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Strong India growth; margins weak

Alkem Laboratories’ (Alkem) reported Q4FY21 performance was below estimate due to lower US sales, higher S,G&A expenses and also inventory provisioning of Rs800mn. Revenue growth stood at 7.0% YoY to Rs21.9bn (I-Sec: Rs22.4bn) driven by strong 17.1% increase in India sales. India business contributed ~67% to the revenues and we believe it would be the key value driver for Alkem. Adjusted EBITDA margin improved 210bps YoY to 16.9% largely benefiting from better revenue mix. US sales were weak but we expect revenue to improve in coming quarters with new launches. We remain positive on the long-term outlook given sustainable growth in the domestic market, which has started improving, scale-up in US generic business and potential for operating leverage, though margins would drop in FY22E on high base of FY21. Reiterate BUY.

India growth strong; US disappoints:

Domestic revenues reported a growth of 17.1% YoY, driven by recovery in acute therapies albeit on a low base. Outperformance in large brands aided recovery with the company gaining market share in key large brands. Overall, the growth in FY21 has been impacted due to COVID-19 related lockdown and we expect the growth recovery to continue in coming quarters. US revenues were weak at US$73mn, down 11.7% QoQ. The company continued to maintain clear FDA status across its plants and has received 19 ANDA approvals during FY21 which would support growth in the coming quarters. ROW markets revenue grew 1.2% YoY.

EBITDA margin remains healthy:

EBITDA margin (adj. for inventory provisioning) improved 210bps to 16.9% on back of better revenue mix with higher India sales. Gross margin improved 430bps YoY. 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 despite partial sustenance of the cost savings implemented by the company. We expect EBITDA margin to be at ~20-21% over next two years.

Outlook:

We expect Alkem to register 10.2% revenue and 8.9% 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 ~Rs26bn over FY22E-FY23E. It would also drive the return ratios, RoE and RoCE higher to 19.3% and 16.7% 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 lower earnings estimates marginally by 1-2% for FY22EFY23E to factor in lower US sales. We reiterate BUY on the stock with a revised target of Rs3,560/share based on 24xFY23E EPS (earlier Rs3,608/share). Key downside risks: regulatory hurdles, addition of products in NLEM and delay in product approvals in the US.

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