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November 06, 2018 INITIATING COVERAGE REPORT Alkem Laboratories Ltd
November 06, 2018
INITIATING COVERAGE REPORT
Alkem Laboratories Ltd
2
Alkem Laboratories manufactures formulations as well as API, has a strong foot hold in India and is emerging as a leading player in US market. It has 21 manufacturing facilities and 5 R&D centres in India and US.
Market leader in various therapeutic areas Alkem has strong presence in India across various therapeutic areas. It has maintained its leadership position in anti-infectives with market share of 12% and is among Top 3 players in gastro as well as Pain division, through brand building efforts and new launches. Apart from this, chronic segment is picking up pace and with increase in revenue, it should result in improvement in margins due to high operating leverage.
Product launches in US to pick up pace We expect US sales to grow at CAGR of 14.5% from FY19-22 on back of higher launches as compared to the past. Though Alkem was a late entrant in US region, it is now a sizeable business of ~$300m. With all of its facilities cleared by USFDA, we expect faster launches in orals as well as non oral solids.
Scope for margin expansion Alkem has invested in manpower with addition of 2,000 MRs in last 2 years to expand its reach. Going forward, lower MR addition and better productivity from this investment should result in higher operating leverage and lower manpower expenses as proportion to sales. Apart from this, it has spent ~Rs.2,000cr in last 3 years on expansion of existing plants and on new plant at Indore. With major capex incurred, capex will be normalized resulting in higher free cash flow going forward.
STOCK DATA
BUY
Reuters Code Bloomberg Code
ALKE BO ALKEM IN
BSE Code NSE Symbol
539523 ALKEM
Face Value Rs. 2
Shares Outstanding* 11.96 Cr
Avg. Daily Vol. (6m) 125,290
Price Performance (%)
1M 3M 6M
(10) (9) 14
200 Days EMA Rs.2217
SHARE HOLDING (%)
Promoters 65.9
FII 3.5
FI/Bank 11.1
Government 0.2
Body Corporate 0.7
Public & Others 18.7
RESEARCH ANALYST Umesh Matkar | +91 22 4093 4078
SALES: Devang Shah | +91 22 4093 6060/61
Y/E Mar Revenue (Rs. Cr)
EBITDA (Rs. Cr)
PAT (Rs. Cr)
NPM (%)
REPS (Rs.)
P/E (x)
P/S (x)
P/BV (x)
FY19 7,357 1,115 774 10.5 63.6 37.3 3.9 5.3
FY20P 8,345 1,474 1,150 13.8 94.5 25.1 3.5 4.7
FY21E 8,047 1,368 1,011 12.6 83.1 28.6 3.6 4.2
FY22E 9,066 1,659 1,247 13.8 102.5 23.2 3.2 3.5
ALKEM LABORATORIES LTD Market Cap. 52 Week H/L CMP Target Price
Rs. 28,396.7 Cr. Rs. 2,882/1,660 Rs.2,373 Rs. 2,870
June 09, 2020 Please refer to the disclosure on last page
3 June 09, 2020
Alkem Laboratories Ltd
OUTLOOK & VALUATION We believe that earnings should grow at CAGR of 17% for FY19-22 driven by 1) Increase in US sales due to momentum in approvals in ANDA filings 2) Increase in productivity from MRs on domestic front 3) Cost rationalization leading to improvement in EBITDA margins. The stock has been trading at 28.7x & 23x its FY21E & FY22E EPS of Rs.83.1 & Rs.102.5 resp. We recommend BUY on the stock with target price of Rs.2870.
4 June 09, 2020
Alkem Laboratories Ltd
INVESTMENT RATIONALE
Market leader in various therapeutic areas Alkem has outperformed domestic market by ~200bps in last 4 years on secondary sales, with CAGR of ~12% in India. Domestic market is dominated by branded generic segment, with doctors prescribing medicines to patients. 90% of domestic sales are through prescription. Over the years, it has been market leader in anti-infective segment, thanks to brand building efforts and increase in penetration led by increase in medical representatives (MR). In last 2 years, it has increased MRs by 2,000 to 9,000 as on FY19. Below chart indicates that the company has maintained its position in acute segment like anti-infectives, Gastro and pain segment, while on chronic segment like CNS, Cardiac and Anti-diabetic, it has improved on its ranking over last 4 years.
Source: Company, Sushil Finance Research Source: Company, Sushil Finance Research
Rank 2016 2017 2018 2019 2020
Anti-infectives 1 1 1 1 1
Gastro Intestinal 3 3 3 3 3
Pain 3 3 3 3 3
Vitamins/
Minerals 5 6 4 4 4
CNS 14 11 9 7 7
Derma 15 18 18 17 15
Cardiac 30 30 28 26 26
Anti-Diabetic 28 26 25 22 21
5 June 09, 2020
Alkem Laboratories Ltd
Management had guided for domestic growth to be ~200bps above industry growth for FY20, driven by increase in productivity from recently added MRs. Also the company is introducing new products to meet therapy gaps including in licensed products, which should aid growth. However for FY21, we believe lockdown due to Covid virus may impact its business performance. With more people at home, we expect prescriptions by doctor to drop significantly in next 3-6 months. Demand for Chronic products is expected to remain stagnant, however since proportion of acute being higher, revenue is likely to some traction with onset of monsoons.
Source: Company, Sushil Finance Research Source: Company, Sushil Finance Research
6 June 09, 2020
Alkem Laboratories Ltd
Product launches in US to pick up pace Alkem entered into US in FY11 and adopted inorganic route with acquistions, which enabled them to establish presence in US and also diversify its manufacturing capabilities in dosage form like semi-solid, liquid and nasal formulations. Its business has grown by ~3x in FY15-20 with US business contributing 27% of total revenue in FY20. It has managed to navigate pricing pressure on generics and has managed to break even couple of years back. Pricing of the products have settled down, with single digit price cuts
Going forward, we expect the legacy brands (like Mycophenolate) to face competition from its peers, but this would be offset by new launches. We expect 14.5% CAGR from FY19-22 on account higher ANDA approvals (double digit approvals vs single digit in previous years) and due to recent clearance on all the facilities. .
Source: Company, Sushil Finance Research Source: Company, Sushil Finance Research
7 June 09, 2020
Alkem Laboratories Ltd
Alkem’s St.Louis plant had OAI from USFDA with 3 observations. On Feb 2020, USFDA has issued an Establishment Inspection Report (EIR) to this plant indicating that the USFDA has cleared the facility. Though St. Louis only contributes 3% of US sales, this plant is important, as the company has plans to introduce non-oral and controlled substances from this plant in future. All the manufacturing plants that cater to US sales have an EIR, which is a great achievement as some of its peers still have OAI or Warning letter. Facility Scope Last inspection Status
Baddi (India) Formulation Aug-19 Successfully closed without any observations
Daman (India) Formulation Aug-19 EIR received in October 2019
thereby successfully closing the inspection
St. Louis (US) Formulation Feb-Mar2019 EIR received in Feb 2020
thereby successfully closing the inspection
California (US) API Aug-18 Successfully closed without any observations
Ankleshwar (India) API Dec-16 EIR received in March 2017
Mandva (India) API Sep-15 EIR received in March 2016
Source: Company, Sushil Finance Research
8 June 09, 2020
Alkem Laboratories Ltd
Scope for margin expansion Alkem has low dependence on Chinese raw materials directly (~5% of raw materials are imported from China) and company also has buffer of 1-1.5 month of API buffer with them. While for rest of raw materials, it depends on domestic players, who purchase from China. Prices of API have gone up significantly in last few months, which may lead to drop in margins for FY21 In the domestic market, company has already made significant investments to create infrastructure for growth of its chronic and acute segment. Alkem has invested in manpower with addition of 2,000 MRs in last 2 years to expand its reach. Going forward, lower MR addition and productivity from this investment should result in higher operating leverage and lower manpower expenses. We expect EBITDA margins to improve from 15.2% in FY19 to 17.9% in FY22, on account of increase in MR productivity on domestic front and on monetizing of ANDA pipeline. Source: Company, Sushil Finance Research
Tax rate for the company is low, mainly on account of tax holiday from Silvassa units till 2027. It is expected that tax rate would be around 12-13% for next 2-3 years. .
9 June 09, 2020
Alkem Laboratories Ltd
Alkem Laboratories is one of the leading pharma companies in India with strong product portfolio and brand equity. Ranked No.5 in India in terms of market share, it has strong presence in acute segment. Apart from India, it produces branded generics, trade generics, active pharmaceutical ingredients (API) to 50 countries globally, with US being its key overseas market. Alkem was established in 1973 and now it has portfolio of over 800 brands, with 14 brands featuring in Top 300 brands in India
COMPANY OVERVIEW
Source: Company, Sushil Finance Research
75% 73% 73% 71% 67% 67%
18% 20% 21% 21% 26% 27%
6% 7% 6% 7% 7% 7%
2015 2016 2017 2018 2019 2020
Revenue mix
Domestic US ROW
Source: Company, Sushil Finance Research
10 June 09, 2020
Alkem Laboratories Ltd
Source: Company, Sushil Finance Research Estimates
PROFIT & LOSS STATEMENT (Rs.cr) BALANCE SHEET STATEMENT (Rs.cr)
Y/E Mar. FY18 FY19 FY20P FY21E FY22E
Net Sales 6,401.2 7,357.2 8,344.6 8,046.8 9,066.2
Raw Material Cost 2,382.8 2,945.0 3,344.9 3,299.2 3,581.2
Employee Cost 1,191.6 1,362.5 1,505.5 1,448.4 1,631.9
Other Expenses 1,817.9 1,935.0 2,020.5 1,931.2 2,194.0
EBITDA 1,008.9 1,114.8 1,473.6 1,368.0 1,659.1
Depreciation 143.0 193.2 252.8 257.5 290.1
Interest Cost 55.3 54.6 65.1 60.0 62.0
Other Income 115.4 87.7 104.2 104.6 117.9
PBT 926.0 954.7 1,260.0 1,155.1 1,424.9
Tax 287.6 181.0 110.5 144.4 178.1
RPAT 638.4 773.6 1,149.6 1,010.7 1,246.8
As on 31st Mar. FY18 FY19 FY20P FY21E FY22E
Equity Share Capital 23.9 23.9 23.9 23.9 23.9
Reserves 4,839.9 5,415.4 6,136.8 6,928.5 7,907.7
Net worth 4,863.8 5,439.3 6,160.7 6,952.4 7,931.6
Total loans 892.0 902.6 1,662.8 903.8 872.5
Other Current Liabilities
2,383.3 2,190.2 3,243.3 2,276.5 2,416.6
Total Liabilities 7,665.6 8,208.2 9,943.3 9,828.5 10,956.8
Net block 1,873.3 2,105.6 2,306.3 2,333.9 2,361.1
Sundry debtors 1,080.5 1,248.4 1,649.4 1,609.4 1,743.5
Inventories 1,442.2 1,499.9 1,818.8 1,649.6 1,790.6
Cash and bank 576.8 661.6 1,092.2 1,100.9 1,337.5
Loans and advances 37.9 30.8 28.0 5.0 5.0
Other Financial Assets 135.7 106.5 193.1 150.0 203.0
Total Assets 7,665.6 8,208.2 9,943.3 9,828.5 10,956.8
11 June 09, 2020
Alkem Laboratories Ltd
CASH FLOW STATEMENT (Rs.cr) FINANCIAL RATIO STATEMENT
Y/E Mar. FY18 FY19 FY20P FY21E FY22E
PAT 638.4 773.6 1149.6 1010.7 1246.8
Depriciation & Amortization
143.0 193.2 252.8 257.5 290.1
Finance Cost 55.3 54.6 65.1 60.0 62.0
(Incr)/Decr in Working Capital
-452.9 -337.1 -741.1 283.1 -233.7
Cash Flow from Operating 671.4 865.4 836.8 1755.6 1543.3
(Incr)/ Decr in Gross PP&E -621.9 -425.5 -453.4 -285.1 -317.3
(Incr)/Decr In Investments 161.0 2.7 4.2 -3.5 -10.0
Cash Flow from Investing -184.5 -489.4 -486.1 -311.2 -441.3
(Decr)/Incr in Debt -50.8 100.6 -72.1 72.4 -8.0
Taxes -287.6 -181.0 -110.5 -144.4 -178.1
Cash Flow from Financing -309.4 -291.2 320.8 -1435.7 -865.4
Cash at the End of the Year 576.8 661.6 1333.1 1100.9 1337.5
Y/E Mar. FY18 FY19 FY20P FY21E FY22E
Growth (%)
Total Sales 9.4% 14.9% 13.4% -3.6% 12.7%
Profitability (%)
EBITDA Margin 15.8% 15.2% 17.7% 17.0% 18.3%
APAT Margin 10.0% 10.5% 13.8% 12.6% 13.8%
ROCE 16.6% 16.3% 19.2% 15.6% 17.0%
Per Share Data (Rs.)
AEPS 52.8 63.6 94.5 83.1 102.5
Reported CEPS 64.6 79.5 115.3 104.3 126.4
BVPS 402.0 447.2 506.5 571.6 674.2
Valuation
PER (x) 45.0 37.3 25.1 28.6 23.2
P/BV (x) 5.9 5.3 4.7 4.2 3.5
EV/EBITDA (x) 28.9 26.1 19.8 21.3 17.6
MCap/Net Sales (x) 4.5 3.9 3.5 3.6 3.2
Turnover
Debtor Days 62 62 61 73 70
Inventory Days 221 186 183 183 183
Creditor Days 147 119 114 118 122
Gearing Ratio
D/E (x) 0.18 0.17 0.16 0.13 0.11
Source: Company, Sushil Finance Research Estimates
12 June 09, 2020
Alkem Laboratories Ltd
OUTLOOK & VALUATION We believe that earnings should grow at CAGR of 17% for FY19-22 driven by 1) Increase in US sales due to momentum in approvals in ANDA filings 2) Increase in productivity from MRs on domestic front 3) Cost rationalization leading to improvement in EBITDA margins. The stock has been trading at 28x & 23x its FY21E & FY22E EPS of Rs.83 & Rs.102.5 resp. We recommend BUY on the stock with target price of Rs.2870.
Source: Company, Sushil Finance Research
Price Comparison between Sensex and Alkem Lab
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BSE Sensex Alkem Lab
Price Chart
Source: Company, Sushil Finance Research
13 June 09, 2020
Alkem Laboratories Ltd
RISKS & CONCERNS
• Company is present in 50 international markets, which exposes it to global economic risk as well foreign exchange risk.
• Company has added ~2000 Medical representatives (MR) in last 2 years to boost Indian operations. MR have good relations with doctors, which thereby leads to prescription for company’s medicines. Higher Attrition may impact the performance
• Any further slowdown in the economy may adversely affect the company’s performance.
14 June 09, 2020
Alkem Laboratories Ltd
Sushil Financial Services Private Limited Member : BSE / NSE - SEBI Regn. No. INZ000165135 Research Analyst – SEBI Registration No. INH000000867 Regd. Office : 12, Homji Street, Fort, Mumbai 400 001. Phone: +91 22 40936000 Fax: +91 22 22665758 Email : [email protected]
Analyst Stock Ownership No
Stock Recommended to Clients Yes
Remuneration/Benefits received from company in 12 months No
Merchant Banking Market Making activities / projects No
Sushil Financial Services Pvt. Ltd and Group Companies Holding No
Sushil Financial Services Pvt. Ltd and Group Directors Holding No
Broking Relationship with the company covered No
Rating Scale : This is a guide to the rating system used by our Institutional Research Team. Our rating system comprises of three rating categories.
Total Expected Return Matrix (Rating and Return) BUY : Over 20% HOLD : 0% to 20% SELL : 0% to -20%
Disclaimer & Disclosures : http://goo.gl/1sOHeV
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