Q3FY24 Review: Alkem Laboratories: Margin levers are there, but largely priced-in

12 Feb 2024 , 03:21 PM

Alkem’s Q3 Ebitda (adj. for forex gain) was 17% ahead of IIFLe, led by ~280bps beat on Ebitda margins owing to lower opex. While M9FY24 Ebitda margin was ~19%, Alkem has guided for ~17% margins for the full year, implying Q4 margins will be 12-13% owing to seasonality impact in the India business and higher R&D. With Alkem’s new CEO striving for productivity-led growth in the India Chronic business and higher growth in the profitable RoW markets, Alkem’s Ebitda margins can improve by ~100bps p.a. to 19.5-20% by FY27, which should help the company to drive 11/15% revenue/Ebitda Cagr over the next 3 years. Analysts of IIFL Capital Services upgrade FY24-26 Ebitda by 3% driven by higher margins. Existing cash balance of Rs35bn also provides ammunition to pursue inorganic growth. They value Alkem at ~26x FY26 EPS, at a discount to ~33- 35x target multiple for peers like Mankind, Torrent and JB, given Alkem’s significantly lower ETR and relatively weak execution in the Chronic segment. Analysts of IIFL Capital Services TP of ₹5,700 implies a modest 7% upside. 

Striving to improve execution in the India Chronic segment: 

Alkem’s India business grew 12% YoY in Q3, as it outperformed market growth in the Gastro, VMN and Diabetes segments. While Alkem’s execution in the Chronic segment has been relatively weak vs peers like Mankind and JB, mgmt is now concentrating on improving company’s therapy presence beyond Anti-infectives and Acute portfolio into the Chronic segments of Diabetes, Cardiac, Respiratory. Chronic revenue share for Alkem is 17% and mgmt expects this to increase to >20% over the next few years. 

Analysts of IIFL Capital Services expect Alkem’s India/US/RoW business to clock 12/6/15% Cagr over FY24-27. While they like Alkem’s volume-led growth in the India business (Alkem/IPM’s volumes have grown at 8/3% Cagr over CY20- 23), a key risk to watch out for is the high NLEM exposure of 28-32% for Alkem’s India portfolio on which the company will not see any price increase for FY25ii. This might lead to lower growth in FY25 vs analysts of IIFL Capital Services assumption of 12% growth. Mgmt expects the US business to grow high-single-digits to low-double-digits, given current price erosion is single-digits only. 

Although mgmt is not sharing a guidance on medium-term margins, analysts of IIFL Capital Services believe that increasing Chronic revenue share in India, US cost optimisation, higher RoW growth, and potential moderation in Pen-G API prices will likely drive ~100bps margin expansion p.a. over next few years. Enzene will also achieve break-even in FY24, which should aid further.