Why the stock of Alkem Labs is a good ‘Buy’

Alkem Laboratories, the fifth largest pharma company in India, is a dominant player in acute therapy areas with well-established brands.

The company is ranked number one — market share in terms of revenue — in anti-infectives. It also has the third largest market share each in gastro-intestinal and pain and analgesics therapies. Over the years, Alkem Labs has held on to or improved its rankings in these areas.

In the chronic segment too, which covers neurology, dermatology, cardiology and anti-diabetics, Alkem Labs, despite smaller presence, has managed to up its market share.

The Indian market accounts for two-thirds of the company’s consolidated revenue. While a late entrant in the generics market in the US, Alkem Labs has more than doubled its revenue from this market in four years to ₹2,200 crore by FY20, thanks to a steady pace of new product launches that it plans to continue with.

Valuation-wise, at the current market price of ₹2,777, the stock trades at 21.6 times its trailing twelve-month earnings (TTM), well below its five-year historical average P/E multiple of 28.7 times. Peers such as IPCA Laboratories, Cipla and Glenmark Pharmaceuticals trade at TTM P/E multiples ranging from 18 to 34 times.

Given the multiple positives on the business front and reasonable stock valuations, long-term investors can consider buying the Alkem Labs stock.

Leading in acute therapy

Alkem Labs is a leading player in acute therapy areas such as anti-infectives, gastro-intestinal and pain and analgesics, and in vitamins, minerals and nutrients (VMN) in India. Thanks to the industry-surpassing growth here, it has expanded its market share, and held on to or improved its rankings over the years. For instance, in anti-infectives, its share has gone up from 11.6 per cent in FY16 to 12.7 per cent in FY20. New product launches, market share gains in the key therapy areas and strong performance by top brands have boosted its growth. A strong force of medical representatives and a pan-India supply chain and distribution network too have helped.

Acute therapies, along with VMN, account for 85 per cent of the company’s India revenue.

Under its smaller segment of chronic therapies too (15 per cent of India revenue), comprising neurology, dermatology, anti-diabetics and cardiology, Alkem Labs has progressed. Focus on a few high-growth therapies, product launches and a specialised sales force have helped.

The US accounted for 29 per cent of the company’s FY21 (nine months) revenue. Australia, Chile, the Philippines, Kazakhstan and others contributed the remaining.

From 11 product approvals (including tentative ones) from the USFDA in FY11, the number has gone up steadily. As on December 31, 2020, Alkem Labs had approvals for 100 abbreviated new drug applications (ANDAs or generic drug filings) including 14 tentative approvals. It launched 14 new products in FY20 and nine so far in FY21 in the US market.

Alkem Labs received 16 ANDA approvals in FY21. This should help ramp up revenue from the US, going forward. The scale-up in operations has also resulted to operating leverage for the US business, reflected in improved overall margins in FY21.

From 4.5 per cent of sales in FY15, the company’s R&D expense went up to 5.9 per cent by FY21 (nine months).

Strong financials

Alkem Labs registered 17.4 per cent growth in revenue from operations, 28.3 per cent in operating profit and 23.5 per cent in net profit (all CAGR) between FY15 and FY20. Over this period, its EBITDA margin rose from 11.3 per cent to 17.7 per cent.

For nine months ended December 2020, Alkem Labs reported a 6.0 per cent year-on-year (y-o-y) growth in revenue to ₹6,673 crore. This includes the impact of ₹143 crore of sales relating to Q4 FY20 accounted for in the Q1 FY21 sales numbers (once goods were delivered). Impacted by lower footfalls in hospital OPDs and private clinics, which hurt new prescription generation, Alkem Labs posted a 5.5 per cent fall in domestic sales in the June 2020 quarter. This was followed by two quarters of recovery. International sales, particularly to the US, grew at a strong pace all through.

Aided by a sharp fall in sales and marketing expenses in India post the lockdowns, the company posted 45 per cent growth in operating profit to ₹1,445 crore and 43 per cent growth in net profit to ₹1,345 crore for the nine-month period ended December 2020, compared to year ago.

This also bumped up the EBITDA margin to 24.7 per cent from 18.6 per cent, a year ago.

Going forward, as per the company, the capping of the export incentive under the government’s MEIS scheme is likely to impact the EBITDA by ₹50 crore on a full-year basis. Alkem Labs reported an EBITDA of ₹1,651 crore for the latest nine-month period.

Its strong balance sheet is another positive. From a net debt of ₹300 crore at the start of FY21, it now holds net cash of around ₹800 crore.

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