3QFY2017 Result Update | Pharma
February 14, 2017
Alkem Laboratories
ACCUMULATE
CMP
`1,837
Performance Highlights
Target Price
`1,996
Y/E March (` cr)
3QFY17
3QFY16
% chg (yoy) 9MFY17 9MFY16
% chg (yoy)
Investment Period
12 Months
Net Sales
1,482
1,288
15.1
4,601
3,877
18.7
Stock Info
EBITDA
268
236
13.7
850
697
21.8
Sector
Pharma
EBITDA Margin (%)
18.1
18.3
-21 bp
18.5
18.0
48 bp
Market Cap (` cr)
21,969
Adj. PAT
233
187
24.9
755
655
15.3
Source: Company, Angel Research
Net Debt (` cr)
80
Beta
0.3
Domestic business remains strong, US business shows strong growth: Alkem
52 Week High / Low
1,886/1,175
reported revenue grew of 15% yoy in 3QFY17. Domestic revenue grew by 16.8%
Avg. Daily Volume
15,878
yoy to `1,030cr while exports grew by 18.7% to `432cr. US revenue grew by 30%
Face Value (`)
2
yoy to `339cr. Other exports de-grew by 9.8% yoy as company continues to focus
BSE Sensex
28,352
on select few international markets. Domestic business contributed 70.4% of the
Nifty
8,805
total revenue. Exports mix changed substantially with US contribution in total
Reuters Code
ALKE.BO
revenue going up from 18.7% in 2QFY17 to 23.2% in 3QFY17.
Bloomberg Code
ALKEM IN
Gross margins improved by ~300bps on yoy basis and 270bps on qoq basis.
Staff costs increased due to increased incentives but are likely to come down
Shareholding Pattern (%)
going ahead. As % of net sales, staff cost was at 19.2% in the quarter vs. 16.8%
Promoters
66.9
in 2QFY17 and 18.0% in 3QFY16. EBITDA came at `268cr vs. `236cr in
MF / Banks / Indian Fls
3.3
3QFY16 showing a yoy growth of 13.7%. 3QFY17 margin at 18.1% shows
FII / NRIs / OCBs
3.7
contraction of ~21bps on yoy basis. Net profit grew by 25% yoy from `187cr in
Indian Public / Others
26.1
3QFY16 to `233cr in 3QFY17.
Outlook and valuation: The stock at the CMP of `1,837 is available at P/E of
Abs. (%)
3m 1yr 3yr
17.5x of FY19E EPS of `105. The stock price in CY2017 has appreciated by 13%
Sensex
5.8
23.4
NA
leaving less room for further upside at this juncture. We expect company to report
Alkem
12.3
39.4
40.4
CAGR of 17.4% and 22.4% in top line and bottom line respectively in next two
NA due to listing in December 2015
years. Its ANDA pipeline has not seen strong traction this year so far, despite
which Alkem maintains guidance of high single digit ANDA launches going
3-year price chart
2,000
ahead. This justifies the ~29-30% growth in the US business over next two years.
We rate Alkem Accumulate with PT of 1,996 based on 19.5x of FY19E EPS.
1,800
Key financials (Standalone)
1,600
Y/E March (` cr)
FY2015
FY2016
FY2017E
FY2018E
FY2019E
1,400
Net Sales
27,351
28,160
28,083
30,096
33,071
1,200
% chg
8.9
3.0
(0.3)
7.2
9.9
Net Profit
2,541
3,132
3,432
3,734
4,072
1,000
% chg
13.1
31.3
9.6
8.8
9.0
OPM (%)
12.8
15.5
16.7
17.0
17.0
Source: Company, Angel Research
EPS (`)
119.5
156.9
171.8
187.0
203.9
P/E (x)
27.0
20.6
18.8
17.3
15.8
P/BV (x)
9.8
8.1
6.6
5.5
4.7
RoE (%)
35.3
33.9
30.1
27.9
25.8
RoCE (%)
42.3
44.9
38.8
35.8
33.3
Shrikant Akolkar
EV/Sales (x)
2.2
2.1
2.1
1.9
1.7
022-3935 7800 Ext: 6846
EV/EBITDA (x)
18.5
15.0
13.8
12.2
10.9
[email protected]
Source: Company, Angel Research; Note: CMP as of February 13, 2017
Please refer to important disclosures at the end of this report
1
Alkem Laboratories | 3QFY2017 Result Update
Exhibit 1: Quarterly financial performance
Y/E March (` cr)
3QFY17
3QFY16
% chg (yoy) 2QFY17
% chg (qoq) 9MFY17 9MFY16
% chg (yoy)
Net sales
1,482
1,288
15.1
1,638
(9.5)
4,601
3,877
18.7
Consumption of RM
540
509
6.1
641
(15.7)
1,761
1,533
14.8
(% of Sales)
36.5
39.6
39.1
38.3
39.5
Staff costs
284
232
22.4
276
3.0
814
700
16.3
(% of Sales)
19.2
18.0
16.8
17.7
18.1
Other expenses
389
310
25.3
410
(5.2)
1176
946
24.3
(% of Sales)
26.3
24.1
25.1
25.6
24.4
Total Expenditure
1,214
1,052
15.4
1,328
(8.6)
3,751
3,180
18.0
Operating Profit
268
236
13.7
310
(13.6)
850
697
21.8
OPM
18.1
18.3
19.0
57.3
54.2
Depreciation
26
23
16.5
25
3.5
75
69
8.2
Other income
25
18
39.9
34
(25.1)
87
136
(35.8)
Finance cost
12
18
(36.5)
12
(2.6)
34
61
(44.9)
PBT (excl. Extr. Items)
255
213
20.0
307
(16.8)
829
703
17.8
Extr. Income/(Expense)
0
0
0
0
0
PBT (incl. Extr. Items)
255
213
20.0
307
(16.8)
829
703
17.8
(% of Sales)
17.2
16.5
18.7
18.0
18.1
Tax
19
23
(15.0)
19
2.3
61
37
62.4
(% of PBT)
0.1
0.1
0.1
0.1
0.1
Reported PAT
236
190
24.2
288
(18.0)
768
666
15.3
Minority int. and Asso. Company
3
3
(14.9)
5
(46.2)
13
11
17.7
Adj PAT
233
187
24.9
283
(17.5)
755
655
15.3
Adj. PATM
15.7
14.5
17.3
16.4
16.9
Equity capital (cr)
24
24
24
24
24
Adjusted EPS (`)
20
16
24.9
24
(17.5)
63
55
15.3
Source: Company, Angel Research
Alkem’s revenue grew by 15% yoy. The domestic revenue grew by 16.8% yoy
to `1,030cr while exports grew by 18.7% yoy to `432cr.
Domestic business’ yoy growth at 16.8% during the quarter continues to
outperform the industry growth of 5.7% in 3QFY17.
US revenue was at `339cr vs. `260cr in 3QFY16, this shows a yoy growth of
30%. Exports to other international markets de-grew by 9.8% yoy as Alkem
continues to focus on select few markets.
During the quarter, company maintained its market share in the Anti-infective,
GI and pain management segments. Company was able to grow faster than
the industry in chronic segment, especially Neuro/CNS, Derma, Cardiac and
Anti-diabetic. We believe that the company has gained market share in these
segments owing to faster growth.
Domestic business contributed 70.4% of the total revenue while exports
contributed 29.6%.
The company has seen substantial increase in the exports mix with US
contribution going up from 18.7% in 2QFY17 to 23.2% in 3QFY17. On yoy
February 14, 2017
2
Alkem Laboratories | 3QFY2017 Result Update
basis, this contribution has grown by 227bps, in line with the company’s
strategy to grow its US business.
Total R&D investments during the quarter were at `85cr (5.7% of net sales) vs.
`43.8cr (3.4% of net sales) in 3QFY16.
Gross margins improved to ~300bps on yoy basis and 270bps on qoq basis.
Staff costs increased due to increased incentives. As % of net sales, staff cost
was at 19.2% vs. 16.8% in 2QFY17 and 18.0% in 3QFY16.
EBITDA came at `268cr vs. `236cr in 3QFY16 showing a yoy growth of
13.7%.
EBITDA margins at 18.1% in the quarter declined by ~21bps on yoy basis and
by ~86bps on qoq basis.
Net profit grew by 25% yoy from `187cr in 3QFY16 to `233cr in 3QFY17.
Exhibit 2: Domestic business growth at 16.8%
Exhibit 3: Export continues to grow
1,400
30
500
35
1,200
25
30
400
1,000
25
20
300
800
20
15
600
200
15
10
400
10
100
200
5
5
0
0
0
0
Domestic
yoy growth (%)
Total exports
yoy growth (%)
Source: Company, Angel Research
Source: Company, Angel Research
Exhibit 4: US records 30% yoy growth
Exhibit 5: ANDA pipeline
400
35
90
350
80
30
70
300
25
60
250
20
50
200
40
15
150
30
10
20
100
5
10
50
0
0
0
US sales
yoy growth (%)
Filed
Approval
Source: Company, Angel Research
Source: Company, Angel Research
February 14, 2017
3
Alkem Laboratories | 3QFY2017 Result Update
Conference call - Key highlights
R&D expenses guidance of 5-6% of net sales maintained.
FY17E capex likely to be `550-600cr.
The tax rate will go up by FY19E.
Company maintains the guidance to launch high single digit ANDAs per year
going ahead.
Exhibit 6: Margins decline due to higher staff costs
Exhibit 7: PAT grows 25% yoy
350
20.0
300
25.0
250
300
20.0
15.0
250
200
200
15.0
10.0
150
150
10.0
100
100
5.0
5.0
50
50
0
0.0
0
0.0
Operating Profit
OPM
Adj PAT
Adj. PATM
Source: Company, Angel Research
Source: Company, Angel Research
Investment arguments
Strong domestic business- Alkem is the 5th largest pharma company in India
in terms of domestic revenues. Its acute segment contributes 88% of domestic
revenue while chronic business contributes
12%. In the acute business,
company is ranked #1 in anti-infective segment and #3 each in pain and
Gastro intestinal segments. Alkem is currently a small player in the chronic
segment but it is expanding this business rapidly.
Domestic business to continue its outperformance vs. industry: Alkem is
expected to continue its outperformance vs. industry due to strong growth in its
acute and chronic segments. Both segments are expected to grow at CAGR of
16% and 30% respectively in next 3 years due to higher sales of major brands
and market share gains. We expect domestic sales to grow at 15.8% CAGR to
`5,620cr in FY19E, vs. domestic industry growth of ~14% in next 3 years.
US revenue to double with increased ANDA monetization: Alkem’s ANDA
pipeline increased 2.5x from 31 ANDAs in FY12 to 76 ANDAs in H1FY17.
ANDA approvals also grew by 2.8x during the same period. In next three
years company expects increased ANDA launches on the back of approval to
2/3rd of its pipeline. This will to double its US revenue from `991cr in FY16 to
`1,919cr in FY19E.
Improving operating performance: Alkem’s operating performance is expected
to improve with better sales mix (increasing exports) and market share gains in
chronic segment. The company has already seen margin improvement and
with rising profitability of US business, we estimate
70-100bps margin
expansion.
February 14, 2017
4
Alkem Laboratories | 3QFY2017 Result Update
Outlook and valuation
The stock at the CMP of `1,837 is available at P/E of 17.5x of FY19E EPS of `105.
The stock price in CY2017 has appreciated by 13% leaving less room for further
upside at this juncture. We expect company to report CAGR of 17.4% and 22.4%
in top line and bottom line respectively in next two years. Its ANDA pipeline has not
seen strong traction this year so far, despite which Alkem maintains guidance of
high single digit ANDA launches going ahead. This justifies the ~29-30% growth
in the US business over next two years. We rate Alkem Accumulate with PT of
1,996 based on 19.5x of FY19E EPS.
Company background
Alkem Laboratories is a Mumbai based pharma company engaged in
manufacturing and marketing of generic drugs, APIs and neutraceutical products.
Company sells its drugs in India and ~50 countries including the US. It has 16
manufacturing facilities of which 14 are in India and two in the USA.. Company
has recently entered into an alliance with Haw Par to exclusively market Tiger Balm
range of products in India.
February 14, 2017
5
Alkem Laboratories | 3QFY2017 Result Update
Profit and loss statement
Y/E March (` cr)
FY15
FY16
FY17E
FY18E
FY19E
Total operating income
3,743
4,992
6,050
6,839
8,077
% chg
19.7
33.3
21.2
13.1
18.1
Total Expenditure
3,322
4,143
4,918
5,485
6,461
Cost of Materials
1,691
1,961
2,323
2,599
3,069
Personnel
646
917
1,053
1,149
1,341
Others Expenses
985
1,265
1,543
1,737
2,052
EBITDA
422
848
1,131
1,354
1,615
% chg
2.9
101.1
33.4
19.7
19.3
(% of Net Sales)
11.3
17.0
18.7
19.8
20.0
Depreciation& Amortisation
71
101
110
130
155
EBIT
351
748
1,021
1,224
1,460
% chg
(1.9)
113.1
36.6
19.9
19.3
(% of Net Sales)
9.4
15.0
16.9
17.9
18.1
Interest & other Charges
81
67
47
47
47
Other Income
181
165
100
100
100
(% of PBT)
40.2
19.5
9.3
7.8
6.6
Share in profit of Ass.
-
-
-
-
-
Recurring PBT
451
845
1,074
1,277
1,513
% chg
4.8
87.5
27.1
18.9
18.5
Prior Period & Extra. Exp.
-
-
-
-
-
PBT (reported)
451
845
1,074
1,277
1,513
Tax
59
161
118
217
257
(% of PBT)
13.1
19.0
11.0
17.0
17.0
PAT (reported)
392
684
956
1,060
1,256
Add: Share of earnings of ass.
-
-
-
-
-
Less: Minority interest (MI)
-
11
-
-
-
PAT after MI (reported)
392
673
956
1,060
1,256
ADJ. PAT
392
673
956
1,060
1,256
% chg
(10.0)
74.8
39.7
10.8
18.5
(% of Net Sales)
10.5
13.5
15.8
15.5
15.5
Basic EPS (`)
32.8
56.3
80.0
88.7
105.1
Fully Diluted EPS (`)
32.8
56.3
80.0
88.7
105.1
% chg
(10.0)
74.8
39.7
10.8
18.5
February 14, 2017
6
Alkem Laboratories | 3QFY2017 Result Update
Balance sheet statement
Y/E March (` cr)
FY15
FY16
FY17E
FY18E
FY19E
SOURCES OF FUNDS
Equity Share Capital
24
24
24
24
24
Reserves& Surplus
2,975
3,479
4,244
5,039
5,918
Shareholders’ Funds
2,999
3,503
4,268
5,063
5,942
Minority Interest
86
97
97
97
97
Total Loans
1,381
739
750
750
750
Deferred Tax Liability
126
153
153
153
153
Total Liabilities
4,591
4,490
5,267
6,062
6,941
APPLICATION OF FUNDS
Gross Block
1,745
1,889
2,389
2,939
3,539
Less: Acc. Depreciation
371
447
557
687
842
Net Block
1,374
1,442
1,832
2,252
2,697
Capital Work-in-Progress
111
172
250
300
300
Investments
481
422
422
422
422
Current Assets
3,325
3,394
3,925
4,415
5,095
Inventories
784
909
1,110
1,255
1,483
Sundry Debtors
527
565
663
750
885
Cash
791
796
651
714
724
Loans & Advances
175
240
290
328
388
Other Assets
1,048
884
1,210
1,368
1,615
Current liabilities
733
998
1,220
1,385
1,631
Net Current Assets
2,592
2,396
2,705
3,030
3,464
Deferred Tax Asset
34
58
58
58
58
Mis. Exp. not written off
-
-
-
-
-
Total Assets
4,591
4,490
5,267
6,062
6,941
Note: Cash includes cash with scheduled banks on dividend current accounts
February 14, 2017
7
Alkem Laboratories | 3QFY2017 Result Update
Cash flow statement
Y/E March (` cr)
FY15
FY16
FY17E
FY18E
FY19E
Profit before tax
451
845
1,074
1,277
1,513
Depreciation
71
101
110
130
155
Change in Working Capital
(12)
14
(454)
(262)
(424)
Interest / Dividend (Net)
(53)
(59)
47
47
47
Direct taxes paid
(106)
(198)
(118)
(217)
(257)
Others
(26)
24
-
-
-
Cash Flow from Operations
325
726
659
975
1,034
(Inc.)/ Dec. in Fixed Assets
(235)
189
(578)
(600)
(600)
(Inc.)/ Dec. in Investments
-
-
-
-
-
Cash Flow from Investing
(235)
189
(578)
(600)
(600)
Issue of Equity
-
-
-
-
-
Inc./(Dec.) in loans
87
(671)
11
-
-
Dividend Paid (Incl. Tax)
(57)
(185)
(191)
(265)
(377)
Interest / Dividend (Net)
569
598
(47)
(47)
(47)
Cash Flow from Financing
599
(258)
(227)
(312)
(424)
Inc./(Dec.) in Cash
690
657
(145)
63
10
Opening Cash balances
101
140
796
651
714
Closing Cash balances
791
796
651
714
724
February 14, 2017
8
Alkem Laboratories | 3QFY2017 Result Update
Key ratios
Y/E March
FY15
FY16
FY17E
FY18E
FY19E
Valuation Ratio (x)
P/E (on FDEPS)
56.1
32.6
23.0
20.7
17.5
P/CEPS
4.5
47.5
28.0
20.6
18.5
P/BV
7.3
6.3
5.1
4.3
3.7
Dividend yield (%)
1.4
0.3
0.8
0.9
1.2
EV/Sales
5.9
4.3
3.6
3.2
2.7
EV/EBITDA
52.3
25.3
19.1
15.9
13.4
EV / Total Assets
4.1
3.9
3.3
2.9
2.5
Per Share Data (`)
EPS (Basic)
32.8
56.3
80.0
88.7
105.1
EPS (fully diluted)
32.8
56.3
80.0
88.7
105.1
Cash EPS
407.7
38.7
65.7
89.2
99.5
DPS
26.6
4.7
15.4
16.0
22.2
Book Value
250.9
293.0
357.0
423.5
497.0
Dupont Analysis
EBIT margin
9.4
15.0
16.9
17.9
18.1
Tax retention ratio
0.9
0.8
0.9
0.8
0.8
Asset turnover (x)
1.2
1.7
1.5
1.5
1.5
ROIC (Post-tax)
9.8
20.0
23.0
21.7
21.9
Cost of Debt (Post Tax)
0.1
0.1
0.1
0.1
0.1
Leverage (x)
0.0
(0.1)
(0.1)
(0.1)
(0.1)
Operating ROE
10.2
17.3
21.3
20.1
20.4
Returns (%)
ROCE
8.0
17.6
20.4
21.1
21.8
Angel ROIC (Pre-tax)
11.3
24.7
25.9
26.2
26.3
ROE
13.1
19.2
22.4
20.9
21.1
Turnover ratios (x)
Asset Turnover (Gross Block)
2.1
2.6
2.5
2.3
2.3
Inventory / Sales (days)
76
67
67
67
67
Receivables (days)
51
41
40
40
40
Payables (days)
45
42
42
42
42
WC cycle (ex-cash) (days)
82
65
65
65
65
February 14, 2017
9
Alkem Laboratories | 3QFY2017 Result Update
Research Team Tel: 022 - 39357800
E-mail: [email protected]
Website: www.angelbroking.com
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Disclosure of Interest Statement
Alkem Laboratories
1. Financial interest of research analyst or Angel or his Associate or his relative
No
2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives
No
3. Served as an officer, director or employee of the company covered under Research
No
4. Broking relationship with company covered under Research
No
Ratings (Based on expected returns
Buy (> 15%)
Accumulate (5% to 15%)
Neutral (-5 to 5%)
over 12 months investment period):
Reduce (-5% to -15%)
Sell (< -15)
February 14, 2017
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