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MOSL: ALKEM LABORATORIES (Buy)-Robust growth in DF-New launches in US/softening RM prices

ALKEM LABORATORIES: Robust growth in DF; New launches in US/softening RM prices to improve profitability

(ALKEM IN, Mkt Cap USD3b, CMP INR1793, TP INR2100, 17% Upside, Buy)

 

• India/US leads while other international business drags revenue growth: Sales increased ~11% YoY to INR18.5b (v/s est. INR18.6b), majorly supported by (a) the US business, which grew 13.7% YoY to INR4.8b (26% of sales), and (b) the Domestic business, which grew ~12% YoY to INR12.2b (66% of sales), on strong performance in the established therapies of Anti-Infective, Gastro-Intestinal and Vitamins/Minerals/Nutrients. Other international business sales declined 12% YoY to INR1.1b, offsetting growth to some extent.
• Superior product mix and lower tax rate drives earnings: Gross margin improved ~140bp YoY/330bp QoQ to 61.5%, primarily due to change in the product mix. EBITDA margin improved ~150bp YoY/ QoQ to 14.3% (v/s est. 15.7%), mainly due to improved gross margin, decline in R&D costs (by 30bp YoY) and other expenses (by 50bp YoY) as % of sales. This was slightly offset by higher employee cost, which increased ~80bp YoY (as % of sales). R&D expense stood at INR1b (5.6% of sales). EBITDA improved ~23.5% YoY to INR2.6b (v/s est. INR2.9b). Adj. PAT increased ~35% YoY to INR1.8b (v/s est. INR1.9b), due to improved EBITDA margin and lower tax rate.
• Concall highlights: (a) For 1QFY20, the YoY growth in the prescription-led DF segment was due to volume growth of 3.5%, price hike of 5%, and new product launch growth of 2.7%. (b) The trade generics segment of India business grew at healthy rate unlike some peers who faced disruption in this quarter. (c) Full benefit of softening of raw material prices would accrue in the coming quarters, even as 1QFY20 witnessed some gains. (d) Price erosion has dropped to mid-single digit for Alkem's US portfolio.
• Valuation and view: We maintain our EPS estimate at INR77/INR104 for FY20/FY21. We continue to value Alkem at 20x 12M forward earnings to arrive at price target of INR2,100 (unchanged). We remain positive on Alkem on the back of (a) robust outperformance in the domestic formulation market led by increased traction in the chronic segment/better MR productivity, (b) improving operating leverage in US generics with new launches, and (c) market share gain in existing products. Maintain Buy