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All round beat

Alkem Laboratories’ (Alkem) reported Q1FY22 performance materially above estimates led by strong growth across the businesses. Revenue growth stood at 36.3% YoY to Rs27.3bn (I-Sec: Rs22.1bn) driven by strong increase in India sales (+65.3% YoY, +29.6% QoQ). India business contributed ~70% to the revenues and we believe it continue as the key value driver for Alkem.

EBITDA margin stood at 21.7% above estimated 19.8% despite higher personnel costs and rise in input prices. US sales also recovered well with 11.2% QoQ growth led by new launches. We remain positive on the long-term outlook given sustainable growth in the domestic market with consistent outperformance, scale-up in US generic business and potential for operating leverage, though margins would drop in FY22E on high base of FY21. Reiterate BUY with a revised target price of Rs4,126/share (earlier: Rs3,945/share).

* India growth strong; US recovers too:

Domestic revenues reported a growth of 65.3% YoY, driven by recovery in acute therapies albeit on a low base and higher sales of anti-infectives due to rise in covid cases. Outperformance in large brands aided recovery with the company gaining market share in key large brands. Overall, we expect India business to grow at strong 22.9% in FY22E with normalized growth in coming quarters. US revenues recovered from low of Q4FY21 and increased 11.2% QoQ. The company continued to maintain clear FDA status across its plants and has received 5 ANDA approvals during Q1FY22 which would support growth in the coming quarters. ROW markets revenue also grew strong 56.4% YoY.

* EBITDA margin remains healthy:

EBITDA margin remained strong at 21.7%, a beat of 190bps vs estimate, led by strong revenue growth. This is despite increase in input costs and certain one-time increase in personnel costs. Gross margin dropped 70bps QoQ. We expect EBITDA margin to drop in FY22E on high base of FY21 mainly due to lot of cost savings seen in FY21 on account of lockdown. We expect EBITDA margin to be at ~21% over next two years.

* Outlook:

We expect Alkem to register 13.0% revenue and 11.7% EBITDA CAGRs over FY21-FY23E with margin dropping by 50 bps to 21.4% on high base of FY21. Consistent growth coupled with limited capex requirement would help in high free cashflow generation of ~Rs27bn over FY22E-FY23E. It would also drive the return ratios, RoE and RoCE higher to 20.3% and 17.6% respectively by FY23E. We remain positive on the stock considering higher proportion of India sales with consistent track record of outperformance and potential for operating leverage.

* Valuations and risks:

We raise earnings estimates by 5-7% for FY22E-FY23E to factor in higher India growth and improving US sales. Reiterate BUY on the stock with a revised target of Rs4,126/share based on 26xFY23E EPS (earlier Rs3,945/share). Key downside risks: regulatory hurdles, addition of products in NLEM and delay in product approvals in the US.

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