Retain ‘buy’ on Alkem Lab, target Rs 1,492

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Published: June 4, 2016 7:10:05 AM

Alkem's Q4FY16 results were better than our ests after adjusting for one-time expenses during the Qtr. Sales were 4.7% ahead of our estimates with domestic formulation recording 23% y-o-y (12% y-o-y ex acquisitions).

Alkem’s Q4FY16 results were better than our ests after adjusting for one-time expenses during the Qtr. Sales were 4.7% ahead of our estimates with domestic formulation recording 23% y-o-y (12% y-o-y ex acquisitions). EBITDA adjusted for one-time expenses was 14% ahead of our ests. However, we are negatively surprised by impact of price control, which the management estimated at Rs 120 crore (vs our earlier est of Rs 30 crore and higher effective tax rate of 20% in FY18F.

Conservatively, we factor domestic formulation growth of 11.7% (vs mgmt. guidance of mid-teen growth), to account for the impact of price control and FDC ban. We also factor in higher tax rate for FY18F. We cut our EBITDA ests for FY17F and FY18F by 7.5% and 3.7% respectively. Our earnings estimates for FY17F/FY18F are reduced by 8.2%/9.7%. We reset our 12-month target price at Rs 1,492/share. We derive the target price based on sum of the parts (methodology unchanged). We value the cash and investments at FY17F book value of Rs 12.6 billion, or Rs 106/share. We value the base business earnings at 22x (unchanged) FY18F EPS of Rs 63.0/share. Our target price implies an upside of 19% from current levels. Retain ‘buy’.

Positive resolution of outstanding regulatory issues, particularly with respect to Taloja facility. Qtrly results in H1FY17F establishing the full impact of price control. At Rs 1,249/share, the stock is trading at 19.3x FY18F and 17.1x FY18F. We expect earnings growth to revive back to 20% in FY19F and hence find the valuation attractive.

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