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Institutional Equity Research

CMP* (Rs) 2,013


Alkem Laboratories Upside/ (Downside) (%) 19
BUY
Bloomberg Ticker ALKEM IN
Pharmaceuticals | India
Market Cap. (Rs bn) 241 Target Price: Rs2,390
Free Float (%) 34
1QFY19 Result Update | August 14, 2018 Shares O/S (mn) 120

Impressive Performance; Maintain BUY


Alkem Laboratories (Alkem) has delivered an impressive performance in 1QFY19. Its revenue
Share price (%) 1 mth 3 mth 12 mth
grew by 28.9% YoY to Rs16.7bn led by 25.7% YoY and 43% YoY growth in India and US business,
Absolute performance 6.1 1.7 15.4
respectively. While gross margin expanded by 352bps YoY to 60.1% on strong domestic and
US sales growth, EBITDA margin surged by 555bps YoY to 12.5% led by low YoY base and Relative to Nifty 3.0 (3.4) (0.5)
positive operating leverage. Its EBITDA and PAT grew by 127% YoY and 115% YoY to Rs2.1bn
and Rs1.4bn, respectively. Notably, Alkem has deferred Rs1.9bn India revenue to 2QFY19 Shareholding Pattern (%) Mar’18 Jun'18
due to change in distribution policy, adjusted to which, Sales/EBITDA margin/PAT stood at
Promoter 65.9 65.9
Rs18.6bn/17.2%/Rs2.2bn, respectively. With marginal change in estimates, we maintain our
BUY recommendation on the stock with a revised Target Price of Rs2,390 (earlier Rs2,360). Public 34.1 34.1

Key Quarterly Highlights & Guidance


ff India Biz (67% of Sales): Adjusted for deferment of sales (Rs1.9bn) to 2QFY19 led by change 1 Year Stock Price Performance
in distribution policy and low YoY base led by GST roll-out, India business grew by 47.6% YoY. 2,400
2,300
Its rankings improved across therapeutic segments i.e. Vitamins, CNS, CVS, anti-diabetic
2,200
and derma, Alkem’s domestic business grew by 14.2% YoY vs. 10.6% of IPM (source: IMS 2,100
MAT Jun-18). It reported strong growth in therapeutic segments i.e. Anti-infectives (+15% 2,000

YoY), Gastro (+16% YoY), Vitamins (+16% YoY), CNS (+17% YoY), derma (+17% YoY), CVS (+22% 1,900
1,800
YoY), anti-diabetes (+29% YoY). We expect its domestic business to grow by 16% over FY18- 1,700
20E led by new launches and market share gain in chronic segment. 1,600
1,500
ff US Biz (26% of Sales): US business grew by 43% YoY on the back of new launches

Nov-17

May-18
Mar-18

Aug-18
Jul-18
Oct-17
Aug-17

Sep-17

Jun-18
Jan-18
Dec-17

Feb-18

Apr-18
and ramp-up in existing portfolio. Alkem filed 4 ANDAs (received 2 approvals) taking its
cumulative filings to 110 and 1 NDA, out of which 59 are pending for approvals (including
Para-IV/FTFs: 49). Alkem expects to launch 8-10 products in FY19E. Note: * CMP as on August 14, 2018

ff US FDA: Alkem is yet to receive The US FDA clearance for St. Louis facility. However, it has
already received EIR for Daman unit (inspected in Mar’18), while the US FDA inspected its
Baddi plant between 6-10th Aug-18 with zero observations.
ff Key Guidance: The Management pegs R&D spend at 6% of sales for FY19/20E. It plans to
incur Rs6bn capex in FY19E.
Outlook & Valuation
Looking ahead, we remain positive on the medium to long-term growth prospects of Alkem on
the back of stable revenue growth from high-margin domestic business. We expect Alkem’s
revenue/PAT to clock 13.7%/37.4% CAGR over FY18-20E owing to low YoY base in FY18, while
EBITDA margin is expected to expand by 354bps to 19.5% led by strong growth in India business
and higher contribution from cash- flow sticky chronic segment. At CMP, the stock trades at a
PE of 25.9x and 20.2x of FY19E and FY20E earnings, respectively. We expect stock to command
premium over its peers on account of healthy return ratios and higher exposure to India
business. Marginally revising our estimates to factor in strong India outlook, we maintain our
BUY recommendation on the stock with a revised Target Price of Rs2,390 (from Rs2,360
earlier), valuing the stock at 24x FY20 EPS of Rs99.6.
Key Financials (Rs mn) FY17 FY18 FY19E FY20E
Sales 58,525 64,312 72,338 83,076
EBITDA 9,990 10,284 12,621 16,226
Adj. PAT 8,920 6,310 9,301 11,907
EPS (Rs) 74.6 52.8 77.8 99.6
P/E (x) 27.0 38.1 25.9 20.2
EV/Sales (x) 4.2 3.9 3.4 3.0
EV/EBITDA (x) 24.6 24.1 19.6 15.2 Research Analyst: Krishnanath.Munde
ROE (%) 20.0 13.0 16.6 18.1 Contact: (022) 33034629
ROCE (%) 19.4 16.9 18.3 20.5
Email: Krishnanath.Munde@relianceada.com
Source: Company, RSec Research
1
Institutional Equity Research

Alkem Laboratories
CMP (Rs)
Upside/ (Downside) (%)
2,013
19
BUY
Pharmaceuticals | India Bloomberg Ticker ALKEM IN Target Price: Rs2,390

Risks to View
ff Slower growth in domestic business.

ff Higher-than-expected price erosion in the US business.

ff Adverse regulatory actions leading to delay in product approval.

Exhibit 1: Segment-wise Sales Performance


(Rs mn) 1QFY19 1QFY18 YoY (%) 4QFY18 QoQ (%)
India 10,906 8,675 25.7 9,602 13.6
US 4,237 2,962 43.0 4,071 4.1
Other Export business 1,242 1,094 13.5 1,165 6.6
Total Sales 16,385 12,731 28.7 14,838 10.4
Source: Company, RSec Research

Exhibit 2: Quarterly Performance


(Rs mn) 1QFY19 1QFY18 YoY (%) 4QFY18 QoQ (%)
Net Sales 16,695 12,952 28.9 15,132 10.3
Cost of Revenues 6,661 5,624 18.4 6,160 8.1
Gross Profit 10,034 7,329 36.9 8,972 11.8
% of net sales 60.1 56.6 352 bps 59.3 1 bps
Employee expenses 3,395 2,738 24.0 2,987 13.7
Other Expenses 4,497 3,647 23.3 4,565 (1.5)
Total operating expenses 14,552 12,009 21.2 13,712 6.1
EBITDA 2,142 944 127.0 1,420 50.9
EBITDA margin (%) 12.8 7.3 555 bps 9.4 3 bps
Depreciation 425 306 38.6 403 5.3
EBIT 1,718 637 169.5 1,017 69.0
Other Income 163 295 (44.9) 179 (9.1)
Interest 163 126 29.5 104 55.7
PBT 1,718 807 112.9 1,091 57.4
Total tax 345 169 104.3 145 137.6
Tax Rate (%) 20.1 20.9 (85 bps) 13.3 7 bps
Minority Interest - - - - -
Adj PAT before extraordinary 1,373 638 115.2 850 61.5
Extraordinary items - - 282.5
Reported PAT 1,373 638 115.2 663 107.0
Adj. EPS (Rs) 11.5 5.3 115.2 7.1 61.5
Source: Company, RSec Research

2
Institutional Equity Research

Alkem Laboratories
CMP (Rs)
Upside/ (Downside) (%)
2,013
19
BUY
Pharmaceuticals | India Bloomberg Ticker ALKEM IN Target Price: Rs2,390

Profit & Loss Statement


Y/E March (Rs mn) FY17 FY18 FY19E FY20E
Net sales 58,525 64,312 72,338 83,076
% yoy change 15.9 9.9 12.5 14.8
Adjusted RM cost 22,215 25,129 27,080 30,422
Employee expenses 10,039 11,916 12,827 13,940
Other expenses 16,282 16,983 19,811 22,489
Total operating expenditure 48,536 54,028 59,718 66,851
EBITDA 9,990 10,284 12,621 16,226
EBITDA margin (%) 17.1 16.0 17.4 19.5
Depreciation 1,012 1,430 1,678 2,068
EBIT 8,978 8,854 10,943 14,158
Other income 1,120 960 1,055 1,161
Interest costs 452 553 546 486
PBT 9,646 9,260 11,452 14,833
Taxes 600 2,875 2,061 2,818
Tax rate (%) 6.2 31.0 18.0 19.0
Reported PAT 8,920 6,310 9,301 11,907
% yoy change 20.3 (29.3) 47.4 28.0
EPS (Rs) 74.6 52.8 77.8 99.6

3
Institutional Equity Research

Alkem Laboratories
CMP (Rs)
Upside/ (Downside) (%)
2,013
19
BUY
Pharmaceuticals | India Bloomberg Ticker ALKEM IN Target Price: Rs2,390

Balance Sheet
Y/E March (Rs mn) FY17 FY18 FY19E FY20E
SOURCES OF FUNDS
Equity Share Capital 239 239 239 239
Reserves & Surplus 44,437 48,399 55,829 65,578
Shareholders Funds 44,676 48,638 56,068 65,817
Total Loans 6,539 8,920 8,806 8,306
Other long term liabilities 113 143 143 143
Deferred tax liability 5 17 17 17
Minority interest 1,152 1,216 1,305 1,413
Total Liabilities 52,486 58,933 66,339 75,696
APPLICATION OF FUNDS
Gross Block 16,103 22,225 26,075 29,925
Less: Acc. Depreciation 1,581 2,843 4,521 6,589
Net Block 14,522 19,382 21,554 23,336
Capital Work-in-Progress 2,993 3,810 5,460 7,110
Goodwill on consolidation 3,448 3,454 3,454 3,454
Investments 2,594 1,965 2,063 2,166
Current Assets 29,388 39,374 43,506 49,775
Cash and cash equivalents 1,666 1,667 1,713 2,553
Bank balances 2,326 4,101 4,101 4,101
Loans & Advances 495 601 676 776
Others 24,900 33,005 37,017 42,345
Current liabilities 13,195 17,723 18,476 19,034
Net Current Assets 16,193 21,651 25,031 30,741
Net Deferred Tax 6,963 6,556 6,556 6,556
Other non-current assets 5,773 2,116 2,222 2,333
Total Assets 52,486 58,933 66,339 75,696

4
Institutional Equity Research

Alkem Laboratories
CMP (Rs)
Upside/ (Downside) (%)
2,013
19
BUY
Pharmaceuticals | India Bloomberg Ticker ALKEM IN Target Price: Rs2,390

Cash Flow Statement


Y/E March (Rs mn) FY17 FY18 FY19E FY20E
Profit before tax 9,646 9,260 11,452 14,833
Depreciation 1,012 1,430 1,678 2,068
Interest provided 610 553 546 486
Change in Working Capital (2,625) (5,635) (3,211) (4,740)
Tax Paid (2,640) (2,032) (2,061) (2,818)
Others (1,291) (815) - -
Cash Flow from Operations 4,712 2,762 8,404 9,829
(Inc.)/ Dec. in Fixed Assets (6,448) (6,838) (5,500) (5,500)
Others 3,589 3,164 (328) (344)
Cash Flow from Investing (2,859) (3,674) (5,828) (5,844)
Inc./(Dec.) in loans 121 3,574 (114) (500)
Dividend Paid (Incl. Tax) (863) (2,176) (1,870) (2,158)
Interest provided (636) (553) (546) (486)
Others (1) 1 - -
Cash Flow from Financing (1,379) 846 (2,531) (3,144)
Net change in cash and cash 473 (66) 46 840
equivalents
Opening cash and cash equivalents 1,271 1,666 1,667 1,713
Closing cash and cash equivalents 1,744 1,600 1,713 2,553
Add/Less: Exchange difference on cash (78) 67 - -
and cash equivalents
Net Closing cash and cash 1,666 1,667 1,713 2,553
equivalents

5
Institutional Equity Research

Alkem Laboratories
CMP (Rs)
Upside/ (Downside) (%)
2,013
19
BUY
Pharmaceuticals | India Bloomberg Ticker ALKEM IN Target Price: Rs2,390

Key Ratios
Y/E March FY17 FY18 FY19E FY20E
Valuation Ratio (x)
P/E 27.0 38.1 25.9 20.2
P/CEPS 24.2 31.1 21.9 17.2
P/BV 5.4 4.9 4.3 3.7
Dividend yield (%) 0.7 0.3 0.6 0.7
EV/Sales 4.2 3.9 3.4 3.0
EV/EBITDA 24.6 24.1 19.6 15.2
EV / Total Assets 4.7 4.2 3.7 3.3
Per Share Data (Rs)
Adj EPS 74.6 52.8 77.8 99.6
Cash EPS 83.1 64.7 91.8 116.9
DPS 15.0 7.0 13.0 15.0
Book Value 373.7 406.8 469.0 550.5
Returns (%)

RoCE 19.4 16.9 18.3 20.5


RoE 20.0 13.0 16.6 18.1
Turnover ratios (x)
Asset Turnover (Gross Block) 3.6 2.9 2.8 2.8
Inventory / Sales (days) 75 82 85 90
Receivables (days) 45 61 70 70
Payables (days) 46 55 60 55

6
Institutional Equity Research

Alkem Laboratories
CMP (Rs)
Upside/ (Downside) (%)
2,013
19
BUY
Pharmaceuticals | India Bloomberg Ticker ALKEM IN Target Price: Rs2,390

Rating History
Date Reco CMP TP
1-Jun-18 BUY 1920 2360
PLEASE CLICK HERE FOR PREVIOUS REPORTS
14-Feb-18 BUY 2138 2610
27-Dec-17 BUY 2152 2610

Rating Guides
Rating Expected absolute returns (%) over 12 months
BUY >10%
HOLD -5% to 10%
REDUCE >-5%

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