Alkem Laboratories Ltd. share price target

Maintain BUY with a revised TP of Rs 2,410 (24x FY20E EPS) Alkems 1QFY19 results were largely below our estimates. Revenue at Rs 16.7bn, was up 28.9%YoY and 10.3%QoQ. EBITDA of Rs 2.1bn grew 127%YoY with margin coming up to 12.8%, up 550bps YoY. PAT at Rs 1.4bn was 115% higher than that in 1QFY18. The impressive growth is attributed to a low GST-hit base. EBITDA, margin, and PAT missed our estimates by 21%, 380bps, and 22% YoY respectively. Domestic growth was 25.7%.

Maintain BUY with a revised TP of Rs 2,445 (24x FY20E EPS). The fourth quarter is seasonally weak for ALKEM, and 4QFY18 was no different. The top-line grew 21% YoY but declined 13%QoQ to Rs 15.1bn. EBITDA margin at 7.5% and PAT at Rs 745mn missed our estimates by ~440bps and 46% respectively. R&D; spend during the quarter was significant (7.4% of sales vs 6.7% expected), with 11 ANDAs filed in 4QFY18. There was also MTM loss of Rs 283mn included in other expenses for real estate investments. Adjusted for this, EBITDA margin was at 9.4% in 4QFY18.

Strong gross margin of 64% (up 50 bps YoY/200 bps QoQ) and higher India (up 22% YoY) and US sales (up 17% QoQ) led to significant operating leverage, as EBITDA grew 34% YoY to Rs 3.6 bn (21% higher than our estimate).

Robust Growth in India Business; Maintain BUY Alkem Laboratories (Alkem) has reported a healthy performance in 3QFY18. Its revenue grew by 17.4% YoY to Rs17.4bn on the back of robust 22% YoY and 13.7% YoY growth in India and other export business, respectively. Despite a soft 6.1% YoY growth (10% YoY in CC terms), its US business grew by 18.1% QoQ due to ramp-up in Benzonatate (owing to seasonality) and launch of gNexium/gPrasugrel. Led by positive operating leverage and low YoY base, EBITDA grew by 34.2% YoY to Rs3.6bn while EBITDA margin expanded by 258bps YoY to 20.7%. However, despite a strong operating performance, Alkem's adjusted PAT declined by 4.3% YoY due to...

Maintain BUY with a revised TP of Rs 2,435 (25x Dec-19E EPS). Alkem Labs (ALKEM) followed up the bumper 2Q performance with another strong quarter in 3QFY18. Revenue came in at Rs 17.4bn, up 17% YoY, with the domestic business growing 15% YoY. EBITDA came in at 3.6bn, up 34% YoY. The margin was 20.7% (up ~250bps YoY), driven up largely by a strong gross margin and operating leverage. Improved gross margin (64%, +200bps QoQ) was largely owing to the product mix in India, with chronic contributing well in 3QFY18. However, mgt expects gross margin to moderate to sustainable levels of 60-62%. PAT came in at Rs 1.7bn, down 27% YoY, impacted by a higher tax rate (45.6% vs 7.5%). The one-off DTA adjustment after the change in the US tax laws was ~Rs 450mn.

Top picks: CDH, LPC, ALKEM, DISH and GRAN Post the bumper domestic sector numbers in 2QFY18 which provided a temporary boost to the pharma pack, we believe that 3QFY18E is likely to be more of a mixed bag. Companies with limited competition launches in the US such as CDH, CIPLA, ARBP and STR are likely to report strong numbers in 3QFY18E. Domestic focused companies like ALKEM and TRP are likely to benefit to some extent from the low base of 3QFY17 which was impacted by demonetisation and the trailing effects of channel re-stocking. However, sequential growth looks difficult. Overall, we see 1.4% YoY growth for our coverage universe and the EBITDA margin to remain steady sequentially at 21.9% in 3QFY18E.

Kumar Saurabh - Research Analyst (Kumar.Saurabh@MotilalOswal.com); +91 22 6129 1519 Ankeet Pandya - Research Analyst (Ankeet.Pandya@MotilalOswal.com ) Investors are advised to refer through important disclosures made at the last page of the Research Report....

Alkem's domestic formulations business (76% of sales) grew 15% YoY (grew 22% YoY adj for excise duty impact, realization gap under GST) led by channel restocking. Gross margin improved 118 bps YoY, while EBITDA margin improved 574 bps driven by operating leverage.

Considering ALKEM's business model (high % of branded revenues), growth trajectory, and regulatory track record, we upgrade our earnings multiple to 22x from 21x and maintain BUY with a revised TP of Rs 2,100 (22x Sep19E). Channel re-stocking post GST implantation was the key reason behind Alkem Labs (ALKEM) revenue uptick and strong EBITDA margin in 2QFY18. Revenue came in at Rs 18.7bn, up 14% YoY, with the domestic business growing 15% YoY. Operating leverage on channel compensation led to a sharp jump in the EBITDA margin to 24.7%, expanding ~575bps YoY. PAT came in at Rs 3.2bn, up 13% YoY.

domestic business grew robustly by 15% YoY to INR14.1b, led by channel refilling post GST. The company is expanding its presence in the domestic business via new product launches and expanding into new therapies. Alkem maintained its guidance for mid-teens growth in FY18; with channel refilling post GST, it is confident to achieve this target. Inventory levels are at ~30...