Alkem Laboratories: A bargain-buy in the pricey market…

Alkem Laboratories
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Major equity indices such as BSE Sensex and CNX Nifty are hovering near their all-time highs. But do you know that plenty of stocks haven’t participated in the on-going rally despite their improved fundamentals?

If you are struggling to find a good bargain in this pricey market, your search is likely to end here.

Alkem Laboratories is one such stock.

It has outperformed BSE Sensex for a good part of the last three years but has been underperforming, of late. We expect this stock to generate double-digit compounded annualised returns in the next three years.

Alkem is a prominent player in the acute therapy segment and ranks among the top 5 players in India. It holds 11.2% market share in the anti-infective market, a subset acute therapy segment. Similarly, it holds 5.9% and 5.5% market share in the gastro-intestinal market and pain management segment, respectively.

The company has a comprehensive portfolio of over 750 brands and has a pan-India distribution network. The Company shares excellent and long-lasting relationships with specialist doctors. It’s noteworthy that nearly 72% of doctors prescribe Alkem products.

Value of Rs 100 invested in Alkem…

Alkem Laboratories

(Source: ACE Equity)

Alkem is one of India’s top 10 pharmaceutical companies with regard to domestic sales. In FY 2018, it clocked a revenue of Rs 6,431 crore and PAT (Profit After Tax) of Rs 638 crore. The Company derived 71% of revenue from India, 22% from the US markets and 7% from the rest of the world.

We expect a recurring capex of Rs. 300-400 crore per annum over the period FY18-22 to cater to the upgradation of the Sikkim facility and ramp up of the Indore R&D facility.

Earlier, Alkem has raised debt to cater to the high capex requirement. Going forward, with the reduction in capex we expect Alkem to become virtually debt free.

Stable growth ahead…Indian Pharmaceutical Market

The Company’s improving prospects in the US, focus on the chronic therapy segment in the domestic market and increased R&D spends are likely to contribute significantly in the Company’s future growth.

The acute therapy segment accounts for 80% of its top line. However, chronic therapy segment, which includes therapeutic areas such as diabetology, Central Nervous System (CNS), cardiology and dermatology, is expected to grow faster.

At a 13% compounded annualised rate, we expect the Company to achieve the top line of Rs 10,309 crore by FY 2022. During the same period, the PAT might grow even faster at 22%, to reach Rs 1,398 crore. On account of lower interest and tax outgo, we expect margins to improve by 360 basis points.

We recently initiated coverage on Alkem Laboratories with a BUY recommendation at Rs 1,698 for a target of 2,306.

Before you invest in the stock, please read the entire report and thoroughly understand the risk factors.

For more information access our full research report here.

Our research head, Vinit Bolinjkar has also discussed Alkem Laboratories with our viewers in Weekends with Ventura.

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