MOSL: ALKEM LABORATORIES (Buy)-1QFY19 an aberration-Levers intact for superior earnings growth

Alkem Laboratories: 1QFY19 an aberration; Levers intact for superior earnings growth

(ALKEM IN,Mkt Cap USD3.6b, CMP INR2071, TP INR2475, 19% Upside, Buy)

• Earnings miss due to deferred sales: Alkem Laboratories (ALKEM) reported a growth of 29% YoY to INR16.7b (v/s est. of INR17.6b) on the back of a strong growth in the domestic formulation (DF) and US businesses. Gross margin expanded by ~350bp YoY (+80bp QoQ) to ~60% due to a change in product mix and favorable currency impact. EBITDA margin improved at a higher rate of ~560bp YoY (+340bp QoQ) to 12.8% as employee expense and other expense contracted by ~80bp and ~170bp (as % of sales). EBITDA increased by 127% YoY to INR2.1b (+51% QoQ). PAT grew by ~90% YoY to INR1.4b (v/s est. of INR2.4b).
• DF sales deferred; Strong growth momentum in US business: ALKEM posted a growth of 26% YoY to INR10.9b in DF sales. ALKEM changed its distribution policy in the domestic business which led to postponement of sales to 2QFY19. After adjusting for the same, the growth in DF sales stood at ~47% YoY and EBITDA margin would have also been higher by ~440bp to ~17%. The growth in DF sales was driven by new launches (~38 products till date) and better traction in existing products. US sales increased significantly by ~43% YoY to INR4.2b (+4% QoQ), led largely by increased market share of existing products.
• Key con-call takeaways: 1) Price erosion in the US business was in low single digit QoQ and mid-to-high single digit YoY 2) In the US business, ALKEM has planned 8-9 launches in FY19 3) Recently, its Baddi facility cleared USFDA inspection with Zero 483 4) ALKEM has guided for a capex of INR5.5b for FY19 for expansion at its Indore and Sikkim sites.