Alkem Labs - Focus Remains On Domestic Formulation, U.S.; Valuations Priced In: Motilal Oswal

Motilal Oswal Report

Alkem Laboratories Ltd. is one of the pharmaceutical companies with the highest proportion of (66% of total sales 9M FY24) sales from the domestic formulation segment.

While it continues to outperform the industry in the DF segment, the outlook is dependent on the variability of season and acute infections as it derives 82% of DF sales from acute therapies.

After muted performance in the U.S. generics business (23% of sales) over FY18- 23, there has been some recovery in 9M FY24. The sound compliance trackrecord and a healthy product pipeline would enable 6% sales compound annual growth rate in constant currency terms to $394 million over FY24-26.

Further, Alkem Labs is focusing on the biosimilar and contract development manufacturing organisation business through Enzene biosciences and expects to reach breakeven in FY25.

Over FY18-23, Alkem Labs has delivered 13%/10%/12% revenue/Ebitda/profit after tax compound annual growth rate. However, return on equity decreased from 15% in FY18 to 14% in FY23.

Considering 9% earnings CAGR and return ratio stabilising at ~18% over FY24- 26, we value Alkem Labs at 25 times 12 months (in line with its 10-year average and 17% discount to sector average) forward earnings to arrive at a target price of Rs 5160. We believe the current valuation and ~65% stock appreciation over the past one year adequately factor the upside in earnings.

We reiterate our Neutral stance on the stock.

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