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International markets and lower RM cost drive earnings

Bioscience off-take at a healthy pace

* Alkem Laboratories (ALKEM) delivered better-than-expected 1QFY24 performance, fueled by superior traction in international markets. ALKEM’s business growth was broad-based within international markets including the US, Chile, the UK, Kazakhstan and the Philippines.

* We cut our earnings estimates by 7%/1% for FY24/FY25, factoring in: a) unfavorable seasonality effect in domestic formulation (DF) segment, b) increased tax rate, and c) better prospects in bioscience segment as well as in international markets. We value ALKEM at 21x 12M forward earnings to arrive at our TP of INR3,810.

* While ALKEM continues to progress well in chronic segment (17-19% of branded generics part of DF sales), the growth prospects of acute segment remain volatile due to seasonality factor. The exports (34% of 1QFY24 sales) have seen healthy uptick from existing products. However, we await new approvals for sustainable growth. Further, the valuation adequately factors in the upside in the earnings. Maintain Neutral.

Better geography mix drives profitability YoY/QoQ

* ALKEM’s 1QFY24 revenue increased 15.2% YoY to INR29.7b (our estimate: INR29.2b). Domestic business grew 7% YoY to INR19b (64% of sales). International business rose 33% YoY to INR10b. Within international business, the US sales grew 25% YoY to INR6.9b (23% of sales). Other International sales jumped 56% YoY to INR3.2b (11% of sales).

* Gross margin expanded 210bp YoY to 59.6% due to lower RM prices.

* EBITDA margin improved 250bp YoY to 13.1% (our est: 12.5%) due to higher GM and lower R&D costs/employee expenses (-110bp/-150bp YoY as a % of sales) offset by increase in other expenses (+220bp as a % of sales).

* Accordingly, EBITDA increased 42.4% YoY to INR3.9b (vs. est. of INR3.7b).

* Adj PAT jumped 52.3% YoY to INR2.9b (our est: INR2.7b) due to lower taxes.

Highlights from the management commentary

* ALKEM guided for high-single digit YoY growth in DF segment vs. earlier guidance of double-digit growth for FY24.

* ALKEM maintained its overall EBITDA margin guidance of 16% for FY24.

* The US generics witnessed price erosion of high-single digit vs. double-digit decline experienced earlier.

* The Enzene biosciences (biotech arm) garnered sales of INR570m for 1QFY24. Management guided for FY24 sales of INR2.4b (vs INR1.6b in FY23).

* ALKEM expects Enzene breakeven by FY25.

* Management guided for gross margin to be at 59.0%-59.5% for FY24

* The effective tax rate is expected to be 17-19% for FY24.

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