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Exports growth offset by weak India business

Increasing investments in the biosimilars segment

*Alkem Lab (ALKEM) delivered a miss on 4QFY24 earnings, led by lower domestic formulation (DF) sales and higher R&D spend. Having said this, compared to earnings decline over FY22-23, it has delivered a 50% YoY earnings growth in FY24. This is largely on the back of lower raw material cost and reduced intensity of price erosion in the US generics segment.

*We reduce our earnings estimate by 4%/2% for FY25/FY26, factoring in a) increased opex related to the Enzene facility in the US, and b) higher product development spend. We assign 27x PE multiple on 12M forward earnings to arrive at a price target of INR5,390.

*We expect 10% earnings CAGR over FY24-26, backed by 12%/20% sales CAGR in DF/Ex-US exports business and stable margins. The improved margins in the base business is expected to be partially offset by higher operational cost related to the biosimilars segment. Given the limited upside from the current levels, we maintain Neutral stance on the stock.

Lower RM costs benefit offset by higher opex

*ALKEM 4QFY24 revenues was stable YoY to INR29.3b (our est: INR31.3b). Domestic business decreased 1.9% YoY to INR19.7b (68% of sales). International business grew 6% YoY to INR9b for the quarter. Within international business, Other International sales grew 7.6% YoY to INR2.9b (10% of sales). US sales grew 5.5% YoY to INR6.2b (22% of Sales).

*Gross margin expanded 550bp on a YoY basis to 62.3%, due to lower raw material prices.

*EBITDA margin expanded 150bp YoY to 13.7% (our est: 16.7%) as higher GM was offset by higher other expense/R&D spend (+320bp/+90bp YoY as % of sales).

*Accordingly, EBITDA increased 13.8% YoY to INR4b (vs. est. of INR5.2b).

*Adj PAT grew at a lower rate of 3.4% YoY to INR3b (our est: INR3.5b) due to higher depreciation.

*For FY24, Revenue/EBITDA/PAT grew 9%/34%/50% YoY to INR129b/INR22.4b/INR19b.

Highlights from the management commentary

*ALKEM indicated to maintain GM/EBITDA margin at FY24 levels (60%/18%).

*ALKEM has responded to 483 issued by USFDA at its Baddi site. The company has no new launches from Baddi in FY25.

*ALKEM recently launched g-Suprep in the US market

*Increased focus on profitability at the organizational level affected 4QFY24 performance.

*ALKEM is working on four assets in the biosimilars segment at a global level.

*ALKEM is putting up plant for the bio-CDMO segment in the US. The plant would be operational by the end of FY25. The annualized operational expense for this facility would be INR1.2b

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