Alkem Laboratories
BSE SENSEX
22,986
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Free float (%)
S&P CNX
6,981
ALKEM IN
119.6
157.7 / 2.3
1,589/1,251
-
2,252
-
12 February 2016
Q3FY16 Results Update | Sector: Healthcare
CMP: INR1,319 TP: INR1,751(+33%)
Strong results; Margins continue to surprise positively
Buy
Financials & Valuations (INR b)
FY16E FY17E FY18E
Y/E Mar
Net Sales
50.6
60.1
71.7
EBITDA
9.0
10.4
13.1
NP
7.4
8.4
10.5
EPS (INR)
62.3
70.7
87.5
Gr. (%)
61.0
13.5
23.9
BV/Sh (INR)
305.8 362.3 430.1
RoE (%)
22.4
21.2
22.1
RoCE (%)
20.4
20.3
22.1
P/E (x)
21.2
18.7
15.1
P/BV (x)
4.3
3.6
3.1
Estimate change
TP change
Rating change
Alkem reported strong 3QFY16 results with net sales at INR 12.7b, up 29% YoY
driven by strong domestic performance (up 28% YoY) and impressive ramp-up in
US sales (up 19% YoY). EBITDA came in at INR2.3b, up 38% YoY (16% above our
est) with EBITDA margin of 18.5% (up 114bps YoY). Sustenance of high margins
(QoQ) is primarily attributed to robust sales in US and India and lower R&D at
(3.4% of sales- ~100bps below est). PAT came in at INR 1.9b, up 17% YoY (16%
above our est) despite lower other income and higher tax rate. We believe market
leadership position in key acute therapies will help provide sustainability whereas
expanding presence in high growth areas of chronic segment will help drive
growth.
Domestic business continues to outperform industry growth:
Domestic business
growth for the company stood at ~28.4% YoY. This strong growth is primarily
driven by acquisition of a) Indchemie and Catchet, b) impressive growth in
established therapies, c) market share gain in emerging therapies. Excluding the
acquisitions, base business grew at steady pace of >13% YoY. According to AIOCD,
secondary sales growth in 3Q for Alkem stood at 15.7% YoY (vs industry growth of
14.3% YoY) providing visibility of strong growth ahead. The new price control list
will have a one-time impact of <1% on domestic sales growth for Alkem. We have
already built this in our estimates.
Strong momentum in US sales to continue:
US sales run rate has improved to
USD40m in 3Q (vs run rate of USD35m in 1H FY16 and ~USD26m in FY15) on the
back of key products including Mycophenolate Mofetil. We expect US business
sales to more than double by FY18E to ~USD225m vs ~USD106m in FY15. This will
be driven by strong ANDA pipeline of ~45 pending ANDAs.
Valuations attractive; sticky profit provides comfort:
Our TP of INR1,750 for Alkem
is based on 20x FY18E PER (~10-15% discount to peers). We argue for a multiple re-
rating going forward given the superior earnings growth profile (>30% EPS CAGR
between FY15-18E), improving return ratios (ROICs to improve to ~22% by FY18E vs
16% in FY15) and net cash balance sheet. We have increased our FY16E EPS est by
~4% on the back of strong 3Q performance and margin sustenance.
(INR Million)
FY15
3Q
9,878
1,711
17.3
212
181
1,679
0
1,679
64
3.8
1,615
0
1,615
4Q
9,119
1,322
14.5
181
339
1,480
0
1,480
181
12.2
1,299
0
1,299
FY16
1Q
2Q
3Q
12,141 13,560 12,747
29.0
2,033
2,545
2,354
16.7
18.8
18.5
224
277
244
162
334
161
1,971
2,602
2,270
0
0
1,971
2,602
2,270
122
91
345
6.2
3.5
15.2
1,849
2,511
1,925
28
45
35
1,821
2,466
1,889
17.0
FY15
4QE
12,142
1,997
16.4
279
138
1,856
0
1,856
576
31.0
1,280
37
1,243
37,887
5,445
14.4
703
999
5,741
574
5,167
542
9.4
4,625
0
4,625
FY16E
50,591
33.5
8,955
17.7
1,025
794
8,724
0
8,724
1,134
13.0
7,590
145
7,445
61.0
FY16E
3QE
13,055
2,023
15.5
260
175
1,938
0
1,938
213
11.0
1,725
100
1,625
Var
%
-2.4
16.3
Quarterly Performance (Consolidated)
Y/E March
Net Revenues
YoY Cha nge (%)
EBITDA
Ma rgi ns (%)
Depreci a ti on
Net Other Income
PBT before EO Exp
EO Exp/(Inc)
PBT
Ta x
Ra te (%)
PAT (pre Minority Interest)
Mi nori ty Interes t
Reported PAT
YoY Cha nge (%)
1H
18,890
1,838
9.7
310
480
2,008
0
2,008
297
14.8
1,712
0
1,712
17.1
16.2
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Kumar Saurabh
(Kumar.Saurabh@MotilalOswal.com); +91 22 3982 5584
Amey Chalke
(Amey.Chalke@MotilalOswal.com); +91 22 39825423

Alkem Laboratories
3Q result snapshot
Exhibit 1: Quarterly Profit and Loss statement
(INR m)
Total revenues
Cost of revenues
Gross profit
Gross margin (%)
Staff cost
% of Total Revenues
Other expense
% of Total Revenues
EBITDA
EBITDA margin (%)
Depreciation
EBIT
Interest cost
Other income (net)
PBT
Income tax
Effective tax rate (%)
Net Profit - reported
Minority interest
Exceptional items
Adjusted Net Profit
3Q FY15
9,878
4,118
5,760
58.3
1,355
14
2,694
27
1,711
17.3
212
1,499
209
390
1,679
64
4
1,615
-
1,615
2Q FY16
13,560
5,491
8,069
59.5
2,420
18
3,103
23
2,545
18.8
277
2,268
184
518
2,602
91
3
2,511
45
2,466
3Q FY16
12,747
5,089
7,658
60.1
2,337
18
2,967
23
2,354
18.5
244
2,109
170
330
2,270
345
15
1,925
35
1,889
%YoY
29.0
23.6
33.0
176 bp
72.5
462 bp
10.1
(400)bp
37.6
114 bp
15.1
40.8
-18.7
-15.2
35.2
436.3
19.2
%QoQ
-6.0
-7.3
-5.1
57 bp
-3.4
49 bp
-4.4
39 bp
-7.5
(31)bp
-11.8
-7.0
-7.7
-36.2
-12.8
280.0
-23.4
-21.6
-23.4
FY15
37,887
16,906
20,981
55.4
6,375
17
9,162
24
5,445
14.4
703
4,742
811
1,810
5,741
542
9.4
5,199
-
574
4,625
FY16
50,591
20,742
29,848
59.0
8,955
18
11,939
24
8,955
17.7
1,025
7,930
744
1,539
8,724
1,134
13.0
7,590
145
7,445
%YoY
33.5
22.7
42.3
362 bp
40.5
87 bp
30.3
(58)bp
64.5
333 bp
45.7
67.2
-8.2
-15.0
52.0
109.3
356 bp
46.0
17.0
61.0
Source: Company, MOSL
Key highlights from earnings call
India business (71% of sales)
Alkem’s India sales grew at 28%YoY to INR8.8b, driven by good volume growth in
existing portfolio. Adjusted for Indchemie and cachet, India sales grew 13%YoY
during this quarter. Secondary sales growth was at 18.6% (as per IMS). Alkem has
maintained its leadership position in Anti-infective, Gastro, Pain and Vitamin
therapies. It has also improved position in growing therapies like Derma, CNS, CVS,
Anti-diabetic.
At present, 24% of India sales come under NLEM. Going ahead, the company
expects additional 6% of India sales to come under NLEM list, taking total NLEM
exposure to 30%.
The management has no plans to add significant field force in near term and would
be more focused on improving MR productivity.
12 February 2016
2

Alkem Laboratories
Exhibit 2: India business grew 28% in 3Q
India sales (INR m)
Exhibit 3: Nine month growth stood at 32.6%
India sales (INR m)
6,865
8,816
20,817
27,613
Source: Company, MOSL
Source: Company, MOSL
US business (21% of sales)
US sales grew 19%YoY to INR INR2.6b, driven by sustained market share in existing
products. In 3Q, Alkem has filed 2 ANDAs and received approvals for 5 ANDAs from
US FDA. Cumulatively, it has filed 70 ANDAs and received 27 approvals till date.
However, it has launched only 16 products in US market. Total pending approvals
stands at 43. In addition, it also has 10 in licensed products. The management
expects more than half of pending ANDAs to get approved over 24 months. Market
share in key product like Mycophenolate Mofetil has also been maintained during
this quarter. We expect Alkem to receive 10-15 approvals over next two years,
leading to 34% revenue CAGR over FY15-18E.
Exhibit 4: India business grew 18.9% in 3Q
US sales (INR m)
Exhibit 5: Nine month growth stood at 48.1%
US sales (INR m)
2189
2602
5046
7473
Source: Company, MOSL
Source: Company, MOSL
Other international business (8% of sales)
Other international business grew 65%YoY to INR1b. Growth was primarily driven by
Australia and Chile markets. Alkem has presence in 50 countries.
Other highlights
Gross margin improvement was driven by price hikes in India, better product
mix in both India and US and cost savings across the segments. The
management also believes gross margins are sustainable going ahead.
R&D costs stood at 3-3.5% of sales in 3Q. Management expects R&D cost to
increase going ahead.
The management indicated that results were also impacted by AS-09 accounting
standards.
12 February 2016
3

Alkem Laboratories
Standalone PAT was higher due to higher inventories in US subsidiary.
Baddi and two US based facilities were inspected last year. Two facilities (Daman
and Ankleshwar-API) are due for US FDA inspection this year. 60-65% ANDAs are
filed from Ankaleshwar and 30-35% ANDAs are filed from Baddi.
Tax rate is expected to be in range of 15-18% for FY16.
Valuations & Risk
Over last 10 years, Alkem has outperformed the most of the Indian pharma
companies in domestic market, driven by consistent launches in acute therapies like
Anti Infective, Pain/Analgesic, and Vitamins while growing its presence in high
growth chronic therapies like CNS, Cardiac, Derma and Anti-Diabetic. Besides India
segment, Alkem has also launched 20 products in US market and has 40 pending
approvals. Going ahead, on the back of improved presence in chronic business and
significant positive leverage from US segment, we expect Alkem’s earnings to grow
at 33%CAGR over next three years. It will be supported by 22% CAGR revenue
growth and 420bp margin expansion over FY15-18E. Our target price of INR 1750
discounts ALKEM’s FY18E EPS at 20x PE multiple which is:
At 10% discount to sector average.
Implies a PEG of 0.64x (FY15-18E EPS CAGR of 31%)
At CMP, ALKEM is trading at 21x FY16E, 19x FY17E and 15x FY18E, which is 30%
discount to sector average, which is unjustified in our view. We argue for P/E re-
rating for ALKEM due to:
Strong EPS outlook of 31% CAGR backed by 22% revenue growth
Improvement in RoCE from 16.3% now to 23.5% by FY18E
Strong free cash flow generation of INR12b over FY16-18E
Deleveraging of balance sheet, as we expect Net D/E to improve to -0.2x by
FY18E (vs 0.0x now).
Key catalysts to drive stock’s performance over the medium term are:
Improvement in US profitability (25% of sales) led by niche product launches.
Greater traction in chronic portfolio.
M&A opportunities in domestic and US market.
Risks to our investment assumptions:
Addition to NLEM list in domestic markets.
Daman formulations facility is due for US FDA inspection in near term (accounts
for ~60% of US revenue).
Incremental competition in existing key products in US business.
Exhibit 6: Our TP of INR1,750 is based on 20x FY18E PER (10% discount to sector avg)
FY18E EPS
87.5
Target multiples
20.0
Target Price
1,750
% Upside
33
Source: Company, MOSL
12 February 2016
4

Alkem Laboratories
Story in charts
Exhibit 7: Overall sales grew 29% YoY to INR12.7b in 3Q
Sales (INR b)
Exhibit 8: EBITDA margin improved with better mix
EBITDA (INR b)
17.3
14.5
17.0
EBITDA margin (%)
18.8
18.5
9.9
9.1
12.1
13.6
12.7
1.7
1.3
2.1
2.5
2.4
Source: Company, MOSL
Source: Company, MOSL
Exhibit 9: Gross margins to stay at 60% levels
Gross Profit (INR b)
60.9
58.3
5.8
57.1
5.2
7.4
8.1
7.7
Gross margin (%)
59.5
60.1
Exhibit 10: 9M EPS stood at INR52/share
EPS (INR/sh)
13.5
10.9
15.4
20.6
15.8
Source: Company, MOSL
Source: Company, MOSL
Exhibit 11: Revenues to grow at 24% CAGR
Revenue (INR b)
Exhibit 12: Chronic to drive India growth
India business (INR b)
16.9
20.2
25.0
31.3
37.9
50.6
60.1
71.7
14.8
17.5
20.5
23.6
28.3
38.8
45.0
52.0
Source: Company, MOSL
Source: Company, MOSL
12 February 2016
5

Alkem Laboratories
Story in charts
Exhibit 13: US sales to be driven by new launches
US sales (INR m)
150.6
56.5
0.5
1.2
1.9
4.2
127.8
53.2
6.5
13.5
37.9
8.9
31.6
11.7
33.6
15.7
2.8
5.9
7.4
YoY Growth (%)
Exhibit 14: Increasing US sales contribution
% of sales
17.4
19.2
21.6
17.1
Source: Company, MOSL
Source: Company, MOSL
Exhibit 15: R&D expense to increase …
R&D expense (INR m)
4.3%
5.0%
4.5%
4.3%
As % of sales
5.0%
5.5%
Exhibit 16: Better business mix to drive profitability
EBITDA (INR b)
17.0
18.6
14.5
13.1
14.4
EBITDA margin (%)
16.5
17.1
18.1
1082
1570
1696
2175
3006
3914
2.9
3.8
3.6
4.1
5.4
8.3
10.3
13.0
Source: Company, MOSL
Source: Company, MOSL
Exhibit 17: Improving return ratios
RoE (%)
25.0
19.2
19.0
15.0
18.3
14.1
18.4
16.3
RoCE (%)
22.2
19.3
21.4
19.9
22.1
21.7
Exhibit 18: Earnings to grow at 31% CAGR
EPS (INR/sh)
24.7
34.0
32.1
36.4
38.7
61.7
71.4
87.5
Source: Company, MOSL
Source: Company, MOSL
12 February 2016
6

Alkem Laboratories
Financials and Valuations
Income Statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Min. Int. & Assoc. Share
Reported PAT
Adjusted PAT
Change (%)
2011
16,908
0.0
2,866
17.0
274
2,592
412
1,134
0
3,314
356
10.7
2
2,956
2,956
0.0
2011
120
14,217
14,337
18
9,094
253
23,702
4,885
0
2,042
538
21,052
2,509
1,710
9,898
6,935
4,816
2,558
2,258
16,237
23,702
2012
20,156
19.2
3,752
18.6
290
3,462
581
1,453
0
4,334
275
6.4
-7
4,065
4,065
37.5
2012
120
18,081
18,201
2
10,048
357
28,607
6,741
0
2,451
3,227
22,239
3,849
2,466
5,138
10,785
6,050
3,622
2,428
16,189
28,607
2013
24,952
23.8
3,625
14.5
398
3,227
882
1,672
0
4,016
180
4.5
-2
3,838
3,838
-5.6
2013
120
21,654
21,773
0
15,485
487
37,745
8,964
0
1,758
4,776
27,202
5,540
3,182
9,955
8,526
4,955
4,049
906
22,247
37,745
2014
31,260
25.3
4,100
13.1
523
3,578
931
1,653
0
4,300
-54
-1.2
0
4,353
4,353
13.4
2014
120
25,730
25,850
0
11,284
609
37,743
9,797
0
1,903
5,880
25,414
6,203
3,669
2,063
13,478
5,251
4,325
926
20,163
37,743
2015
37,887
21.2
5,445
14.4
703
4,742
811
1,810
-574
5,167
542
10.5
0
4,625
5,139
18.1
2015
239
29,752
29,991
857
13,059
964
44,870
11,429
0
3,421
4,808
33,008
7,842
5,271
7,908
11,987
7,796
6,286
1,510
25,212
44,870
2016E
50,591
33.5
8,955
17.7
1,025
7,930
744
1,539
0
8,724
1,134
13.0
145
7,445
7,445
44.9
2016E
239
36,323
36,562
857
13,059
964
51,441
11,655
1,250
3,421
4,808
41,121
10,065
7,038
9,710
14,308
10,813
8,154
2,659
30,308
51,441
2017E
60,119
18.8
10,401
17.3
1,141
9,260
653
1,524
0
10,131
1,520
15.0
162
8,449
8,449
13.5
2017E
239
43,070
43,309
857
13,059
964
58,188
12,639
1,375
3,421
4,808
49,496
12,019
8,364
13,064
16,050
13,550
9,724
3,826
35,946
58,188
(INR Million)
2018E
71,688
19.2
13,147
18.3
1,242
11,906
653
1,455
0
12,708
2,059
16.2
184
10,466
10,466
23.9
Balance Sheet
Y/E Mar
Share Capital
Reserves
Net Worth
Minority Interest
Debt
Deferred Tax
Total Capital Employed
Net Fixed Assets
Capital WIP
Goodwill on consolidation
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
(INR Million)
2018E
239
51,179
51,418
857
13,059
964
66,298
13,623
1,400
3,421
4,808
59,421
14,151
9,973
17,134
18,164
16,375
11,489
4,887
43,046
66,298
12 February 2016
7

Alkem Laboratories
Financials and Valuations
Ratios
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2011
24.7
27.0
119.9
1.5
7.1
0.0
0.0
0.0
0.0
0.0
0.1
41.2
31.8
0.7
36
54
36
-0.1
2011
2,866
155
-992
-666
116
1,479
-1,203
276
-323
1,956
430
0
8,201
-412
0
7,789
9,698
200
9,898
2012
34.0
36.4
152.2
2.0
6.8
0.0
0.0
0.0
0.0
0.0
0.2
25.0
19.0
0.7
43
70
50
0.1
2012
3,752
243
-1,448
-966
10
1,591
-2,481
-890
-2,612
-1,147
-6,240
0
646
-547
-210
-111
-4,760
9,898
5,138
2013
32.1
35.4
182.1
2.0
7.2
0.0
0.0
0.0
0.0
0.0
0.2
19.2
15.0
0.7
45
81
42
0.0
2013
3,625
59
-1,827
-1,102
26
781
-2,335
-1,554
-281
3,095
480
0
4,870
-797
-517
3,556
4,816
5,138
9,955
2014
36.4
40.8
216.2
2.0
6.4
35.1
31.3
5.9
5.2
39.5
0.2
18.3
14.1
0.8
41
72
36
0.1
2014
4,100
167
-364
-1,111
107
2,900
-1,004
1,897
25
-3,814
-4,792
0
-4,732
-914
-354
-6,000
-7,892
9,955
2,063
2015
38.7
48.9
250.9
4.0
12.3
33.0
26.1
5.1
4.2
29.0
0.3
18.4
16.3
0.8
49
76
45
0.0
2015
5,445
-796
-963
-1,056
652
3,281
-1,354
1,928
1,028
3,406
3,081
0
871
-793
-596
-518
5,845
2,063
7,908
2016E
62.3
70.8
305.8
6.2
11.7
20.5
18.0
4.2
3.1
17.4
0.5
22.4
20.4
1.0
49
73
43
0.0
2016E
8,955
0
-3,294
-1,134
0
4,526
-2,500
2,026
0
1,539
-961
0
0
-744
-1,018
-1,763
1,802
7,908
9,710
2017E
70.7
80.2
362.3
12.0
20.1
18.1
15.9
3.5
2.5
14.7
0.9
21.2
20.3
1.0
49
73
43
-0.1
2017E
10,401
0
-2,284
-1,520
0
6,597
-2,250
4,347
0
1,524
-726
0
0
-653
-1,865
-2,518
3,354
9,710
13,064
2018E
87.5
97.9
430.1
16.6
22.5
14.6
13.0
3.0
2.1
11.3
1.3
22.1
22.1
1.1
49
72
42
-0.2
Cash Flow Statement
Y/E Mar
Adjusted EBITDA
Non cash opr. exp (inc)
(Inc)/Dec in Wkg. Cap.
Tax Paid
Other operating activities
CF from Op. Activity
(Inc)/Dec in FA & CWIP
Free cash flows
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax) & Others
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
(INR Million)
2018E
13,147
0
-3,031
-2,059
0
8,058
-2,250
5,808
0
1,455
-795
0
0
-653
-2,540
-3,193
4,070
13,064
17,134
12 February 2016
8

Alkem Laboratories
NOTES
12 February 2016
9

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