Alkem Labs Q2 Results Review - Strong Operating Leverage Drives Profitability: Motilal Oswal

Motilal Oswal Report

Alkem Laboratories Ltd. delivered a strong beat on Q2 FY24 earnings. An improved performance in the U.S. generics and moderating raw material costs led the sharp improvement in operating margins for the quarter. Given the surplus cash, Alkem is looking for inorganic opportunities in chronic therapies and the consumer healthcare space.

We raise our earnings estimates by 21%/11% for FY24/FY25 factoring in:

1. increased share of relatively high-margin products in the U.S. generics segment,

2. benefits from reduced raw material costs, and

3. reduction in effective tax rate.

We value Alkem Labs at 22 times 12 months forward earnings to arrive at our target price of Rs 3,920.

We expect 28% earnings compound annual growth rate over FY23-25 on the back of 11%/10% sales CAGR in the U.S. generics/domestic formulation segments and 350 basis points margin expansion.

Even the price/earning multiple assigned is largely in-line with its five-year average. Considering these factors, we believe the current valuation adequately factors in the earnings upside. Reiterate 'Neutral'.

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