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Slower domestic growth, US rise not a healthy mix; D/G to SELL

Result Synopsis

Alkem reported beat on topline though the driver was sharp jump in US and ROW markets while domestic lagged at +7% YoY. We note company lagged IPM in key covered therapies like gastro and vitamins in Q1. Notably, July is off to a weak start and company has downgraded domestic growth to 7-8% vs double digit earlier. US growth appeared high but only because Q1 FY23 had a low base eroded by severe price erosion; we would not extrapolate such growth though expect US profitability to remain stable on presumed benign pricing situation. While not indicated as such by the management, a robust ROW growth of 56% YoY on a not so weak base may point to some degree of channel filing which would reverse during rest of the year. Management reiterated some of the points on costs such as US plant shutdown and anticipated benefits from Q2, recovery in Enzene EBIDTA (to a mild loss) and cost control efforts – reckon there could be potential for margin expansion of more than 100bps in FY25 especially as input costs too decline. We largely keep estimates unchanged and downgrade to SELL as slower growth in domestic business may be an overhang and newfound support from US/ROW may not be sustainable. Stock trades above 5-year average PE of ~23x and we are reluctant to give any higher; SELL for TP Rs3,500 (earlier Rs3,650)

Result Highlights

Revenue beat expectation at 15% YoY growth driven by exports with US growth at 25% YoY and ROW growth of 33% YoY

Domestic growth was lackluster at +7% YoY as gastro sales remained tepid due to delayed monsoon as also alluded by other players like DRL and Torrent

Gross margin benefited from lower input costs YoY, benign US pricing

Enzene sales at Rs570mn and should be in a mild loss in FY24

Apart from gross margin, OPM at 13% benefited from lower R&D YoY

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