Buy Alkem Labs; target of Rs 2250: HDFC Securities

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HDFC Securities’ research report on Alkem Labs

Despite facing several challenges, ALKEM has ended the year with 14/15/12% revenue/EBITDA/PAT growth, aided by US ramp up. The 4Q numbers surprised positively with 9% beat on the top line which grew 23% YoY. India performance (+27% YoY) was noticeable. 4Q is a seasonally weak quarter for India business due to 85% exposure to acute therapies. Still, the revenues were only down 2% QoQ to Rs 12.2bn and up 27% YoY. The change in distribution policy in 1QFY19 and higher traction in key therapies like anti-infectives and gastro were the major drivers. On a soft base of FY19, we expect ALKEM to report 13% revenue CAGR over FY19-21E. Despite having the highest acute exposure, it has consistently outperformed the IPM growth rate. We expect this growth leadership to continue in FY20-21E. At US$ 69mn, US grew 9% YoY. The ramp up in existing products and sales from new products like gWelchol aided the growth in 4Q. Surprisingly,
we did not see a significant impact of incremental competition in Mycophenolate (15% of US sales). EBITDA at Rs 2.4bn, up 107% YoY was boosted by higher India sales. EBITDA margin at 12.7% was up 516/-352bps YoY/QoQ. The margin was inline despite higher R&D at 7.5% of sales. On a favorable base, PAT grew 157% YoY.

Outlook

We maintain BUY on ALKEM following a big beat to our estimates. Our target price is at Rs 2,250 (22x FY21E EPS).

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