IPO Note | Pharmaceutical
December 7, 2015
Alkem Laboratories
AVOID
Issue Open: December 8, 2015
IPO Note - Valuation provides little comfort
Issue Close: December 10, 2015
Alkem Laboratories (Alkem) is among the largest companies in the Indian
Issue Details
formulation market, having a market share of 3.6%. The company is the fifth
largest pharmaceutical company in India by domestic sales. Currently, domestic
Face Value: `2
markets constitute around 75% of its sales; while in terms of exports, the company
Present Eq. Paid up Capital: `239cr
is at a relatively nascent stage vis-a-vis its peers. In exports (predominately US),
Offer Sale:1.28cr Shares
the company is expanding through both the inorganic and the organic route.
Alkem has 16 manufacturing units, 14 in India and 2 in the US; of which, 5 are
Post Eq. Paid up Capital: `239cr
USFDA, TGA and UK-MHRA approved.
Issue (amount): `1,311-1,350cr
Established Market Leadership in Domestic formulation market: Alkem is one of
Price Band: `1020-1050
India’s leading pharmaceutical companies in the domestic formulation market
Domestic formulations constitute around ~75% of the company’s overall sales. The
Post-issue implied mkt. cap `12,196cr*-
12,554cr**
company ranks fifth in the Indian pharmaceutical market. Its most significant therapeutic
Note:*at Lower price band and **Upper price band
areas accounted for 80.7% of its total sales in the domestic market in FY2015. Its revenues
from domestic operations grew at a CAGR of 17.6% over FY2011 to FY2015.
Expanding in export markets: Although a late entrant in the export markets,
~25% of Alkem’s sales are contributed by exports. The company has expanded
Book Building
internationally through organic growth and through certain strategic acquisitions.
QIBs
50%
The US market is its key focus market (accounting for ~70% of its exports) in
Non-Institutional
15%
terms of its international operations. The revenues from its international
Retail
35%
operations have grown at a CAGR of 45.7% between FY2011 and FY2015. The
contribution of revenues from international operations to overall revenues has
grown from 12.6% in FY2011 to 25.3% FY2015.
Outlook and Valuation: In our view, the company is comparable only to mid-cap
Post Issue Shareholding Pattern(%)
companies like IPCA Laboratories (IPCA) in terms of size and profitability. While the
Promoters Group
66.2
company is growing at a robust pace of >20%, its low profitability is a cause of
MF/Banks/Indian
concern. Also, a major part of the profitability is being accrued from other income
FIs/FIIs/Public & Others
33.8
and aided by low taxation. On an average, the company’s other income accounts
for around ~30-35% of PBT, while tax as % of PBT has been at 5% levels over the
years. Thus, on a like-to-like basis IPCA has a more superior business quality and
we therefore believe that Alkem should trade at a discount to companies like IPCA
Labs. Adjusting for other income, the PE of Alkem stands at 17.3x-17.8x its
FY2016E earnings and 3.3x-3.4x its FY2016E P/BV (at the lower and upper end
of the price band respectively). We believe that the valuation leaves little scope for
further appreciation in the stock price in the near term. Hence, we recommend an
“Avoid” on the issue.
Key Financials
Y/E March (` cr)
FY2013
FY2014
FY2015
FY2016E
Net Sales
2,417
3,033
3,701
4,960
% chg
22.5
25.5
22.0
34.0
Net Profit
384
436
463
785
% chg
(5.7)
13.6
6.3
69.5
OPM (%)
32.1
36.4
38.7
65.6
EPS (`)
11.8
10.5
10.8
15.5
P/E (x)
32.7
28.8
27.1
16.0
P/BV (x)
19.2
18.3
16.6
23.4
RoE (%)
9.7
9.1
10.0
17.4
Sarabjit Kour Nangra
EV/Sales (x)
5.8
4.9
4.2
3.4
+91 22 3935 7800 Ext: 6806
EV/EBITDA (x)
4.8
4.0
3.1
2.3
[email protected]
Source: Company, Angel Research; Note:*EPS and other valuation parameters is based on upper price band
Please refer to important disclosures at the end of this report
1
Alkem | IPO Note
Company background
Established in 1973 in Patna, Alkem is present in acute and chronic therapeutic
segments. The company has extensive brand share in therapeutic areas in
domestic market in anti-infectives, gastro-intestinal, pain and analgesics, and
vitamins, minerals and nutrients. These therapeutic areas accounted for 80.7% of
the company’s total sales in the domestic market in FY2015. It has a portfolio of
800 brands and has 14 manufacturing facilities across 7 locations in India and 2
in the US. For FY2015, Alkem was the fifth largest pharmaceutical company in
India by domestic sales. In the US, it has filed 69 abbreviated new drug
applications (ANDAs; of which 21 have received final approval and 30 are Para-
IV including first-to-file [FTF]).
Alkem has also expanded through the inorganic route, having acquired Ascend in
July 2010, which provided it with the commercial platform for the world's largest
drug market, the US. Further, in December 2012, it acquired manufacturing assets
from Norac Inc in the US, focused primarily on manufacturing specialty active
pharmaceutical ingredients (APIs) and providing contract research and
manufacturing services. Earlier in June 2009, it had acquired a majority stake in
Pharmacor Pty Ltd to enter the Australian market. Pharmacor targets individual
pharmacies, pharmacy groups, pharmacy co-ops, aged care and hospitals to offer
prescription drugs and over-the-counter generic medicines. Two months ago, it
acquired a formulation manufacturing facility from Long Pharmaceuticals LLC in
the US that has semi-solids, liquid and nasal formulation manufacturing
capabilities.
Issue details
Alkem is coming out with an initial public offering (IPO) to raise `1,311-1,350cr
from the equity market at a price band of `1,020-1,050/equity share. Through the
IPO, the company proposes to offer 1.29cr equity shares for sale by promoter and
other selling shareholders. Since the offer is being made through offer for sale, the
proceeds from the offer will be remitted to the respective shareholders. The
company will not receive any proceeds from the offer.
Exhibit 1: Shareholding pattern
Particulars
Pre-Issue
Post-Issue
No. of shares
(%)
No. of shares
(%)
Promoter group
84,735,715.5
70.87
79,187,899.5
66.23
Others
34,829,284.5
29.13
40,377,100.5
33.77
Total
119,565,000
100.0
119,565,000
100.0
Source: Company, Angel Research
Key investment rationale
Established Market Leadership in Indian markets
Alkem is one of India’s leading pharmaceutical companies in the domestic
formulations markets; domestic formulations constitute around ~75% of its overall
sales. The company’s most significant therapeutic areas in the domestic market are
anti-infectives, gastro-intestinal, pain and analgesics, and vitamins, minerals and
December 7, 2015
2
Alkem | IPO Note
nutrients. These therapeutic areas accounted for 80.7% of its total sales in the
domestic market for FY2015. In these categories, the company has a leadership
position, ie the company has a market share of 11.2% in anti-infectives, and is
ranked third in terms of market share for both the gastro-intestinal (with a market
share of 5.6%) and pain/analgesics (with a market share of 5.0%) therapeutic
areas. The top 20 brands of the company account for around 55% of its domestic
revenues. Alkem has a strong marketing and distribution network in India
comprising of a field force of 5,856 medical representatives.
According to IMS Health, the company was the third-fastest growing company in
terms of sales during FY2011-15 and is among the ten largest pharmaceutical
companies in the Indian domestic formulations market. The net revenues from the
company’s domestic operations grew at a CAGR of 17.6% over FY2011 to
FY2015.
Expanding in Export markets
Although a late entrant in the exports market, exports now account for ~25% of
Alkem’s sales. Alkem has expanded internationally through both organic growth
and through certain strategic acquisitions. The US market is the key focus market
(accounting for ~70% of its exports) for its international operations. It markets and
sells products in the US under the brand name Ascend to major pharmacy chains’
stores, wholesalers, managed care companies, distributors, food and grocery
stores and pharmaceutical retailers. Ascend currently sells 17 products in the
market, out of which 12 are its own products and 5 are in-licensed from third
parties. The revenues from its international operations have grown at a CAGR of
45.7% between FY2011 and FY2015. The contribution of net revenues from
international operations to overall revenues has grown from 12.6% in FY2011 to
25.3% in 2015.
The company’s largest facility servicing the US market is in Daman, which was last
inspected by the USFDA_in 2013. Another US servicing facility in Baddi has
received Establishment Inspection Report in Oct-Nov 2015, which means it can
continue supplying to the US market. Overall the company has three USFDA
approved facilities in India and two in the US.
Research and development skills
Alkem has employed 483 scientists working on various drug products and
substances in India and the US. The research and development department carries
out process development, formulation development and analytical research for
domestic and international markets. The company has a strong pipeline of
products under development for its focused markets. It has a robust ANDA pipeline
with cumulative filing of 69, with 45 ANDAs pending for approval. Alkem has 30
para IV filings which include FTFs as well. The company spent 4.5% of its net sales
towards R&D in FY2015.
December 7, 2015
3
Alkem | IPO Note
Valuation
Alkem is valued at a P/E multiple of 15.5x-16.0x its FY2016E EPS at the lower and
upper ends of the price band, respectively. In our view, the company is comparable only
to mid-cap companies like IPCA in terms of size and profitability. However the profitability
of the company in the recent past has been subject to variations owing to its investments
in infrastructure and building man power in Indian markets. This is evident from the OPM
of the company coming in at 10.8% in FY2015 from 16.9% in FY2013 and the ROE
consequently dropping from 22.4% in FY2013 to 16.6% in FY2015. However,
1HFY2016 has seen a recovery in the operating performance with the OPM expanding
to 16.5%, thus moving back to earlier levels.
The growth of the company is robust at >20%, while its low profitability in the
recent past is a cause of concern. Also, a major part of the company’s profitability
is being accrued by other income and low taxation. On an average, the company
has other income of around ~30-35% of PBT, while tax as % of PBT has been at
5%. Thus, on a like -to-like basis, IPCA, which in our coverage is the closest
comparison, has a more superior business quality. Thus we would like to get more
comfort on profitability improvement and sustenance of the same for Alkem. We
believe that the stock should trade at a discount to companies like IPCA Labs(
which trade at 18x one year forward normalized earnings). Adjusting for other
income, we believe that the PE of the company is 17.3x-17.8x its FY2016E
earnings and 3.3x-3.4x its FY2016E P/BV (at the upper and lower end of the price
band respectively). We believe that the valuation leaves little scope for further
appreciation in the stock price in the near term.
Hence, we recommend an “Avoid” on the issue. Investors could consider waiting for
a possible correction in the stock price post the listing of the IPO.
Risks for the company
Any adverse outcome of inspection of the USFDA approved sites could affect
the financials of the company and hamper future growth and profitability.
Domestic formulations constitute 75% of total sales, with Alkem’s top 20
brands accounting for 55% of domestic sales. Thus, inclusion of its key brands
under NLEM could severely impact its revenues and profitability.
December 7, 2015
4
Alkem | IPO Note
Consolidated Profit & Loss Statement
Y/E March (` cr)
FY2012
FY2013
FY2014
FY2015
FY2016E
Gross sales
2,028
2,497
3,138
3,818
5,140
Less: Excise duty
55
80
105
117
180
Net sales
1,973
2,417
3,033
3,701
4,960
Other operating income
187.9
245.1
258.1
268.3
268.3
Total operating income
2,161
2,662
3,291
3,970
5,228
% chg
19.2
23.2
23.6
20.6
31.7
Total expenditure
1,640
2,133
2,716
3,302
4,193
Net raw materials
834
1,056
1,386
1,691
1,977
Personnel
303
412
532
638
853
Other
503
665
799
974
1,363
EBITDA
333
285
317
400
767
(% of Net Sales)
16.9
11.8
10.5
10.8
15.5
Depreciation& amortisation
29
40
52
70
82
Interest & other charges
58
88
93
81
81
Other income
0
-
0
0
-
(% of PBT)
0
-
0
0
-
Share in profit of Associates
-
-
-
-
-
Recurring PBT
434
402
430
517
872
% chg
Extraordinary expense/(Inc.)
-
-
-
-
-
PBT (reported)
434
402
430
517
872
Tax
28
18
(5)
54
87
(% of PBT)
6.3
4.5
(1.3)
10.5
10.0
PAT (reported)
406
384
436
463
785
Add: Share of earnings of asso.
-
-
-
-
-
Less: Minority interest (MI)
(1)
-
-
-
-
Prior period items
-
-
-
-
-
PAT after MI (reported)
407
384
436
463
785
ADJ. PAT
407
384
436
463
785
% chg
37.5
(5.7)
13.6
6.3
69.5
(% of Net Sales)
20.6
15.9
14.4
12.5
15.8
Basic EPS (`)
34.0
32.1
36.4
38.7
65.6
Fully Diluted EPS (`)
34.0
32.1
36.4
38.7
65.6
% chg
37.5
(5.7)
13.6
6.3
69.5
Note: *EPS calculation is based on Pre IPO outstanding shares
December 7, 2015
5
Alkem | IPO Note
Consolidated Balance Sheet
Y/E March (` cr)
FY2012
FY2013
FY2014
FY2015
FY2016E
SOURCES OF FUNDS
Equity share capital
12.0
12.0
12.0
23.9
23.9
Preference Capital
-
-
-
-
-
Reserves & surplus
1,802
2,160
2,567
2,971
3,699
Shareholders funds
1,814
2,172
2,579
2,995
3,723
Minority Interest
0.2
89.2
89.2
Other Long Term Liabilities
0.2
12.3
7.8
5.1
5.1
Long Term Provisions
185.2
49.5
47.4
71.7
71.7
Total loans
309
256
232
33
33.4
Deferred tax liability
33
47
39
90
90.1
Total liabilities
2,342
2,536
2,906
3,285
3,924
APPLICATION OF FUNDS
Net block
674
896
980
1,143
1,261
Capital work-in-progress
-
-
-
-
-
Goodwill
245
176
190
342
342
Long Term Loans and Advances
259
339
418
542
542
Investments
299
410
338
420
420
Current assets
1,302
2,156
1,602
2,344
3,088
Cash
514
995
206
791
901
Loans & advances
97
133
126
130
282
Other
691
1,028
1,270
1,423
1,905
Current liabilities
1,114
1,735
1,406
2,012
2,403
Net current assets
189
421
197
332
685
Other non-current assets
677
293
783
506
675
Total assets
2,342
2,536
2,906
3,285
3,924
December 7, 2015
6
Alkem | IPO Note
Consolidated Cash Flow Statement
Y/E March (` cr)
FY2012
FY2013
FY2014
FY2015
FY2016E
Profit before tax
434
402
430
517
872
Depreciation
29
40
52
70
82
(Inc)/Dec in Working Capital
(145)
(59)
(381)
102
(281)
Less: Other income
-
-
-
-
-
Direct taxes paid
31
18
(5)
54
87
Cash Flow from Operations
287
364
107
635
586
(Inc.)/Dec.in Fixed Assets
(248)
(110)
(93)
(816)
(150)
(Inc.)/Dec. in Investments
(261)
(111)
72
(82)
-
Other income
-
-
-
-
-
Cash Flow from Investing
(509)
(221)
(21)
(898)
(150)
Issue of Equity
-
-
-
-
-
Inc./(Dec.) in loans
10
(53)
(23)
(199)
-
Dividend Paid (Incl. Tax)
(21)
(52)
(32)
(57)
(57)
Others
224
443
(821)
1,103
(269)
Cash Flow from Financing
213
338
(876)
847
(326)
Inc./(Dec.) in Cash
(10)
482
(789)
584
110
Opening Cash balances
524
514
995
206
791
Closing Cash balances
514
995
206
791
901
December 7, 2015
7
Alkem | IPO Note
Key Ratios
Y/E March
FY2012
FY2013
FY2014
FY2015
FY2016E
Valuation Ratio (x)
P/E (on FDEPS)
30.8
32.7
28.8
27.1
16.0
P/CEPS
28.8
29.6
25.7
23.5
14.5
P/BV
6.9
5.8
4.9
4.2
3.4
Dividend yield (%)
0.1
0.2
0.2
0.2
0.2
EV/Sales
6.2
4.8
4.0
3.1
2.3
EV/EBITDA
36.9
40.5
38.5
28.3
14.6
EV / Total Assets
5.2
4.5
4.2
3.4
2.9
Per Share Data (`)
EPS (Basic)
34.0
32.1
36.4
38.7
65.6
EPS (fully diluted)
34.0
32.1
36.4
38.7
65.6
Cash EPS
36.5
35.4
40.8
44.6
72.5
DPS
1.4
2.5
2.5
2.5
2.5
Book Value
151.8
181.7
215.8
250.5
311.4
Returns (%)
ROCE (Pre-tax)
13.0
9.7
9.1
10.0
17.4
Angel ROIC (Pre-tax)
27.6
16.6
13.7
14.1
28.3
ROE
22.4
19.2
18.3
16.6
23.4
Turnover ratios (x)
Asset Turnover (Gross Block)
4.8
5.1
5.3
3.7
3.4
Inventory / Sales (days)
40.4
36.0
32.0
31.9
28.1
Receivables (days)
33.9
29.6
28.1
29.2
24.3
Payables (days)
45.7
43.2
44.2
39.7
29.5
WC cycle (ex-cash) (days)
0.6
(61.6)
(32.4)
(21.6)
(23.6)
Solvency ratios (x)
Net debt to equity
(0.1)
(0.3)
0.0
(0.3)
(0.2)
Net debt to EBITDA
(0.6)
(2.6)
0.1
(1.9)
(1.1)
Interest Coverage (EBIT / Int.)
5.2
2.8
2.8
4.1
8.4
Note:*EPS and other valuation parameters is based on upper price band
December 7, 2015
8
Alkem | IPO Note
Research Team Tel: 022 - 39357800
E-mail: [email protected]
Website: www.angelbroking.com
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ownership of more than 1% in the company covered by Analyst. Angel or its associates/analyst has not received any compensation /
managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. Angel/analyst
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December 7, 2015
9