Julius Baer downgrades Alkem Labs to ‘hold’ on soft Q2 results; stock down 15% this year

Domestic brokerage house Julius Baer (JB) has downgraded Alkem Labs to 'hold' from 'buy' on the back of soft September quarter (Q2FY23) results. It has a target price of ₹3,400, indicating an upside of 10 percent from the current market price.

"With limited upside to our unchanged target of ₹3,400 (22.5x September 2024E EPS), we downgrade Alkem to Hold, and would look for better opportunities or a distinct improvement in the margin profile," it said.

The stock has lost 7 percent in the last 1 year as against a 4 percent decline in Nifty Pharma. The stock has shed over 2 percent in November so far following a 4 percent decline in October.

In the 11 months of the year 2022 (considering November so far), the stock has given positive returns in just three months and negative in the remaining eight. It has gained 10 percent each in September and March and 7.5 percent in July. The stock lost the most in April, down 10 percent followed by August, down 8 percent. On a YTD basis, the stock has lost 15 percent.

In the September quarter, the company's revenue rose 10 percent YoY to ₹3,080 crore, led by higher domestic and non-US business, while US remained weak on persistent pricing pressure, noted the brokerage. While gross margins declined 468 bps YoY, EBITDA margin narrowed a steeper 756 bps YoY to 14.7 percent on higher staff and marketing costs, resulting in EBITDA declining 27 percent YoY to ₹450 crore, while PAT fell 39 percent YoY to ₹330 crore, it informed.

The brokerage also pointed out that Alkem’s India sales are seeing better trends, with improving demand and the company gaining market share, aided by new launches and better productivity, however, the US business remains quite patchy despite new launches, with persistent price erosion in the portfolio; this remains a key monitorable in the near term, it said.

Despite the soft quarter, the brokerage remains constructive on Alkem's longer-term prospects, with its leading position in the domestic acute segment, rising contribution from the chronic segment, the healthy pipeline for the US business, and the recent foray into biosimilars/CDMO. While the company is guiding for an improvement in EBITDA margins from next year (although lowered from their earlier targets of 20 percent), the brokerage remains watchful on the trajectory amidst the US pricing pressure and higher marketing spending.

SWOT ANALYSIS by the brokerage

Strengths

- Alkem is one of the leading and fastest-growing firms in the Indian pharma market with leadership in key acute therapies like anti-infectives, GI, pain, and vitamins.

- It has a robust product portfolio, brand-building capabilities, an extensive pan-India sales and distribution network and an experienced management team.

- It has a healthy balance sheet, aiding investments in R&D and scouting for inorganic opportunities.

Weaknesses

- The firm has a concentration risk in the domestic market due to high exposure in the acute business.

- Subdued growth in the anti-infective segment in the past couple of years is another weakness.

- The firm is a relatively late entrant to the US market, with less number of exclusive products in the pipeline.

Opportunities

- The firm has been increasing contributions from high-margin niche and complex therapeutic businesses, which should help improve profitability.

- It is well placed for gains in the US market, given its robust ANDA pipeline, with faster approval and launches, and all its facilities having regulatory clearances.

- Strategic and value-accretive acquisitions and growth opportunities (including CDMO) from areas like biosimilars.

Threats

- Regulatory changes in the domestic market, including those related to price controls.

- Rising competition in the US generics space or setbacks related to its manufacturing facilities, resulting in delays in approvals and product launches.

- Longer-than-expected impact of COVID-19 in its key product segments.

According to a Mintgenie poll, 23 analysts on average have a Hold call on the stock.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.