Add Alkem Labs Ltd For Target Rs. 3,450 - Yes Securities
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Presumptive margin recovery baked in; D/G to ADD
Result Synopsis
Alkem gross margin came in at lowest across historical 2Q periods as US price erosion led to 470bps decline in gross margin YoY. Price hikes in domestic business and 9% QoQA rise in US business saved further damage on a sequential basis. Domestic business up 13% YoY while ROW sales up 15% YoY
Alkem reported healthy growth in domestic business on what was an elevated base of last year from sale of anti-infectives and multi-vitamins. US revenues up 9% QoQ and marginally down YoY. Company indicated lot of gross margin pressure with price erosion of up to 30% in individual products in the US business. Price hikes in domestic business was not fully absorbed in 2Q while some of the high cost inventory was consumed during the quarter. We presumed normalized gross margin next fiscal along with double digit growth in India. Given the margin performance, we cut FY23 EPS by 15% but a presumed rebound in growth/margin restrict FY24 EPS reduction to 3%. Given the cut to earnings and lack of triggers for a PE rerating, we D/G to ADD while retain 24x FY24 EPS and revised TP Rs3,500 (earlier Rs3,600).
Result Highlights
* India sales up 13% YoY, US growth at 9% QoQ
* Multiple reasons for compressed gross margin – API prices, generic price erosion
* Difficult to reach 15-16% margin if such gross margin pressure persists
* Higher material cost in India is well compensated by price hikes in domestic business
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