We recommend buy with a target price of Rs 2,018, an upside of 21 percent for investors with a horizon of 12 months.
Alkem Laboratories is a strong domestic player and continues to significantly outperform the Indian pharmaceutical market in almost all the major therapies, during both the quarter and for the entire fiscal.
During Q4FY19, the company witnessed a growth of 14.6 percent compared to 7.7 percent reported by the sector. Similarly, for the full year, it reported year-on-year growth of 14.3 percent compared to IPM growth of 10.5 percent.
The company continues to maintain its leading positions in established therapy areas of anti-infectives, gastrointestinal, pain management and vitamins and nutrition. In the chronic business too, it continues to grow ahead of the market growth rate, thereby improving the market share and market rankings in therapy segments of Neuro, CNS, Anti- Diabetic, Cardiac and Derma.
The company introduced two novel molecules in India - Arbekacin in Anti-Infective segment and Evogliptin in Anti-Diabetic segment. Both of these are in-license products and would be exclusively marketed by Alkem, as per the terms of the agreement.
The company has also added about 2000 medical reps in the last two years to expand its reach in the Indian market and increased focus on its key brands. However, the domestic business faced challenges on account of FDC ban on select products, relatively weak anti-infective season and muted growth in its trade generic business due to tightening of credit terms by the company.
Alkem’s India business registered a growth of 26.8 percent YoY in Q4FY19 and 8.6 percent in FY19.
The company’s international business, mainly led by the US, delivered a robust YoY growth of 18.8 percent in Q4FY19 and 31.2 percent on YoY basis in FY19.
In Rest of the world markets, Alkem follows a focused approach on key markets like Chile, Australia, Philippines, EU, Africa, and Kazakhstan. The overall portfolio continues to grow. US business witnessed a growth of 18.5 percent on YoY basis in Q4FY19 and 38.8 percent on YoY basis in FY19, largely driven by new product launches and market share gain in existing products.
The Company’s EBITDA margin was under pressure in FY19, but next year, the management is hopeful for better margins and improvement by 100 or 125 basis points.
Alkem invested about Rs 462 Crores in R&D, which is 27 percent higher than FY18. R&D expenses stood at 6.3 percent of revenue from operations compared to 5.7 percent in FY18. The Company filed 23 ANDAs during the year and received 21 approvals, which includes 6 tentative approvals. This is the highest number of filings and approvals received by the company in a year.
On the regulatory front, the company had a mixed year with 4 US FDA inspections between August 2018 and January 2019, at its manufacturing facilities at Baddi, Daman and California and also a bioequivalence centre at Taloja, being closed successfully without any observations.
However, in the US FDA inspection at St Louis and Baddi facilities in Jan 2019 and May 2019, respectively, the company received a few observations, to which it replied within the stipulated timelines.
The facility at St Louis has been classified as an OAI (Official Action Indicated), and it is working towards resolving the observations. Apart from the US, Chile and the Philippines, among the other key international markets, registered robust growth during the quarter, both in local currency as well as Indian rupees.
The company enjoyed positive operating cash flow and double-digit return ratio over a period of 5 years. We believe such consistent performance over the years deserves a premium. At CMP of Rs 1,670, the company is valued at a P/E of 26x. We recommend Buy with a target price of Rs 2,018 (P/E of 26x on estimated FY20 EPS of Rs. 77.6), with an upside of 21 percent for the next 12 months.
(The author is Vice President - Equity Research at Ajcon Global.)
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