1. Alkem Laboratories, Dr Lal Pathlabs IPOs hit markets; all you need to know

Alkem Laboratories, Dr Lal Pathlabs IPOs hit markets; all you need to know

Dalal Street is set to witness two initial public offers (IPOs) this week from pharma and healthcare related companies - Alkem Laboratories and Dr Lal Pathlabs — on December 8.

By: | Updated: December 8, 2015 12:56 PM
Dr lal pathlabs Alkem Pharma-IPO

Dalal Street is set to witness two initial public offers (IPOs) this week from pharma and healthcare related companies – Alkem Laboratories and Dr Lal Pathlabs — on December 8. (Graphic: Sanjay Tambe)

Dalal Street is set to witness two initial public offers (IPOs) this week from pharma and healthcare related companies – Alkem Laboratories and Dr Lal Pathlabs — on December 8. Dr Lal Pathlabs is a provider of diagnostic and related healthcare tests and services in India, while Alkem Laboratories is a domestic pharmaceutical company with global operations, engaged in the development, manufacture and sale of pharmaceutical and neutraceutical products. Both initial public offers (IPO) will close on December 10.

Below are five key points you should know about these companies before investing in their IPOs.

1. About the Public Offer

Alkem Laboratories: The company will raise Rs 1,315-1,355 crore from its upcoming IPO from equity markets. The public offer has a price band of Rs 1,020-1,050 per equity share.

Dr Lal Pathlabs: IPO of Dr Lal Pathlabs will raise Rs 626- 638 crore from equity markets at a price band of Rs 540-550 per equity share.

2. Positives

Alkem Laboratories: For the financial year ended March 2015, Alkem was the fifth largest pharmaceutical company in India by domestic sales, and unlike many domestic pharma companies that bank on sales in the USA, it derives the bulk of its revenues from the domestic market (around 75 per cent). The company also has a strong marketing and distribution network in India comprising of a field force of 5,856 medical representatives. Alkem Laboratories also has employed 483 scientists working on various drug products and substances in India and the USA. The research and development department carries out process development, formulation development and analytical research for domestic and international markets.

Dr Lal Pathlabs: Dr Lal PathLabs (DLP) is a diagnostic chain in India with 172 clinical laboratories, 1,554 patient service centers and over 7,059 pickup points as of September 30, 2015. Though the company has pan India presence, more than 72 per cent of its revenue comes from North India region.

DLP operates through “hub & spoke” model whereby specimens are collected across multiple locations within region for delivery to a predesigned clinical laboratory for centralised diagnostic testing, providing greater economies of scale and offers scalable platform for continued growth of business. The centralised IT platform fully integrates the large network through common logistics and payment system and tracks operations and internal performance metrics, thereby enabling to improve the efficiencies of business.

According to Sharekhan, DLP management’s focus in future is to expand presence in existing markets (north and east India). The expansion of network can be organic as well as through strategic acquisitions and partnership especially in newer geographies (south and west India). The company also intends to focus on hospital-based clinical labs by increasing tie-ups and providing lab management and specialised lab testing services.

3) Risks

Alkem Laboratories: Alkem competes with different companies depending on the market and type of products. Its main competitors in India include leading domestic players, such as Torrent Pharmaceuticals, Ipca Laboratories and Alembic, and leading global players that have penetrated the domestic market, such as GSK Pharma, Pfizer and Abbott, who offer branded generics. In the US generics market, the principle competitors are Teva Pharmaceutical Industries, Mylan, Actavis PLC, Apotex, Amneal, Sun Pharmaceutical Industries, Dr Reddy’s Laboratories, Lupin, Zydus Cadila Healthcare and Camber Pharmaceuticals Inc.

Sharekhan in a research note said, “Any adverse outcome of inspection of the USFDA approved sites could affect the financials of the company and hamper future growth and profitability of the business.”

Dr Lal Pathlabs: India’s diagnostics industry is highly competitive with standalone centers having close to a 48 per cent market share, compared to around 37 per cent for hospital-based diagnostic centers. This increases competition for organised diagnostic chains in terms of volumes of patients’ samples and aggressive pricing of diagnostic tests.

According to Motilal Oswal, diagnostics centres have to constantly upgrade their technology to stay ahead of competition. However, these upgrades not only involve significant capital investments but also increase maintenance costs. This significantly increases cost overheads for service providers.

4. Financials

Alkem Laboratories: Revenues of the Alkem have grown at a CAGR of 22.3 per cent in FY11-15 to Rs 3788.7 crore mainly due to robust growth in the international market and above industry growth in the domestic market. EBITDA margins contracted 400 basis points from to 12.9 per cent in FY11-15 due to investments in the international business and chronic segments in the domestic market. However, in H1FY16, the EBITDA margin increased to 17.9 per cent due to strong gross margins and higher operating leverage. The net debt/equity has reduced to 0.1x in FY15 from 0.3x in FY12. Also, in the past two years, it has generated cumulative free cash flow of Rs 488 crore post incurring capex on capacity expansions, technological upgradation and maintenance.

Dr Lal Pathlabs: Revenues grew at a CAGR of 29.1 per cent in FY11-15 to Rs 659.6 crore mainly due to an increase in sample collection. The strong growth in sample collection was mainly due to network expansion and increase in the portfolio of diagnostic and related healthcare tests and services.

Net profit grew at 33.9 per cent CAGR to Rs 95 crore during the same period. Due to its assets light model, the balance sheet is leverage free. Similarly, due to a low cash conversion cycle and a strong operational performance, the company has cumulatively generated Rs 246 crore of free cash flow by FY15.

5. Should you Invest

Alkem Laboratories: Alkem has set forth an ambitious target of doubling its US contribution in the next five years. Today, US contributes a quarter of the overall revenue.

With its impending product pipeline and focused efforts in R&D, Reliance Securities in a research report said, “We believe the company is following the footsteps of Alembic and Torrent pharma. Besides, its India business is a steady cash cow at 17-18 per cent growth adding financial muscle to the company. Alkem is definitely entering late into chronic and lifestyle therapies but its experience of brand-building and a large prescriber base should come in handy. At a price band of Rs 1,020-1,050, Alkem is valued at 15.7/16.2x FY18E EPS, (as per our back of the envelope calculations) which we feel is fairly valued given its operational scale. We recommend ‘Subscribe’ to the issue.”

According to SMC, with the company’s increasing clientele, expanding capacities, valuation of Alkem Labs looks good for subscribing the issue for long term.

Dr Lal Pathlabs: Dr Lal Pathlabs will be the only pure play listed diagnostic business in India. According to market experts, the company has a strong brand franchise, robust growth, net cash balance sheet and cash flow generation.

ICICIdirect.com in a research report said, “At the IPO price band of Rs 540-550, the stock is available at 46-47x on FY15 EPS of Rs 11.7. We recommend that investors should ‘Subscribe’ to the issue.”

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