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India focused play and encouraging outlook bodes well

Given the turmoil on the international front, the branded Domestic Formulation segment (DF) remains well protected. It is also on the growth path, with the easing of COVID-related restrictions.

ALKEM, which garners maximum sales from the DF segment (70% of total sales), is well-placed to reap better business prospects as compared to its peers. It also has multiple levers to outperform the India Pharma market (IPM) in the near to medium term.

Sound compliance and steady approvals are helping to offset the intense price erosion impact in the US Generics segment.

 We cut our FY23/FY24 estimate by 6%/7% to factor in raw material and logistics-related headwinds. The stock is currently trading at attractive valuations of 21x/18x FY23E/FY24E EPS.

We value ALKEM at 22x its 12-months forward earnings to arrive at our TP of INR3870. We remain positive on the back of its superior execution in the DF segment, positive benefit of inflation-linked price hike on products under NLEM, and consistent compliance track record. We reiterate our Buy rating

Higher contribution from the DF segment augurs well for ALKEM

After MNC Pharma and pure-play companies like ERIS, ALKEM has minimal exposure to the international business. It has multiple growth drivers over the next 12-18 months, despite a high base in the past 12 months, due to: a) a revival in Non-COVID therapies and better MR productivity (14% net addition over the past two years), b) sustained outperformance in Chronic therapies, and c) positive impact of WPI-linked price hike in the portfolio under NLEM

We expect a 13% sales CAGR in the DF segment over FY22-24

The healthy pace of filing/launches to arrest the impact of the price erosion in the US

Exports, largely comprising of the US and other select geographies, grew at 18% CAGR over FY16-21

However, there has been a moderation in FY22 (almost flat YoY in 9MFY22) due to significant price erosion in the US base portfolio (81% of exports). However, ALKEM remains on track to file 12-15 ANDAs and subsequently keep up the pace of launches (18 ANDA approvals in 9MFY22).

Non-US exports (19% of total exports) remain on a healthy growth path on better traction in existing products as well as launches (35% YoY growth in 9MFY22). We expect 11% sales CAGR in exports over FY22-24 to INR36b.

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