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MOSL : ALKEM LABORATIES: US Generics and higher OPEX drags earnings

.  ALKEM LABORATIES: US Generics and higher OPEX drags earnings

(ALKEM IN, Mkt Cap USD4.7b, CMP INR3112, TP INR3240, 4% Upside, Downgrade to Neutral)

Downgrade our rating on the stock to Neutral

• ALKEM delivered a lower than expected 1QFY23 earnings, led by a sharp rise in operational cost and increased competition in the US Generics segment. In addition to the Domestic Formulation (DF) segment and US Generics, it is adding Biosimilars and contract development and manufacturing operations (CDMO) as additional growth levers over the next four-to-five years.
• We cut our FY23/FY24 earnings estimate by 24%/13% to factoring in: a) a sharp price erosion in the US base portfolio, b) considerable increase in marketing and promotional spends in the Branded Generics segment, and c) increased logistics cost. We value ALKEM at 21x 12M forward earnings to arrive at our target price of INR3,240.
• Considering the moderate earnings CAGR of 3% over FY22-24 and limited upside from a valuation perspective, we downgrade the stock to Neutral.

Higher employee cost and other expenses hurt margin in 1QFY23

• Revenue declined by 6% YoY to INR25.8b (est. INR25.8b).
• DF sales declined by 7% YoY to INR17.8b (70% of sales). US sales fell 8% YoY to INR5.6b (22% of sales). Other International sales grew 10% YoY to INR2b (8% of sales).
• Gross margin (GMs) contracted by 240bp YoY to 57.5% due to price erosion in the US market and higher raw material price inflation.
• EBITDA margin contracted by 1,110bp YoY to 10.6% (est. 15.5%) due to lower GMs and higher other expenses (up 670bp as a percentage of sales).
• Accordingly, EBITDA decreased by 54% YoY to INR2.7b (est. of INR4b).
• Interest cost increased by 106% to INR265m.
• Adjusted PAT fell at a higher rate of 60% YoY to INR1.9b (est. INR2.9b).

 

Highlights from the management commentary

• The management remains confident of clocking 10% YoY growth in sales in the US Generic segment in FY23.
• It expects EBITDA margin to be 100-200bp lower than its earlier guidance of 18% for FY23.
• Overall, GM is expected to be 59% in FY23.
• Other expenses rose INR1b QoQ in 1QFY23 due to a forex loss of INR500m and a one-time expense to the tune of INR200-250m.
• Price erosion in the US base portfolio and increased RM cost, resulted in a lower gross margin in 1QFY23.
• Trade Generics constitute ~20% of the Domestic Formulation segment.
• ALKEM has sufficient MRs at present in the DF segment and will focus on improving productivity.