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Looking beyond near term margin weakness

Result Synopsis

Alkem margin came in lower than estimate on higher input costs (gross margin had one off in base quarter) and steep price erosion in US. PAT was suppressed due to additional tax provision arising from a court judgement coupled with Rs150mn investment write off in US business.

Alkem guided to gross margin pressure especially in the busy H1 FY23 – we reckon a tug of war between price hikes in NLEM/non NLEM portfolio and liquidation of high cost inventory purchased in 4Q and could last till end of H1. US business showed a 5% decline in FY22 on back of sharp price erosion in high mid-teens – a factor which could moderate in current fiscal as companies respond quicker with product rationalization (our expectation) as also commentary from generics giant Sandoz (expects bottoming out of US business and back to growth per 1Q CY22 call). While we have factored growth in line with US guidance, there could be room for surprise if price erosion moderates sharply. Margin performance in domestic business would be in focus compared to growth in H1 FY23. We cut our FY23 margin estimate by ~200bps resulting in a ~7% EPS cut though gross margin to revert to 61% in FY24 translating in to margin recovery at 20%. Our BUY stays based on unchanged 23x with marginally revised TP Rs3,900 (earlier Rs3,950); near term margin uncertainty does not dilute our positive view on the stock.

Result Highlights

* Revenue up 13.3% YoY to Rs 24,839mn, higher than our estimate of 12% growth YoY.

* India business grew ahead of IPM delivering 16.7% growth for the quarter YoY. Anti-infectives, pain and respiratory delivered double digit growth rates.

* US sales were flat due to high price erosion in base portfolio. Other International markets continued strong performance delivering 34.8% growth YoY in Q4FY22. ▪ Operating margins came in at 13.6% and were flat on YoY basis but fell ~550bps sequentially as high RM prices affected the margins.

* PAT was lower due to higher tax adjustment for previous periods and one time adjustment on fair value of one of its US investments. (Rs150mn)

* Management alludes to inflationary pressures of high RM prices & increased freight costs being a key challenge.

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