Alkem Laboratories (Alkem) remains on sustainable growth path due to higher dependence on domestic formulations business and less dependence on US generics. Q1FY18 performance was impacted by negative revenue growth in India due to inventory destocking prior to GST implementation. However, management expects growth recovery to start in Q2FY18 itself and continue in coming quarters.
We expect FY18 performance to remain muted mainly due to significantly weak Q1, but double-digit revenue growth to sustain in coming quarters on y-o-y basis. Higher contribution (>70%) of domestic branded formulations, a sustainable revenue stream, and building up of ANDA pipeline for US market with clear FDA status augur well for long-term sustainability of growth. We lower our revenue estimates marginally by 0-1% and PAT estimate by 3-6% for FY18-20 to factor in slower growth in India business in FY18E, higher personnel cost and lower other income. We maintain buy on the stock considering its strong brand presence in domestic market with sustainable growth visibility; scale up of US generic business on low base, over 50 pending ANDAs, improving margin profile, 15.6% net profit CAGR and potential for higher return ratios.
India business contributes over 70% to total revenue for Alkem and we expect this business to grow in mid-teens. Growth would be led by expectation of low double-digit industry growth, strong brand recognition of Alkem and growing proportion of chronic therapies for the company. Further, we expect 15.8% CAGR in US revenue on low base and over 50 pending ANDAs. Lower dependence on US generics would keep Alkem less vulnerable to severe competitive and pricing pressure than seen in peer companies.
The company has been investing into building US business and India chronic business over past few years. Close to 100% of EBITDA was being generated from Indian acute business , 60% of total revenue. US business broke-even in FY17 at EBITDA level.