Buy Alkem Laboratories Ltd For Target Rs.3,223 - HDFC Securities
Alkem Labs has been the No. 1 Anti-infectives (~10% market share) player in India for over 15 years. It is the No. 3 gastrointestinal and vitamins (VMN) company in India. It is ranked No. 5 in the Indian Pharma Market (IPM) as on Mar-2020. Company has 8 brands with annual sales of more than Rs 100cr each, 4 brands features amongst the top 50 pharmaceutical brands and 7 brands features in top-100 brands in India while 14 brands feature amongst the top 300 pharmaceutical brands in India. Alkem continues to remain the industry leader for Anti-Infectives in India and expects to grow by 1.5x industry growth in the overall acute segment. Domestic formulations business contributed ~67% of total revenues and has consistently outperformed industry over the years. We believe FY21 is likely to be a relatively subdued year for Alkem due to its high dependence on acute portfolio (the most impacted by lockdown). However, trade generics has witnessed strong traction and also vitamins portfolio has seen strong demand.
Off late, Alkem has increased its focus on introducing new products to meet identified therapy gaps across its established therapeutic segments. Company derives 60-65% of its domestic revenues from acute segment. Alkem’s overall share in chronic segment is at 1.6%. It has gained ~70bps over the last 7 years. It has improved its ranks across key therapeutic segments - cardiac, anti-diabetes and CNS by launching new products and gaining market share in most of its top 10 molecules in each of these therapies. The differentiated product offerings in these new therapy areas will enable the company to grow and diversify its portfolio. While a strong and long anti-infective season helped Alkem in supernormal FY20, Alkem's leadership position in its legacy brands and therapies along with improved standing in chronic space would ensure above-average growth. It has sufficient capacity for the next 2-3 years. US business has seen 22% revenues CAGR led by steady base business and new launches over FY17-20. We estimate 18% revenues CAGR in US sales over FY20-23E. R&D spends has been in the range of 5-6% of revenues and are likely to remain in the same levels in the next 2-3 years. Long-term API procurement contracts will ensure stable gross margins. We like Alkem’s volume driven growth in India aided by strong brands and deep penetration, which is reflected in its domestic revenue growth that is in-line/higher than broader market despite the high acute exposure.
Valuations and Recommendations:
Alkem’s chronic business continued to grow significantly ahead of the market growth rate, leading to improvement in its market share and ranking in therapy segments of CNS, anti-diabetic, cardiology and dermatology. International Business mainly led by US, delivered a robust performance on the back of new product launches and market share gains in the company’s existing products. Company looks to outperform in the chronic segment on the back of 1) new product launches including in-licensed products 2) effective sales and marketing strategies 3) improved sales force productivity and 4) building strong brands. We believe there is good headroom for growth in the US market. In H1FY21, the company registered 28% yoy growth in the US business led by new launches and market share gain. Alkem has cumulatively filed 147 ANDAs with the US FDA out of these 56 are pending for approval, it has cGMP compliant manufacturing facilities and own front end to distribute and market its products. We expect 10.4% CAGR growth in revenues on led by strong 18% growth in US business and 7% CAGR in India business over FY20-23E. Higher profit contribution from chronic portfolio, improving MR productivity and rising scale in US generics will drive margin expansion of ~450bps over FY20-23E. Healthy revenues and steady margin of around 21-23% would lead to strong 18% CAGR in PAT over the same period. Return ratios would improve with margin expansion led by healthy growth in India and strong growth in US business.
Alkem has strong market positions in anti-infective, gastrointestinal and pain segments and is a leader in acute therapy segments. In recent years, it has entered into chronic segments such as cardiology, anti-diabetics & dermatology. Its domestic business should benefit from focus on MR productivity improvement. Alkem has built a decent platform for growth in the US with its diversified manufacturing base (6 FDA approved facilities, including 2 in the US), pipeline of 74 ANDAs (~75 products approved) and front-end presence. Its US business targets 12-15 filings and 10+ launches every year. Alkem’s prudent capital allocation framework and refraining from investments in high risk areas resulting in better return ratios and that appeals to a lot of investors.
Earlier, on May 28, 2020 we had recommended buy on Alkem Labs with price target of Rs 2703. The stock achieved our target as the company had registered stellar numbers for Q1FY21. The stock had touched high of Rs 3089 in Aug-2020.
We remain positive on the long-term outlook considering the company’s strong brand presence in the domestic market with sustainable growth and scale up of US generic business. Strong brand equity in the domestic market, robust balance sheet and return ratios support our positive view on the stock. We feel investors can buy the stock at LTP and add on decline to Rs.2534-2542 band (18.5x FY22E EPS) for base case target of Rs 3020 (22.0x FY22E EPS) and bull case target price of Rs 3223 (23.5x FY22E EPS) over the next two quarters.
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