Alkem Laboratories Stock Research Report

Growth to accelerate ahead, FY25 margin guidance raised…..

Alkem Laboratories (Alkem) Q2FY25 revenue growth was dragged by a sharp fall of 22.1% YoY in US while India growth narrowed to 5.7% YoY due to slowdown in acute market. In a bid to improve US profitability, Alkem has discontinued a portion of its product portfolio, as a result, in Q2 its volume dipped 18.7% YoY while price erosion further shaved off 6% YoY. However, mix improvement drove gross/EBITDA margin to 64.7%/22%. Management aims for 8-9% growth in India sales despite a slowdown in H1FY25 (up 6%). It now expects mid-single digit revenue growth and raises margin guidance to 18.5-19% for FY25. We raise FY25/26E EPS by 9-7% to factor in better margins. Maintain ADD, raise TP to INR 6,155 based on 29x FY26E earnings.

Sub-par revenue growth drags Q2FY25 result

Alkem’s Q2 sales declined 0.7% YoY (12.6% QoQ) to INR 34.1bn (I-Sec: INR 37.4bn). Product mix improvement drove 330bps YoY expansion in gross margin to 64.7% (+21bps QoQ). EBITDA grew 0.8% YoY (23.7% QoQ) to INR 7.5bn (I-Sec: INR 8.3bn) but EBITDA margin jumped 34bps YoY (197bps QoQ) to 22.0%. R&D spending grew 27% YoY to INR 1.5bn (4.3% of sales vs 3.4% in Q2FY24 and 4.1% in Q1FY25). Other income rose 112.8% YoY to INR 1.3bn. Adjusted PAT rose 2.0% to INR 6.8bn (I-Sec: INR 7.2bn).

Portfolio rationalisation hurts US; India growth modest

Domestic business grew at 5.7% YoY to INR 24.6bn, growth in India business was impacted by general slowdown in acute market. Management maintains India growth guidance of 8-9% for FY25. We expect India business to grow at a CAGR of 8.3% over FY24-26E driven by new launches. US revenue declined a sharp 6.9% QoQ (-22.1% YoY) to INR 6bn. In Q2, volumes dipped 18.7% YoY while pricing pressure further eroded 6% YoY growth. Management expects US revenue to decline by 5-7% in FY25, dragged by portfolio rationalisation. It will also file 8-10 products in US in FY25. We expect US business to decline 0.6% over FY24-26E. Other international market sales grew 11.8% YoY to INR 3.2bn. Management guides for mid-single digit revenue growth and EBITDA margin between 18.5-19% in FY25. Expenses of new ventures are likely at INR 500-600mn. The biologics CDMO plant in US is expected to commence operations in Q1FY26.