On recovery path. We maintain BUY on ALKEM despite a big miss on our 1QFY20 estimates. Our TP is 2,180 (22x FY21E EPS) with estimates largely unchanged owing to a sharp recovery expected in the next two quarters following a shift in the seasonally strong quarters (from 1Q earlier to 2Q now). With a lower than expected impact of gMycophenolate competition in the US, coupled with the highest top-line growth in India business among large-cap peers (1QFY20), we maintain our FY20/21E revenue estimates for Alkem and model a 13% CAGR over FY19-21E. The profitability, too, is likely to expand by 100-120bps YoY with lower raw material prices and improving business mix. With moderated tax expectations, we model 25% EPS CAGR over FY19-21E. Alkem remains among the fastest-growing companies in the Indian market while its performance in the US also stands out. At CMP, Alkem is available at 18x FY21E EPS. Considering its stable branded business, healthy cashflows (~Rs 8bn annual FCFF over FY20/21E), and reasonable return ratios (22% RoIC in FY21E), we believe this is unjustified.
We expect the stock to command premium over its peers owing to higher exposure to India business. Cutting down our earnings by 21% for FY21E to factor in lower growth in India business and EBITDA margin pressure and rolling over our earnings estimates to FY21E, we maintain our BUY recommendation on the stock with a revised Target Price of Rs2,050.
We lower ALKEM’s P/E multiple to 22x (from 24x earlier) to factor in the increased competition in the US generics space and gradual downtrend in the domestic formulation industry. We arrive at PT of INR2,170 (from INR2,368 earlier). Based on 23% earnings CAGR expected over FY19-21E and led by healthy performance in the DF segment, enhanced margins in the US generics business, and attractive valuation, we maintain a BUY rating on the stock.