Alkem Laboratories
BSE SENSEX
26,515
S&P CNX
8,171
12 December 2016
Update
| Sector:
Healthcare
CMP: INR1,628
TP: INR1,800 (11%)
Neutral
Ankleshwar API facility recieves 483 observations
Unlikely to disrupt supplies; Daman resolution key
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
ALKEM IN
119.6
1853/1175
1/18/-
202.2
3.0
386.1
33.12
US FDA inspected Alkem’s Ankleshwar formulation facility over September 5-9, 2016,
following which it has issued form-483 with three observations.
The Ankleshwar plant currently supplies two API products only, which constitute less
than 2% of Alkem’s US sales. However, this plant is an API source for a few future
fillings including para-IVs.
We do not expect any meaningful supply disruption due to 483s pertaining to the
Ankleshwar plant. Resolution of the 483s pertaining to the Daman facility is,
however, key.
Early resolution of Daman 483 critical
Financials Snapshot (INR b)
2016 2017E 2018E
Y/E Mar
Sales
49.9
58.3
68.0
EBITDA
8.5
10.5
12.5
NP
7.7
9.2
10.1
EPS (INR)
64.7
76.7
84.5
EPS Gr. (%)
67.4
18.5
10.2
BV/Sh. (INR)
293.0 354.3 419.8
P/E (x)
27.9
23.5
21.3
P/BV (x)
6.2
5.1
4.3
RoE (%)
23.8
23.7
21.8
RoCE (%)
17.6
21.6
20.3
Shareholding pattern (%)
As On
Sep-16 Jun-16 Mar-16
The Daman facility accounted for ~30% of Alkem’s FY16 US revenue (~6% of
total revenue). Additionally, ~50% of Alkem’s pending ANDA pipeline has been
filed from its Daman facility. Accordingly, it is essential for the company to
quickly resolve the form-483 observations pertaining to the Daman facility.
At this stage, these are just observations and should not have any immediate
impact on business. There are multiple approvals due from the Daman facility
over the next six months. If the observations are not critical in nature, Alkem
should get final approval.
Notably, Alkem has received a tentative approval from this plant. We believe a
final approval from this facility will help allay FDA-related concerns.
The Taloja bio-equivalence center was the latest facility to receive US FDA
clearance. Alkem’s other key facility in Baddi was inspected by US FDA in
2HFY15 and has received EIR.
Near-term impact of demonetization coupled with seasonality factor will have
a negative impact on domestic sales in 2HFY17. According to AIOCD, secondary
sales for Alkem grew ~10% YoY in October and 14% YoY in November against
~16% moving annual turnover (MAT) growth as at the end of November 2016.
We assume >15% decline in domestic sales in 2HFY17 v/s 1HFY17.
Promoter
Public
Others
66.9
33.1
-
66.9
33.1
-
66.8
33.2
-
Domestic business in 2H to be weak
Stock Performance (1-year)
Alkem Lab
Sensex - Rebased
2,200
1,850
1,500
1,150
800
Recent stock run-up coupled with US FDA related uncertainty provides
limited room for upside
US business achieved breakeven in FY16; so, contribution to profits remains
negligible. However, going forward, US would act as a catalyst on the back of
~50 pending ANDAs. A warning letter situation will impact our FY18E EPS
estimate by 6-8% (low probability event in our view).
We continue to believe that Alkem is the best way to play the domestic growth
story (~72% of revenue and >90% of EBITDA came from India in FY16).
However, given the recent run-up in stock of >35% in the last five months, re-
rating story has largely played out.
Kumar Saurabh
(Kumar.Saurabh@MotilalOswal.com); +91 22 6129 1519
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.