Buy Alkem Laboratories, target price Rs 2,882: ICICI Securities

ICICI Securities has upgraded Alkem Laboratories from add to buy with a target price of Rs 2,882 based on 24 times FY22E earnings. The share price of the company moved down by -0.61 per cent from its previous close of Rs 2394.55. The last traded stock price is Rs 2380.

The brokerage is positive on the long-term outlook given the sustainable growth in the domestic market and continued scale-up in US generic business, though near term outlook is muted due to a large acute portfolio.

Alkem Laboratories reported Q4FY20 performance was in line with the brokerage estimates despite one-time impact due to shipment delay of Rs 1-1.5 billion due to lockdown in March 2020. Revenue growth was healthy at 10.6 per cent year on year to Rs 20.5 billion against brokerage estimate of Rs 20.9 billion, driven by 22.7 per cent increase in US sales and 3.3 per cent growth in domestic business.

Investment Rationale

The brokerage expects Alkem to register 9.9 per cent revenue and 12.9 per cent PAT CAGRs over FY20-FY22E with margin expansion of 160bps to 19.3 per cent. Lower earnings growth is mainly due to expectation of a muted first half in FY21 on account of Covid-19 impact and increase in tax rate. A reduced capex requirement would help in high free cash flow generation of about Rs 21 billion over FY21E-FY22E. The brokerage says it would also drive the return ratios, RoE and RoCE higher to 19.2 per cent and 16.7 per cent respectively by FY22E.

The brokerage has lowered earnings estimates by 4-6 per cent for FY21E-FY22E to factor in lockdown impact on acute portfolio in FY21. Considering recent correction in stock price, it has upgraded it to buy from add with a revised target price of Rs 2,882/share from Rs 3,008/share earlier.

Key downside risks: regulatory hurdles and delay in product approvals in the US.

Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 2048.99 Crore, down -6.09 per cent from last quarter sales of Rs 2181.84 Crore and up 10.51 per cent from last year's same quarter sales of Rs 1854.20 Crore. The company reported net profit after tax of Rs 191.54 Crore in the latest quarter.

Promoter/FII Holdings

Promoters held 65.88 per cent stake in the company as of March 31, 2020, while FIIs held 3.64 per cent, DIIs 11.78 per cent and public and others 18.70 per cent.