The price correction of the past six months provides a good buying opportunity in Alkem Labs (ALKEM), in our view. With compliance in place and ANDA filings/approvals proceeding at a healthy rate, we expect ALKEM to post a revenue CAGR of 16% over FY19-21E and improve profitability from US generics. We believe its domestic formulation (DF) segment is in a good position to deliver a 14% CAGR over FY19-21E due to (a) higher number of MRs focusing on chronic therapies, (b) adjustment of few products’ base business for the FDC ban and (c) the ongoing momentum in trade generics.
We reduce ALKEM’s P/E multiple from 24x to 22x (12M forward basis) to factor in US generics’ headwinds and the gradual growth downtrend in the DF industry growth. Accordingly, we arrive at PT of Rs 2,170. Alkem’s 9MFY19 performance was subdued (a 3% y-o-y decline in earnings) due to the course correction and weak season in the DF business. However, we remain positive on ALKEM due to its superior execution in domestic and US generics, thereby driving 23% earnings CAGR over FY19-21E. We reiterate ‘Buy’.
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ALKEM has ramped up its US sales to 6x over FY13-18 on new launches, reasonable market share gains in existing products, and partly on low base. For M9FY19, ALKEM delivered a strong 34% y-o-y growth to $200 million. We expect growth in ALKEM’s US business to remain intact despite competition in one of its key products; newer approvals should offset the decline in base business and aid growth in the US generics segment. Accordingly, we expect ALKEM to garner US sales of $390 million in FY21E.
ALKEM had a strong 17% revenue CAGR in the DF segment over FY13-18 to Rs 4,500 crore. The y-o-y growth over 9MFY19 was under pressure (4% y-o-y) due to (a) lowering of receivable days for trade generic business, (b) the FDC ban and (c) adverse impact of lower seasonality on anti-infective therapy. We expect the base effect to smoothen out and ALKEM to be back on track with aggressive growth in its chronic portfolio and on major therapies in the acute category, thereby aiding a 14% revenue CAGR over FY19-21E.
