Neutral Alkem Laboratories Ltd For Target3,530 - Motilal Oswal Financial Services
Strong operating leverage drives earnings growth On track to implement cost rationalization measures
* Alkem Lab (ALKEM) delivered a strong beat in 3QFY23 as EBITDA/PAT exceeded our estimates by 26%/22%, led by controlled costs and a higher off-take of seasonal products in the US generics segment. The execution was superior in the domestic formulation (DF) segment, with a healthy outperformance compared to the industry.
* We raise our FY23E EPS by 3% and maintain FY24E/FY25E EPS. We continue to value ALKEM at 21x 12M forward earnings to arrive at a TP of INR3,530.
* Due to business headwinds like pricing pressure in the US and higher operational costs, we expect a 22% YoY earnings decline in FY23. However, with cost saving measures, improving MR productivity and a healthy ANDA pipeline for US generics, we expect a 29% earnings CAGR over FY23-25. We maintain Neutral on the stock as the current valuation offers limited upside
Inferior product mix offset by controlled cost
* 3QFY23 revenue grew 16% YoY to INR30.4b (in line).
* The international business grew 29% YoY to INR10b. US sales rose 33% YoY to INR7.6b (25% of sales). Other international sales increased 17% YoY to INR2.3b (8% of sales). DF sales grew 10% YoY to INR20b (66% of sales).
* Gross margin contracted 300bp YoY to 58.9% due to ongoing pricing pressure in the US generics segment.
* However, EBITDA margin expanded 60bp YoY to 19.7% (our est. 15.8%), due to reduced opex (other expenses/R&D costs/employee expenses down 170bp/130bp/70bp YoY as % of sales).
* EBITDA increased by 20% YoY to INR6b (v/s est. of INR4.7b).
* Adj. PAT increased at a lower rate of 12% YoY to INR4.5b (our est. INR3.7b), due to higher interest expenses.
* For 9MFY23, sales grew 7% YoY to INR87b, but EBITDA/PAT declined 23%/32% YoY to INR13b/INR10b.
Highlights from the management commentary
* ALKEM expects EBITDA margin to be 15-15.5% in FY23. It achieved 15.2% EBITDA margin in 9MFY23.
* It is on track to implement cost saving initiatives worth INR2.5b and expects to improve EBITDA margin by 200bp in FY24.
* Supply challenges related to dabigatran in the US generics segment persist. ALKEM is working on a couple of strategies and may take 6M to implement them.
* The strategy for cardiac therapy in DF has been revised with the inclusion of high-volume products in addition to low-volume products.
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