Buy Alkem Laboratories Ltd For Target Rs.3,950 - Yes Securities
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US rebound key to earnings
Our view
Alkem lowered US growth expectation and now expects a flat FY22 vs earlier indication of 15% growth; price erosion seems to have a played a role as US sales would now disappoint for 2 consecutive years. Our base case remains for gradual decline in pricing pressure leading to rebound in US aided by new launches. Meanwhile, US weakness to be partly offset by ~18% growth in domestic business in FY22 which would also be supportive of gross margin. We do not foresee any structurally low growth period in US for companies with relatively small base like ALKEM; otherwise, it would result in a much deeper EPS cut than 6‐9% reduction over FY22‐24. Overall, focus would shift on the underlying growth over & above IPM in FY23/24 and revival in US. As we do not expect US to remain weak beyond Q4 FY22, do not cut target PE and retain BUY for revised TP Rs3,950 (earlier Rs4,200) in lieu of cut in FY24 EPS estimate. Any prolonged US pain would be a key risk to our earnings estimates.
Result Highlights
* Strong domestic growth of 25% YoY, albeit on low base of last year, drives revenue beat at +19% YoY
* Robust traction seen in anti‐infectives, vitamins, pain and trade generics YoY; US sales declined 2.6% YoY, and up just 1% QoQ despite decent launches like Duexis in Aug’21 impacted by price erosion in base business
* Gross margin up QoQ and YoY in contrast to input price inflation scenario seen at other players; strong domestic growth and US mix played a role
* Strong margin and lower tax rate led to beat on PAT, up 16% YoY
Valuations
As we do not expect US to remain weak beyond Q4 FY22, do not cut target PE and retain BUY for revised TP Rs3,950 (earlier Rs4,200) in lieu of cut in FY24 EPS estimate. Any prolonged US pain would be a key risk to our earnings estimates.
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