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Strong momentum in Domestic Formulations drives earnings

New launches to improve US growth prospects

* ALKEM delivered better-than-expected 4QFY21 performance, led by superior execution in the domestic formulations (DF) segment. While the US business faced headwinds in 4QFY21, it expects healthy launches to deliver better YoY growth in FY22.

* We maintain our FY22E/FY23E EPS estimate. We continue to value ALKEM at 23x 12-month forward earnings to arrive at our TP of INR3,500. We remain positive on ALKEM on the back of: a) healthy outperformance in DF, supplemented by strong brand recall, new introductions including Biosimilars, and partly aided by COVID-19 associated demand, and b) revival in US sales growth, led by improved pace of launches and reduced impact of price erosion in its base business. Reiterate Buy.

Better product mix drives 4QFY21 performance

* Revenue grew 7% YoY to INR21.9b (est: INR19.7b) in 4QFY21.

* DF sales grew 17.1% YoY to INR14.7b (68% of sales). International business reported a 8.2% YoY decline to INR6.9b, led by a 10.4% decrease in US sales to INR5.4b (25% of sales). Other international sales reported a marginal growth of 1.2% YoY (7% of sales).

* ALKEM incurred a one-time inventory charge of INR800m on one product in the US (Ibuprofen). Adjusting for the same, gross margin expanded 430bp a YoY to 60.6%.

* However, EBITDA margin expanded at a lower rate of 210bp YoY to 16.9% (est: 15.5%), due to higher staff costs (+250bp as a percentage of sales), offset by lower other expense (-70bp YoY as a percentage of sales). 

* EBITDA grew 23% YoY to INR3.7b (est: INR3b).

* Adjusted PAT grew at a higher rate (47% YoY) to INR3.2b (est: INR2.2b) due to a lower tax rate.

* Sales/EBITDA/PAT grew 20%/80%/41% to INR89b/INR20b/INR16b in FY21

Highlights from the management interaction

* For FY22, ALKEM indicated double-digit ANDA launches, which would be higher than FY21. It launched 12 products out of the 19 that had final approvals in FY21. It expects YoY growth in US sales in FY22.

* The management guided at mid-teen YoY growth in the DF segment in FY22.

* While the increase in raw material cost/product mix change may impact GM, ALKEM remains confident of achieving EBITDA margin of 19.5-20% in FY22.

* Trade Generics constituted ~20% of domestic sales in FY21.

* The company is witnessing structural cost savings in DF on account of increased virtual marketing and promotion of new launches.

* The effective tax rate would be 13-14% in FY22.

Valuation and view

* On a high base of FY21 (41% YoY growth), we expect 8% earnings CAGR over FY21-23E, led by 11%/14% sales CAGR in the US/DF segment on account of new launches and better traction in existing products in the US and strong growth in Antibiotic, VMN, and Pain Relief in DF.

* Continued efforts toward cost optimization and savings from digital initiatives such as digital conferences is expected to reduce opex structurally in the DF segment, which will help sustain profitability over the next two years.

* We maintain our FY22E/FY23E EPS estimate. We continue to value ALKEM at 23x 12-months forward earnings to arrive at our TP of INR3,500.

* We remain positive on ALKEM on the back of industry outperformance in DF in its focused therapies and better growth outlook in the US as well. Maintain Buy.

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