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Strong margin-led beat Chronic momentum strong; new businesses in gestation

* ALKEM delivered in-line revenue and EBITDA/PAT beat of 16%/19% in 1QFY27, driven by improved segmental mix and higher-than-expected operating leverage.

* Notably, ALKEM achieved the highest quarterly gross margin in the past 10 years. Additional cost related to newer business (CDMO) dragged down EBITDA growth for the quarter.

* The company continued to outperform the industry in chronic therapies, led by superior marketing efforts.

* Therapy-wise, ALKEM posted industry-beating growth in anti-diabetic, pain, VMNs, respiratory and dermatology in domestic formulation (DF).

* Currency benefit supported some growth in US segment. The approval pace has improved over the past two quarters.

* ALKEM is implementing remediation measures to resolve OAI classification at its Daman site.

* We raise our earnings estimates by 4%/3% for FY27/FY28, factoring in superior growth in ROW markets and higher-than-industry growth in chronic therapies. These factors were partly offset by

a) weak performance in trade generics

b) increased gestation period to achieve EBITDA breakeven in CDMO business

c) additional time taken to consolidate med-tech business. We value ALKEM at 27x 12-month forward earnings to arrive at a TP of INR5,770.

* Considering the front-loading of opex in new business initiatives like Enzene CDMOs and enhanced efforts to improve profitability of med-tech business, we expect earnings to decline in FY27 and subsequently revive FY28 onward. The valuation leaves limited upside from the current levels. Maintain Neutral.

Segmental mix benefit offset by higher operational costs YoY

* 1QFY27 revenue grew 11% YoY to INR37.4b (our est.: INR37.1b).

* Gross margin expanded 260bp YoY to 67.9%.

* EBITDA margin contracted 145bp YoY to 20.5% (our est.: 17.8%) as higher gross margin was offset by higher other expenses/employee costs (up 250bp/105bp YoY as % of sales).

* EBITDA grew 3.7% YoY to INR7.6b (est. INR6.6b).

* Adj. PAT declined 20.4% YoY to INR5.2b (our est.: INR4.4b)

Highlights from the management commentary

* India segment growth was impacted by weakness in trade generics, broadly flat in 1Q, due to heightened competition, tighter DSO discipline and price increases following higher API costs. Management expects primary sales to recover as channel inventories normalize, with India segment growth expected to reach ~12% YoY for FY27.

* US segment growth guidance stands at mid- to high-single digit for FY27.

* US CDMO business incurred capex of ~INR600m in 1QFY27. Annualized sales of USD25-30m should reach breakeven.

* The denosumab biosimilar approval in US has been delayed by few months.

* In Europe, the Prolia biosimilar will be commercialized via partner Theramex. Management expects a gradual ramp-up given the highly competitive market and does not anticipate a significant contribution in the near term.

* The Xgeva biosimilar launch in Europe is expected in three months.

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