contribution from the chronic portfolio, improving MR productivity (from Rs5mn to Rs6.1mn in the next three years), and rising scale in the US market should drive margin expansion of ~460bps over FY20-23e.
Our target price of Rs3,315/sh provides ~20% upside potential; risks
We initiate coverage on Alkem with a BUY rating and TP of Rs3,315/sh, based on a target PER of 22x Sep 22e EPS, which is ~15% discount to Torrent’s implied PER of 26x on Sep 22e. Downside risks: expansion of NLEM list (~30% portfolio is under price control), lower growth in India, higher price erosion in the US
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