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Better-than-estimated 3Q aided by controlled costs

Work-in-progress towards investment in CDMO/Med-tech segments

* Alkem Laboratories (ALKEM) reported in-line revenue in 3QFY25. It delivered better-than-expected EBITDA/PAT for the quarter, fueled by controlled operational costs and R&D spending. Weaker off-take in the trade generics segment and higher opex related to the CDMO/med-tech businesses adversely impacted YoY earnings.

* We broadly maintain our earnings estimates for FY25/FY26/FY27. We value ALKEM at 25x 12M forward earnings to arrive at our TP of INR5,400.

* ALKEM is implementing efforts to outpace the industry in the branded prescription segment. Further, it is preparing to be the leading company in launching Semaglutide in the Indian market. The investment is progressing well in the CDMO and med-tech domains, which are going to be the additional growth drivers over the medium to long term. The overall moderation in the domestic formulation market is affecting the overall growth prospects for ALKEM. Accordingly, we model a 9% earnings CAGR over FY25-27. Reiterate Neutral.

Product mix benefits partly offset by higher opex on a YoY basis

* ALKEM’s 3QFY25 revenue grew 1.5% YoY to INR33.7b (our est: INR33b). Domestic business grew 6% YoY to INR23.6b (71% of sales). International business declined 6% YoY to INR9.6b for the quarter. Within international business, the US sales declined 7% YoY to INR6.3b (19% of sales). Other international sales declined 4% YoY to INR3.3b (10% of sales)

* Gross margin expanded 360bp YoY to 64.3% due to lower raw material costs.

* EBITDA margin expanded 120bp YoY to 22.5% (our est: 20%) as higher GM was offset by higher employee costs/other expenses (-130bp/-100bp YoY as % of sales).

* Consequently, EBITDA grew 7.3% YoY at INR7.6b (v/s est. of INR6.6b).

* Adj PAT declined 2.6% YoY to INR6.3b (our est: INR5.5b).

* During 9MFY25, revenue was flat at INR98b, while EBITDA/PAT rose 15.0%/ 15.9% to INR21b/INR18.6b.

Highlights from the management commentary

* Despite a 21.6% EBITDA margin for 9MFY25, ALKEM has maintained its EBITDA margin guidance of 19% for FY25, as it is expected to incur costs related to product filings. ? ALKEM indicated that US sales would be flat for FY25 and management expects a single-digit YoY growth in FY26. Price erosion in the US generics segment was 5% in 3QFY25.

* Alkem expects a mid-to-high single-digit YoY growth in the trade generics segment from a medium-term perspective. ? Enzene and medical devices had a combined operational loss of INR350m/ INR150m on a YTD/3QFY25 basis.

* The overall investment for the med-tech venture has been ~INR2.7b to date.

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