Alkem Laboratories (Alkem) is among the largest companies in the Indian
formulation market, having a market share of 3.6%. The company is the fifth
largest pharmaceutical company in India by domestic sales. Currently, domestic
markets constitute around 75% of its sales; while in terms of exports, the company
is at a relatively nascent stage vis-a-vis its peers. In exports (predominately US),
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
USFDA, TGA and UK-MHRA approved.
Established Market Leadership in Domestic formulation market: Alkem is one of
India’s leading pharmaceutical companies in the domestic formulation market
Domestic formulations constitute around ~75% of the company’s overall sales. The
company ranks fifth in the Indian pharmaceutical market. Its most significant therapeutic
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
internationally through organic growth and through certain strategic acquisitions.
The US market is its key focus market (accounting for ~70% of its exports) in
terms of its international operations. The revenues from its international
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
companies like IPCA Laboratories (IPCA) in terms of size and profitability. While the
company is growing at a robust pace of >20%, its low profitability is a cause of
concern. Also, a major part of the profitability is being accrued from other income
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.

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