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Strong DF and US recovery drive 1Q beat

Emerging revenue from Biologics/Med-tech; valuation limits upside

• ALKEM delivered a better-than-expected performance in 1QFY26, with 9%/38%/48% beat on revenue/EBITDA/PAT. This was led by strong growth in domestic formulation (DF) and a revival in the US generics segment. Operating leverage boosted EBITDA/PAT.
• ALKEM grew faster than the market in seven therapies in DF segment for the quarter. Even volume growth was better than the market.
• After a decline in revenue growth for US business in FY25, ALKEM saw a healthy recovery in US sales during the quarter.
• It has enhanced its focus on non-US international markets, and its benefit is reflected in 1QFY26 performance.
• In addition, new growth drivers, biologics and med-tech, started contributing some revenue in 1QFY26.
• We raise our earnings estimates by 7%/2% for FY26/FY27 to factor in a) superior execution across markets, b) improving profitability of Medtech/CDMO business, and c) higher R&D spending for product development across markets. We value ALKEM at 26x 12M forward earnings to arrive at a TP of INR5,580.
• We estimate a CAGR of 12%/13% in revenue/EBITDA over FY25-27. However, we expect a low CAGR of 4% in PAT over FY25-27 due to an increase in the tax base in FY27. While there has been an improvement in performance, the valuation captures the upside in earnings. Maintain Neutral.

Product mix/operating leverage drive margins on YoY basis

• 1QFY26 revenue grew 11% YoY to INR33.7b (our est: INR31b).
• DF business grew 12% YoY to INR22.6b (68% of sales).
• International business grew 9% YoY to INR10.5b. In international business, US sales grew 9% YoY to INR7b (21% of sales). Other International sales grew 9% YoY to INR3.6b (11% of sales).
• Gross margin expanded 80bp YoY to 65.3% due to a better product mix.
• EBITDA margin expanded 180bp YoY to 21.9% (our est: 17.3%) due to better GM and better operating leverage (R&D spending/other expenses down 60bp/120bp YoY as % of sales), partly offset by higher employee expenses (+70bp YoY as % of sales).
• Accordingly, EBITDA grew 21% YoY at INR7.4b (vs. est. of INR5.4b).
• PAT grew 20% YoY to INR6.6b (vs. est. of INR4.4b).

Highlights from the management commentary

• While 1QFY26 was a robust quarter, ALKEM maintained its EBITDA margin guidance of 19.5% and GM guidance of 64% for FY26.
• Med-tech business has started showing commercial benefits, with revenue of INR25m in 1QFY26. ALKEM intends to scale up this revenue to INR250m in FY26.
• ALKEM has launched g-Entresto in the US market in Jul’25. The benefit is expected from 2QFY26 onward.
• CDMO revenue is at a small scale, led by lab-level work. 4Q would be the quarter to look forward to reasonable revenue from this segment.

Management call highlights

• ALKEM reported strong volume growth of 2.9% YoY vs. IPM volume growth of 1.5% YoY for the quarter.
• Overall export margin would be slightly lower than the consolidated companylevel margin.
• ALKEM exhibited Gastrointestinal growth of ~1.6x IPM, VMN ~2.3x IPM, Pain ~1.4x IPM, Anti-Diabetics ~1.4x IPM, Neuro/CNS ~1.2x IPM, Respiratory ~1.4x IPM, and Derma ~1.1x IPM for the quarter.
• R&D expense was 3.5% of sales in 1QFY26, and ALKEM intends to maintain its guidance of 4.5-5% of sales for FY26. With a higher focus on growing international non-US business, there is some R&D spending on product development/filing for these markets.
• Gross margin expansion in 1QFY26 was due to lower API prices (0.8-0.9% of sales). Segmental mix improvement also favored GM for the quarter. About 3- 4% price drop was witnessed in US generics segment.
• ALKEM has filed b-denosumab for the US market. It would take about 12 months for approval from USFDA for this product.
• CDMO/Med-tech related opex will be INR500m/INR250m per quarter at 100% capacity utilization. ? Enzene revenue was INR900m and EBITDA broke even in 1QFY26.

Broad-based growth in DF and international markets

DF: Growth accelerates with outperformance in key therapies

• Compared to mid-single digit YoY growth for the past two years, ALKEM exhibited 12% YoY growth in DF segment to INR22.6b for the quarter.
• Therapy wise, ALKEM outperformed IPM in gastrointestinal (1.6x IPM growth), VMN (2.3x IPM growth), Pain (1.4x IPM growth) and anti-diabetes (1.4x IPM growth).
• Brand wise, PAN continues to be on robust growth path even at a sizeable base of INR13b sales within gastrointestinal therapy. Interestingly, Uprise-D has grown at a phenomenal rate of 40% YoY as per IMS for the past 12 months.
• Certain brands within anti-infectives (Xone, Pipzo, Taxim, Gemcal) have shown moderation in YoY growth for the past three months compared to respective performance for past 12 months.
• The chronic share for 1QFY26 was largely stable at 17-18% over the past two years.
• With the intent to sustain better-than-industry growth in DF segment and focus on increasing chronic share, we expect ALKEM to register a 10.4% sales CAGR in DF to INR109.4b over FY25-27.

US and non-US exhibit healthy growth on YoY basis

• After exhibiting weak performance in FY25, international market sales showed an encouraging revival with YoY growth of 9% for the quarter, taking sales to INR10.5b.
• Interestingly, the non-US international market and US market grew at a similar rate of 9% YoY for the quarter.
• The non-US international market revenue growth was on the back of superior execution in Australia and other European markets.
• The traction in recently approved products fueled some growth in US market during the quarter. ALKEM launched g-Entresto in Jul’25 and this product would further add to the YoY revenue growth in US segment.
• In FY25, international market sales declined 5% YoY to INR38b.
• Specifically, US sales declined 11% YoY to INR24.5b. Excl. US, international business grew 11% YoY in FY25 to INR13.3b.
• ALKEM filed 1 ANDAs and received 5 approvals in 1QFY26.
• Overall, we expect ALKEM to deliver a 10% sales CAGR in the international markets to INR46.2b over FY25-27. Reiterate Neutral
• We raise our earnings estimates by 7%/2% for FY26/FY27 to factor in a) superior execution across markets, b) improving profitability of Med-tech/CDMO business and c) higher R&D spending for product development across markets. We value ALKEM at 26x 12-month forward earnings to arrive at a TP of INR5,580.
• We estimate a CAGR of 12%/13% in revenue/EBITDA over FY25-27. However, we expect a low CAGR of 4% in PAT over FY25-27 due to an increase in the tax base in FY27. While there has been improvement in performance, the valuation captures the upside in earnings. Maintain Neutral.

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