Q4FY23 Review: Alkem Laboratories: Waiting for margin normalization

22 May 2023 , 12:27 PM

Alkem’s execution in the domestic market continues to remain strong, with the company’s India Formulations sales clocked 13% Cagr over FY20-23 (vs IPM growth of 10% Cagr), driven by ~6/4/3% contribution from volume/price/new launches. Domestic juggernaut is likely to continue with ~12% growth p.a., over the next few years, driven by ~8-9% growth in Alkem’s acute portfolio and >20% growth in chronic segment. However, margins have been under pressure over past 2 years, owing to API cost escalation and US price erosion. Although margin normalisation has seen delays, mgmt expects Ebitda margins to improve from 14% in FY23 to 16% in FY24 (vs earlier guidance of 17%) and 18-19% over next 3-4 years, led by softening API prices, operating leverage from improving India PCPM, and US plant closure savings.

Analysts of IIFL Capital Services expect Alkem’s India business to clock ~12% Cagr over FY23- 26: 

India business grew 17% YoY in Q4, ahead of IIFLe of 8% growth, aided by a strong flu season in India. FY23 growth of 8% on a steep base of last year (FY22 growth of 30%) was driven by 9% growth in the Rx business and 4-5% growth in the TGx business. With Alkem adding 1,000 MRs p.a., over past few years, mgmt is confident of sustaining 8-9% growth in Acute segment and 20-22% growth in Chronic.

US plant closure will add 80-90bps to overall margins: 

With sustained price erosion in the US market, Alkem’s US sales has been flat at USD310m over FY20-23. Although mgmt is hopeful that price erosion will moderate from double digits in FY23 to single-digits in FY24, analysts of IIFL Capital Services have assumed only 4% Cagr in US sales over FY23-26. Closure of the US plant in St Louis will drive operating expense savings of Rs1-1.1bn p.a. (80-90 bps of overall revenue), with benefit expected to flow through for 7-8 months in FY24.

Margin normalisation isn’t a question of if, but when: 

Mgmt has guided for ~200bps expansion in Ebitda margins in FY24. With moderation in API prices (except Pen-G) and WPI-led price hike for NLEM portfolio, Alkem expects GMs to improve from 58% in FY23 to 59-59.5% in FY24. Additionally, other expenses (incl. R&D) is expected to moderate from 25% to 23.5-24.5% led by operating leverage from improving India PCPM, controlled S&M spends and US plant opex savings.

Analysts of IIFL Capital Services cut FY24/25 EPS by 4-5% to factor lower margins, but continue to like Alkem’s volume-focused growth execution in the domestic market. Maintain ADD with target price of Rs 3575.