Reduce Alkem Labs Ltd For Target Rs.3,770 - Yes Securities
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US persistence drives beat; upgrade to Reduce
Result Synopsis
Prima facie Alkem reported better than ours/consensus expectation, but we note few points 1) US must have drove significant part of margin beat (on back of 20% QoQ growth) as pricing environment remains benign 2) no positive surprises in domestic business as weak acute season took its toll 3) Ex-R&D, other expenses still up 13% YoY and management has indicated no further cost savings likely. H2 margin has been indicated around 16% which leaves full year expectation of 16-17% intact. Effectively, US revenue has precluded margin guidance cut which was a possibility as domestic business battles a virtually lost season. Higher R&D in H2, uncertainty around persistence of US performance and leaner seasonality would keep second half margin under check even as staff cost savings would be a more durable margin lever. We raise FY24/25 estimates by 6-8% but as was our stance on Q1, quality of margin beat is is driven by US and cost savings, none of which may be a sustainable feature in H2 and FY25. Rather we continue to factor in better domestic growth of ~11% next fiscal which leads to north of 18% margin; any moderation in PenG price would be a trigger for better margin and is a risk to our upgraded Reduce rating with revised TP Rs3,770 (earlier Rs3,500), based on unchanged 22x FY25 EPS.
Result Highlights
Revenue growth of 12% YoY ahead of estimate on surprisingly strong US performance – up 27% YoY on a not so weak base of last year
Domestic muted as expected at +5% YoY given the by now well-known weakness in anti-infectives and gastro
Margin came in much ahead of estimate at ~22% vs expected ~18% on 180bps gross margin improvement and opex decline –St Louis shutdown savings wading its way into lower opex. Notably, ex-R&D other expenses still up 13% YoY
Takes additional impairment Rs576mn related to St Louis shutdown in Q2
Strong topline and margin beat drove 88% YoY rise in PAT
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