YES Securities' research report on Alkem Labs
Alkem margin came in lower than estimate on higher input costs (gross margin had one off in base quarter) and steep price erosion in US. PAT was suppressed due to additional tax provision arising from a court judgement coupled with Rs150mn investment write off in US business. Alkem guided to gross margin pressure especially in the busy H1 FY23 – we reckon a tug of war between price hikes in NLEM/non NLEM portfolio and liquidation of high cost inventory purchased in 4Q and could last till end of H1. US business showed a 5% decline in FY22 on back of sharp price erosion in high mid-teens – a factor which could moderate in current fiscal as companies respond quicker with product rationalization (our expectation) as also commentary from generics giant Sandoz (expects bottoming out of US business and back to growth per 1Q CY22 call). While we have factored growth in line with US guidance, there could be room for surprise if price erosion moderates sharply. Margin performance in domestic business would be in focus compared to growth in H1 FY23. We cut our FY23 margin estimate by ~200bps resulting in a ~7% EPS cut though gross margin to revert to 61% in FY24 translating in to margin recovery at 20%.
Our BUY stays based on unchanged 23x with marginally revised TP Rs3,900 (earlier Rs3,950); near term margin uncertainty does not dilute our positive view on the stock.
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