Subscribe to Alkem Labs & Dr Lal Pathlabs: India Nivesh Sec

Mumbai-based Alkem Laboratories is set to launch its initial public offer of 1.28 crore equity shares for subscription on December 8. The company has fixed price band at Rs 1020-1050 per share. The company aims to raise more than Rs 1,300 crore through this issue. Meanwhile, Dr Lal Pathlabs is aims to garner Rs 600 crore through its IPO, wherein the promoters and other existing shareholders will collectively sell 1.16 crore shares of the company, amounting to 14.1 percent stake.Both the companies aim at tapping the uptick in investor sentiment. Daljeet Singh Kohli, HOR, India Nivesh Securities recommends susbcribing to both the issues. According to him valuations of Alkem are comfortable compared to its peers. The company also has a strong product pipeline, he says in an interview to CNBC-TV18. The company has filed for 69 Abbreviated New Drug Application (ANDA) out of which 45 are pending. Alkem is likely to see a revenue CAGR of 30 percent next two years. Although 25 percent of its business comes from international markets, primarily US which could be subjected to the risk of regulatory inspsections but the domestic business will cushion these risks.For Dr Lal Pathlabs the key driver would be its expansion plans and its strong brand name.Below is the verbatim transcript of Daljeet Singh Kohli’s interview with Anuj Singhal and Ekta Batra on CNBC-TV18. Anuj: Let us start with Alkem Laboratories. The feedback I have got is that good company but maybe slightly expensive. What is your call on this one and are you recommending your clients to subscribe? A: Yes we are recommending a subscribe on the IPO. Prima facie it appears to be on the higher side valuation but if you incorporate the kind of approvals that they have -- two tentative approvals from US and the market size of those two products Zyvox and Azilect, then probably you will not find it very costly. We have done some kind of calculation in incorporating these two products and feel that the revenue CAGR for next two years can be actually around 30 percent and profit CAGR can be around 42 percent which will mean that on FY17 basis this will trade at around 20 times which is in line with all the midcap pharmaceutical companies. Valuation to that extent is justified if we take care of the future growth prospects. On the trailing 12 months, it might look slightly expensive. Ekta: For Alkem what would be the key story that would attract you because they are increasing sales to the US but with that comes the US FDA risk eventually as well? A: That is right. The two things we have to keep in mind are that 25 percent of the business comes from international markets, which is majorly US and this business has grown in last four years from almost 13 percent to 25 percent. So, that means they are doing things right in that market. Second, they have filed for 69 Abbreviated New Drug Application (ANDA) out of which 45 are pending. So, there is a strong product pipeline available for next two to three years. Third thing is these two tentative approvals that I talked, one about Zyvox and other about Azilect, Zyvox has a market size of USD 460 million and Azilect has a market size of USD 500 million. So there is a clear near-term visibility on these two products. Fourth which you said about US FDA, their most of the plants are – there are four or five units which are all complied with US FDA and they have seen recent inspection. So, regulatory risk to that extent goes down because of the recent inspections happening and gone through well. So, that means that the US story is intact. On the domestic front also they are doing very well. 75 percent business comes from domestic but in the top 50 brands in India, there five brands find a place and all of them are more than Rs 100 crore brand. So, that again gives you a comfort that even if US business has some kind of problem there is something to cushion at the domestic level. Anuj: What is the top risk for anyone investing in Alkem IPO? A: In a pharmaceutical company, the biggest risk is of course regulatory risk. So, in this case also 25 percent business is exposed to international markets. US FDA is definitely one of the important risk factors to keep in mind. Second thing is out of their 75 percent business in India, some of the business is in the legacy part like the therapies which have become very common now. So, there the growth potential is less. If you see FY15, the growth has been just 5 percent whereas normally we take for pharmaceutical 15-16 percent growth. So, some of those areas might see a bit of retarded growth but we feel that the risk is very well taken care of because of the experience of the promoters as well as, as we talked about FDA inspection being recently done. Third on the local front they are now gone into respiratory and gas ventralogy which again is a growing segment. So, they have taken care of those risks.Ekta: I was looking at Dr Lal Pathlab, there are more brokerage reports on Dr Lal as oppose to Alkem this time around. What is your view, is it a concept stock and hence maybe we could see a pop after some time or is it a good story which is intact? A: Though we have a subscribe rating on this also because we feel that probably because of scarcity mainly that this is the only company in the diagnostic space which will be listed so there will be a lot of interest in the stock and you could see a good pop up at the time of listing. In terms of valuations, it might slightly be on the higher side than even Alkem. If you see in the last four five years their margins are also on the downward trajectory and the topline growth has also been on the downward trajectory. That is mainly because competition has grown up, pricing power is not that much. Price has gone up by only 3-4 percent in last five years but the number of tests has gone up. Despite these two negatives we still feel that why one should subscribe is because one now their key growth driver is geographical expansion, right now they are in North and East, they will be looking at West and South which again is exposing to new market which will add big business. Second, they are setting up a new laboratory which will help them in growing business. Third that the company has a very strong brand name and they are not dependent only doctors, actually maximum customers come in walk-in, so, there again they have good margins. Their margins are 23.5-24 percent which is almost 300 basis points more than the competitors. So, Dr Lal Pathlab qualifies for subscription.