Alkem Laboratories: Solid India-franchise trading at discount to peers

25 Jul 2023 , 10:30 AM

Recommendation: Buy; Target Price: Rs 4350

Alkem’s FY23 AR highlights that the company’s execution in the domestic pharma market continues to remain strong, with Alkem outperforming IPM growth by 300-400bps over FY20-23 driven by its industry-leading volume growth, expanding presence in chronic therapies, and impressive new product launch momentum which has allowed Alkem to fill portfolio gaps in Diabetes, CNS and Respiratory segments. Despite an equally-strong India franchise, consistent volume-led outperformance in the domestic market, and comparable earnings growth potential of 25-30% EPS Cagr over FY23-26, Alkem’s stock is trading at 20-30% PE discount to peers like Mankind, Torrent and JB. 

With seasonal improvement expected in Alkem’s margins in Q2/Q3FY24 (aided by good monsoons) and Pen-G related margin improvement anticipated from FY25, analysts of IIFL Capital Services expect Alkem’s valuation discount vs peers to narrow. Analysts of IIFL Capital Services upgrade Alkem from ADD to BUY and their revised TP of Rs4,350 is based on ~26x 2YF EPS, implying a potential 15% upside on the stock.

Volume-led growth driving consistent 300-400bps outperformance in India business: 

Alkem’s India formulations business clocked 13% Cagr over FY20-23 led by strong volume growth, as Alkem’s volume/price/N.I. grew 6/4/3% Cagr vs IPM’s 2/5/3% Cagr resp. Notably, Alkem’s chronic portfolio has also grown at 15% Cagr over FY20-23, which is ~1.4x of IPM’s chronic therapy growth rate, driven by new launches. In fact, Alkem’s chronic therapy growth over FY20-23 has been in-line with that of Mankind and has been better than that of Ipca/Ajanta. Analysts of IIFL Capital Services believe Alkem’s domestic juggernaut is likely to sustain with ~12% sales growth p.a. over FY23-26.

Prioritizing profitability over growth in the US: 

Owing to sustained price erosion in the US market, Alkem is scaling down its investments in authorized generics and has discontinued the operations at its St Louis manufacturing plant. Filing run-rate has also reduced from 15-20 ANDAs p.a. over FY15-20 to 8-12 ANDAs p.a. over FY21-23. Including manufacturing & R&D cost optimization, Alkem is targeting Rs2.5bn of cost savings over the next 2-3 years, which will aid company’s overall margins. 

Ebitda margins to improve ~350bps over FY23-26 driven by input cost moderation, US plant opex savings and operating leverage. Although Alkem’s margin normalisation has been delayed owing to high Pen-G prices, analysts of IIFL Capital Services expect Q2/Q3FY24 to be strong quarters (driven by good monsoons), with Ebitda margins likely to improve to 18-19% in Q2/Q3 vs 14% in FY23.