Alkem Laboratories
BSE SENSEX
28,152
S&P CNX
8,672
13 August 2016
Q1FY17 Results Update | Sector: Healthcare
CMP: INR1,561 TP: INR1,800(+15%)
Buy
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Strong overall performance; Margins continued to surprise positively
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Free float (%)
ALKEM IN
119.6
186.6 / 2.8
1,626/1,175
10/-4/-
426
33.1
Financials & Valuations (INR b)
Y/E Mar
2016 2017E 2018E
Sales
49.9
60.1
71.8
EBITDA
8.5
10.4
13.3
NP
7.7
8.9
10.3
EPS (INR)
64.7
74.8
85.8
EPS Gr. (%)
67.4
15.6
14.6
BV/Sh. (INR)
293.0 352.8 419.3
RoE (%)
23.8
23.2
22.2
RoCE (%)
17.6
21.0
20.5
P/E (x)
20.8
18.0
15.7
P/BV (x)
4.6
3.8
3.2
Estimate change
TP change
Rating change
Alkem’s net sales for 1QFY17 stood at INR14.6b, up 21% YoY (beat of 3.5%),
driven by a strong domestic performance (up 22% YoY) and steady growth in
US (up 12% YoY). Despite regulatory headwinds in domestic markets and
increase in R&D to ~5.4% (up 180bps YoY), EBITDA margin was at record high
levels at 18.6% (up 150 bps YoY & ~300bps above our est). Strong margin
performance was driven by robust growth in India (most profitable division for
the company). PAT came at INR2.4b (up 19% YoY) and was positively impacted
by lower tax rate at ~9% in 1Q.
Domestic business’ robust growth to continue despite regulatory headwinds:
Alkem’s domestic business grew by an impressive 22% YoY. 1Q FY16 domestic
revenues were suppressed (part of it got deferred to 2Q) due to change in
accounting treatment (revenue recognition changed from invoicing to
shipment). Even after normalizing impact of this, domestic business grew at a
robust pace of ~15-16% YoY in 1Q FY17 (vs reported growth of ~22% YoY).
Going forward, we believe that a consistent outperformance in established
therapies, coupled with improvement in productivity of the company’s sales
force in the chronic segment will help partially offset the impact of regulatory
headwinds (we estimate ~16% CAGR till FY18E).
Strong launch momentum in US to continue:
US sales came in at INR2.7b (up
~12% YoY). We expect a ramp-up in sales momentum going forward on the
back of 3 recently launched ANDAs and 5-6 launches due in rest of FY17
(including Benicar in 2Q and Crestor in Nov-16).
Key concall takeaways:
a) Domestic business to grow at 15-16% in FY17; b) US
business can potentially double by FY19; c) Taloja plant cleared; Daman and
Ankleshwar US FDA inspection due in FY17; d) Capex for FY17 to be ~INR5b; e)
Tax rate to be ~12-15% in FY17; f) Half of price control impact to come in 2Q.
Valuation attractive; sticky profit provides comfort:
We believe that the stock
will witness a re-rating, going forward, given the company’s strong India
presence, net cash balance sheet, operating free cash generation and
improving return ratios (ROIC to improve to ~24% by FY18E vs. 16% in FY15).
Our target price of INR1,800 for Alkem is based on 21x FY18E PER (as compared
to our earlier target price of INR1,700 @ 20x FY18E PER).
(INR Million)
FY17E
2Q
3Q
15,187 15,297
12.0
20.0
2,582
2,600
17.0
17.0
280
295
347
287
2,649
2,592
2,649
425
16.0
2,224
30
2,194
2,194
-11.0
2,592
345
13.3
2,247
30
2,217
2,217
18.4
FY16
4Q
15,057
31.8
2,507
16.7
332
475
2,650
2,650
477
18.0
2,172
22
2,150
2,150
36.3
49,915
31.7
8,482
17.0
1,006
975
8,451
0
8,451
1,606
19.0
6,845
114
6,731
0
6,731
45.5
FY17E
60,119
20.4
10,401
17.3
1,137
1,290
10,554
0
10,554
1,477
14.0
9,076
127
8,949
0
8,949
32.9
FY17E
1QE
14,084
16.0
2,155
15.3
265
250
2,140
2,140
350
16.4
1,790
30
1,760
1,760
-3.4
Var
%
3.5
25.8
Quarterly Performance (Consolidated)
Y/E March
Net Revenues
YoY Cha nge (%)
EBITDA
Ma rgi ns (%)
De pre ci a ti on
Ne t Othe r Income
PBT before EO Exp
EO Exp/(Inc)
PBT
Ta x
Ra te (%)
PAT (pre Minority Interest)
Mi nori ty Inte re s t
Reported PAT
YoY Cha nge (%)
Adj Net Profit
YoY Cha nge (%)
1Q
12,075
2,062
17.1
206
251
2,107
2,107
68
3.2
2,039
28
2,011
2,011
FY16
2Q
3Q
13,560 12,747
29.0
2,545
2,354
18.8
18.5
277
244
334
161
2,602
2,270
2,602
91
3.5
2,511
45
2,466
2,466
2,270
345
15.2
1,925
35
1,889
17.0
1,872
17.0
4Q
11,426
25.3
1,580
13.8
260
319
1,639
1,639
1,066
65.0
573
6
567
-56.3
1,577
21.4
1Q
14,579
20.7
2,711
18.6
230
181
2,663
2,663
230
8.6
2,433
45
2,388
2,388
18.7
24.4
35.7
35.7
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 6129 1519
Gaurav Tinani
(Gaurav.Tinani@motilaloswal.com); +91 22 6129 1552

Alkem Laboratories
1Q 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
R&D expense
% 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
1Q FY16
12,075
4,745
7,331
60.7
2,282
19
435
3.6
2,551
21
2,062
17.1
206
1,856
225
475
2,107
68
3
2,039
28
2,011
4Q FY16
11,426
4,279
7,147
62.6
2,066
18
870
7.6
2,631
23
1,580
13.8
260
1,320
107
426
1,639
1,066
65
573
6
567
1Q FY17
14,579
5,789
8,790
60.3
2,541
17
788
5.4
2,750
19
2,711
18.6
230
2,482
100
281
2,663
230
9
2,433
45
2,388
%YoY
20.7
22.0
19.9
(41)bp
11.3
(147)bp
81.3
181 bp
7.8
(226)bp
31.5
152 bp
11.4
33.7
-55.7
-41.0
26.4
237.2
19.3
%QoQ
27.6
35.3
23.0
(226)bp
23.0
(65)bp
-9.4
(221)bp
4.5
(416)bp
71.5
476 bp
-11.7
87.9
-7.2
-34.1
62.5
-78.5
324.5
651.7
321.0
1Q FY17E
14,084
5,845
8,239
58.5
2,422
17
-
3,662
26
2,155
15.3
265
1,890
100
350
2,140
350
16
1,790
30
1,760
% VAR
3.5
6.7
179 bp
25.8
330 bp
31.3
24.4
35.9
18.7
35.7
Source: Company, MOSL
Key highlights from earnings call
India business (75% of sales)
Alkem’s India sales reported INR10.8b sales in 1QFY16, exhibiting 22%YoY growth.
However 1QFY16 domestic revenues were suppressed (part of it got deferred to 2Q)
due to change in accounting treatment (revenue recognition changed from invoicing
to shipment). Post normalizing impact of this, domestic revenue growth stood at
~15-16% YoY in 1Q FY17.
Impact of regulatory actions in domestic market
Expanded NLEM list, WPI led price cuts and NPPA led downward price revisions
to adversely impact domestic sales growth by ~4-5%. Half of this impact was
witnessed in 1QFY16, and the remainder will be evident in 2QFY17.
FDC ban impact- Currently the central government’s ban order has been stayed
in court and the final verdict is pending. However If the decision does not go in
favor of Alkem, it will have adversely impact ~3-4% of sales. Management is
already working on substitute products and the real impact may not be to this
extent.
Alkem exhibited robust growth in emerging therapies of Neuro/CNS, Cardiac and
Anti-Diabetic. Secondary sales growth for the quarter was at 10.6% (as per IMS).
Alkem continued its outperformance in Anti-infective and Gastro-Intestinal, Pain
and Vitamin therapies.
Management expects India business to deliver growth of ~15-16% YoY in FY17
despite regulatory headwinds.
13 August 2016
2

Alkem Laboratories
Exhibit 2: India business grew 22.8% in 4Q
India sales (INR m)
Exhibit 3: India business exhibited 30% YoY growth in FY16
India sales (INR m)
8827
10803
20,817
27,613
Source: Company, MOSL
Source: Company, MOSL
Exhibit 4: Alkem is outperforming in all major therapies
Source: Company, MOSL
US business (19% of sales)
US sales grew 12%YoY to INR INR2.7b, driven by sustained market share in existing
products. In 1QFY17, Alkem received tentative approvals for 3 ANDAs from US FDA
and launched 3 ANDA products towards end of 1Q FY17. Though these are small
opportunities, impact of these will be visible from 2QFY17. Apart from these 3
launches, another 4-5 launches expected in rest of FY17. gCrestor launch expected
in Nov-16. Total product launches to be ~8-10 in FY17.
Additionally, the company expects to file 12-15 ANDA’s through FY17. Topical filings
expected to commence in 2HFY17. Cumulatively, it has filed 76 ANDAs and received
26 approvals till date. Total pending approvals stands at 50. Management expects
3/4
th
of pending 50 ANDAs to be approved by FY19. This could help potentially
double the US revenue run rate from ~USD150m in FY16 to ~USD300m by FY19. In
addition, it also has 10 in licensed products.
13 August 2016
3

Alkem Laboratories
Exhibit 5: US business grew 11.8% in 1QFY1776
US sales (INR m)
Exhibit 6: US business exhibited 40% YoY growth in FY16
US sales (INR m)
2432
2719
5046
7473
Source: Company, MOSL
Source: Company, MOSL
Exhibit 7: Cumulative US ANDA filings
76
Exhibit 8: 64% of pending ANDA’s are Para IVs
US Filings
Total ANDAs filed
Para IV (including FTFs)
NDAs
# Nos.
76
32
1
Source: Company, MOSL
43
26
7
Final Approvals
Tentative
Approvals
Pending Total
Total
Source: Company, MOSL
Other international business (6% of sales)
Other international business grew 24%YoY to INR871mn. Growth was primarily
driven by Australia, Chile and Kazakhstan markets. Alkem has presence in 50
countries.
Other highlights
Revenue R&D expenses for the quarter were at INR788m (5.4% of sales),
compared to INR435m (3.6% of sales) in 1QFY16
Bioequivalence facility at Taloja, was fully cleared from all major regulatory
bodies including (US FDA, UK MHRA, EMA)
Regulatory inspection of Daman Formulations facility and Ankleshwar API facility
due in FY17.
Biosimilar launches will start from India in FY18
Tax rate for full year expected to be ~12-15% (~9% in 1Q)
Capex for full year to be ~INR5b (~INR800m in 1Q).
Cash on books stand at INR7.6b at end of 1QFY17.
13 August 2016
4

Alkem Laboratories
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 50 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 exhibit
15%CAGR over next two years. It will be supported by 20% CAGR in revenues and
150bp margin expansion over FY16-18E. Our target price of INR 1,800 discounts
ALKEM’s FY18E EPS at 20x PE multiple which is at 10% discount to sector average
At CMP, ALKEM is trading at 21x FY17E and 18x FY18E, which is 20% 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 15% CAGR backed by 150bp margin expansion over FY16-
18E
Improvement in RoCE from 17.6% now to 21% by FY18E
Strong free cash flow generation of INR8b over FY16-18E
Key catalysts to drive stock’s performance over the medium term are:
Improvement in US profitability (20% 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:
Expansion of 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 9: Our TP of INR1,800 is based on 21x FY18E PER (10% discount to sector avg)
FY18E EPS
85.8
Target multiples
21.0
Target Price
1,800
% Upside
16
Source: Company, MOSL
13 August 2016
5

Alkem Laboratories
Story in charts
Exhibit 10: Overall sales grew 21% YoY to INR14.6b in 1Q
Sales (INR b)
17.3
Exhibit 11: EBITDA margin improved with better business
mix
EBITDA (INR b)
14.5
17.1
18.8
EBITDA margin (%)
18.5
13.8
18.6
9.9
9.1
12.1
13.6
12.7
11.4
14.6
1.7
1.3
2.1
2.5
2.4
1.6
2.7
Source: Company, MOSL
Source: Company, MOSL
Exhibit 12: Gross margins to stay at 60% levels
Gross Profit (INR b)
60.7
58.3
5.8
57.1
5.2
7.3
8.1
7.7
7.1
8.8
Gross margin (%)
62.6
59.5
60.1
60.3
Exhibit 13: 1Q reported EPS stood at INR20/share
EPS (INR/sh)
13.5
10.9
16.8
20.6
15.8
4.7
20.0
Source: Company, MOSL
Source: Company, MOSL
Exhibit 14: Revenues to exhibit 20% CAGR over FY16-18E
Revenue (INR b)
Exhibit 15: Chronic to drive India growth
India business (INR b)
16.9
20.2
25.0
31.3
37.9
49.9
60.1
71.8
14.8
17.5
20.5
23.6
28.3
38.8
45.0
52.0
Source: Company, MOSL
Source: Company, MOSL
13 August 2016
6

Alkem Laboratories
Story in charts
Exhibit 16: US sales to be driven by new launches
US sales (INR m)
150.6
127.8
56.5
53.2
13.5
37.9
31.6
11.7
33.6
2.8
0.5
1.2
1.9
4.2
6.5
8.9
15.7
5.9
7.4
YoY Growth (%)
Exhibit 17: Increasing US sales contribution
% of sales
19.2
21.4
17.1
17.4
Source: Company, MOSL
Source: Company, MOSL
Exhibit 18: 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 19: Better business mix to drive profitability
EBITDA (INR b)
17.0
18.6
14.5
13.1
14.4
EBITDA margin (%)
17.0
17.3
18.5
1082
1570
1696
2146
3006
3922
2.9
3.8
3.6
4.1
5.4
8.5
10.4
13.3
Source: Company, MOSL
Source: Company, MOSL
Exhibit 20: Improving return ratios
RoE (%)
25.0
19.2
17.8
18.3
18.4
14.6
17.6
21.0
RoCE (%)
23.8
23.2
22.2
20.5
Exhibit 21: Earnings to grow at 31% CAGR
EPS (INR/sh)
14.3
14.2
24.7
34.0
32.1
36.4
38.7
64.7
74.8
85.8
Source: Company, MOSL
Source: Company, MOSL
13 August 2016
7

Alkem Laboratories
Financials and Valuations
Consolidated - Income Statement
Y/E March
Total Income from Operations
Change (%)
EBITDA
Margin (%)
Depreciation
EBIT
Int. and Finance Charges
Other Income
PBT bef. EO Exp.
EO Items
PBT after EO Exp.
Current Tax
Deferred Tax
Tax Rate (%)
Less: Mionrity Interest
Reported PAT
Adjusted PAT
Change (%)
Margin (%)
FY11
16,908
NA
2,866
17.0
274
2,592
412
1,134
3,314
0
3,314
328
28
10.7
2
2,956
2,956
NA
17.5
FY12
20,156
19.2
3,752
18.6
290
3,462
581
1,453
4,334
0
4,334
172
104
6.4
-7
4,065
4,065
37.5
20.2
FY13
24,952
23.8
3,625
14.5
398
3,227
882
1,672
4,016
0
4,016
42
137
4.5
-2
3,838
3,838
-5.6
15.4
FY14
31,260
25.3
4,100
13.1
523
3,578
931
1,653
4,300
0
4,300
25
-79
-1.2
0
4,353
4,353
13.4
13.9
FY15
37,887
21.2
5,445
14.4
703
4,742
811
1,810
5,741
-574
5,167
85
457
10.5
0
4,625
5,139
18.1
13.6
FY16
49,915
31.7
8,482
17.0
1,006
7,477
671
1,645
8,451
0
8,451
1,606
0
19.0
114
6,731
7,741
50.6
15.5
(INR Million)
FY17E
60,119
20.4
10,401
17.3
1,137
9,264
294
1,584
10,554
0
10,554
1,477
0
14.0
127
8,949
8,949
15.6
14.9
FY18E
71,829
19.5
13,317
18.5
1,339
11,978
294
1,081
12,765
0
12,765
2,361
0
18.5
144
10,259
10,259
14.6
14.3
Consolidated - Balance Sheet
Y/E March
Equity Share Capital
Total Reserves
Net Worth
Minority Interest
Deferred Tax Liabilities
Total Loans
Capital Employed
Net Fixed Assets
Goodwill on Consolidation
Capital WIP
Total Investments
Curr. Assets, Loans&Adv.
Inventory
Account Receivables
Cash and Bank Balance
Loans and Advances
Curr. Liability & Prov.
Account Payables
Other Current Liabilities
Provisions
Net Current Assets
Deferred Tax assets
Appl. of Funds
E: MOSL Estimates
FY11
120
14,217
14,337
18
253
9,094
23,702
4,885
2,042
0
538
21,052
2,509
1,710
9,898
6,935
4,816
1,677
881
2,258
16,237
0
23,702
FY12
120
18,081
18,201
2
362
10,048
28,612
6,741
2,451
0
3,227
22,239
3,849
2,466
5,138
10,785
6,050
2,760
862
2,428
16,189
4
28,612
FY13
120
21,654
21,773
0
506
15,485
37,765
8,964
1,758
0
4,776
27,202
5,540
3,182
9,955
8,526
4,955
2,876
1,173
906
22,247
20
37,765
FY14
120
25,730
25,850
0
781
11,284
37,915
9,797
1,903
0
5,880
25,414
6,203
3,669
2,063
13,478
5,251
3,057
1,267
926
20,163
172
37,915
FY15
239
29,752
29,991
857
1,256
13,059
45,162
11,429
3,421
0
4,808
33,008
7,842
5,271
7,908
11,987
7,796
4,619
1,667
1,510
25,212
292
45,162
FY16
239
34,787
35,027
965
1,027
5,885
42,904
11,517
3,531
1,093
4,220
33,944
9,094
5,645
7,964
11,241
11,482
5,793
3,694
1,995
22,462
82
42,904
(INR Million)
FY17E
239
41,933
42,172
965
1,027
5,885
50,050
13,754
3,531
2,719
4,220
39,395
12,019
8,364
4,790
14,223
13,651
7,079
2,645
3,927
25,745
82
50,050
FY18E
239
49,883
50,122
965
1,027
5,885
57,999
16,340
3,531
2,294
4,220
47,864
14,144
9,993
7,364
16,363
16,331
8,331
3,160
4,840
31,533
82
58,000
13 August 2016
8

Alkem Laboratories
Financials and Valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout (%)
Valuation (x)
P/E
Cash P/E
P/BV
EV/Sales
EV/EBITDA
Dividend Yield (%)
FCF per share
Return Ratios (%)
RoE
RoCE
RoIC
Working Capital Ratios
Asset Turnover (x)
Inventory (Days)
Debtor (Days)
Creditor (Days)
Leverage Ratio (x)
Debt/Equity
FY11
24.7
27.0
120
1.5
7.1
FY12
34.0
36.4
152
2.0
6.8
FY13
32.1
35.4
182
2.0
7.2
FY14
36.4
40.8
216
2.0
6.4
42.9
38.3
7.2
6.3
47.8
0.1
15.9
18.3
14.2
13.7
0.8
72
41
36
0.4
FY15
38.7
48.9
251
4.0
12.3
40.4
31.9
6.2
5.1
35.2
0.3
16.1
18.4
14.6
13.6
0.8
76
49
45
0.4
FY16
64.7
73.2
293
5.6
11.7
24.1
21.3
5.3
3.7
21.8
0.4
55.0
23.8
17.6
19.5
1.2
67
40
42
0.2
FY17E
74.8
84.4
353
12.7
20.1
20.9
18.5
4.4
3.1
18.0
0.8
-21.2
23.2
21.0
23.4
1.2
73
49
43
0.1
FY18E
85.8
97.0
419
16.3
22.5
18.2
16.1
3.7
2.6
13.9
1.0
35.5
22.2
20.5
23.7
1.2
72
49
42
0.1
0.1
2.3
20.6
14.2
17.4
0.7
54
36
36
0.6
0.1
-7.4
25.0
17.8
19.3
0.7
70
43
50
0.6
0.1
-13.0
19.2
14.3
14.2
0.7
81
45
42
0.7
Consolidated - Cash Flow Statement
Y/E March
OP/(Loss) before Tax
Depreciation
Interest & Finance Charges
Direct Taxes Paid
(Inc)/Dec in WC
CF from Operations
Others
CF from Operating incl EO
(Inc)/Dec in FA
Free Cash Flow
(Pur)/Sale of Investments
Others
CF from Investments
Issue of Shares
Inc/(Dec) in Debt
Interest Paid
Dividend Paid
Others
CF from Fin. Activity
Inc/Dec of Cash
Opening Balance
Closing Balance
FY11
3,314
274
-567
-666
-992
1,363
116
1,479
-1,203
276
-323
1,956
430
0
8,201
-412
0
0
7,789
9,698
200
9,898
FY12
4,334
290
-629
-966
-1,448
1,581
10
1,591
-2,481
-890
-2,612
-1,147
-6,240
0
646
-547
-209
-1
-111
-4,760
9,898
5,138
FY13
4,016
398
-730
-1,102
-1,827
754
26
780
-2,335
-1,554
-281
3,095
480
0
4,870
-797
-517
0
3,556
4,816
5,138
9,955
FY14
4,300
523
-555
-1,111
-364
2,793
107
2,900
-1,004
1,897
25
-3,814
-4,792
0
-4,732
-914
-319
-35
-6,000
-7,892
9,955
2,063
FY15
5,142
703
-1,196
-1,056
-963
2,630
652
3,281
-1,354
1,928
1,028
3,406
3,081
0
871
-793
-567
-29
-518
5,845
2,063
7,908
FY16
8,451
1,006
-975
-1,606
1,992
8,868
0
8,868
-2,296
6,572
588
1,645
-63
0
-7,174
-671
-790
-114
-8,748
57
7,908
7,965
(INR Million)
FY17E
10,554
1,137
-1,290
-1,477
-6,457
2,466
0
2,466
-5,000
-2,534
0
1,584
-3,416
0
0
-294
-1,803
-127
-2,224
-3,175
7,965
4,790
FY18E
12,765
1,339
-787
-2,361
-3,215
7,741
0
7,741
-3,500
4,241
0
1,081
-2,419
0
0
-294
-2,310
-144
-2,748
2,574
4,790
7,364
13 August 2016
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