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Beneficiary of strong recovery in acute portfolio

Alkem Laboratories’ (Alkem) has seen strong growth recovery in its acute portfolio during Q1FY22 as per AIOCD (secondary sales) data and its better than industry growth. The anti-infectives and gastro-intestinal, the two largest therapeutic segments for Alkem, have witnessed healthy ramp-up. Additionally, we believe the growth in FY22E may show positive surprise considering the low base of FY21 and if the momentum of this sharp recovery in acute segments continues.

We remain positive on the long-term outlook based on sustainable growth in the domestic market and gradual scale-up in US generic business coupled with an improving margin profile. We view this stock as compounder with sustainable mid-teen earnings growth. Reiterate BUY.

* Valuations likely to further improve with recovery in growth:

After underperforming in H2FY21, primarily due to weak growth resulting from lockdown which was a temporary issue, the valuations have started improving in recent past with improving growth outlook. Alkem witnessed secondary sales growth of 48.4% in Q1FY22 as per AIOCD vs industry growth of 37.2%. We believe the growth momentum would be strong for Alkem in FY22E in India business which along with 20%+ margin would help valuations to catch-up with peers.

* Recovery to be strong in India business:

India formulations business contributes ~67% of total revenues and Alkem has consistently outperformed industry growth over the years. FY21 was impacted due to high dependence on acute portfolio which was severely impacted by lockdown. However, growth started recovering from Q4FY21 and we expect strong 16.1% growth in FY22E led by strong recovery in acute portfolio. We also expect company to continue to outperform industry growth in India in future years as well on back of strong brand franchise (Clavam, PAN, PAN-D, A to Z etc). As per AIOCD, the brand beyond top-5 have grown even faster which reinforces our view of strong brand building capability. Further, US sales was impacted in Q4FY21 due to ibuprofen and we believe revenue would now gradually recover in coming quarters.

* Outlook:

We expect Alkem to register CAGR of 11.0% at revenue and 10.0% at EBITDA over FY21-FY23E despite high base of FY21 which incorporates several cost savings measures. We expect EBITDA margin to rebase at ~21-22% for Alkem vs ~17% earlier. Strong earnings growth coupled with reduced capex would aid free cashflow generation of ~Rs27bn over FY22E-FY23E. It would also help in RoE/RoCE to be at 19.6%/17.0% respectively in FY23E.

* Valuation and risks:

We remain positive on Alkem considering strong India business model, growth recovery and improving margin profile. Maintain Alkem as one of our top picks and reiterate BUY with a revised target of Rs3,945/share based on 26xFY23E EPS (earlier Rs3,560/share). Key downside risks: regulatory hurdles and delay in product approvals in the US.

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