RESULTS REVIEW 3QFY17 11 FEB 2017

Alkem
BUY
INDUSTRY PHARMA
Growth story continues
Alkem (ALKEM) reported strong numbers in 3QFY17 market share in established therapies. We expect the
CMP (as on 10 Feb 2017) Rs 1,830 as the top-line grew by ~16% YoY, helped by a 13.5% segment to continue to outperform the IPM.
Target Price Rs 2,150 growth in India (highest among peers) and ~30% YoY We expect the US business to be a significant
growth in the US (~8% beat). EBITDA margins at contributor to ALKEMs growth story over FY17-19E.
Nifty 8,794
18.1% and earnings growth of ~24%YoY were a On the back of 6-7 launches every year and various in-
Sensex 28,334
positive surprise. We maintain our view that licensing opportunities being sought, we foresee ~30%
KEY STOCK DATA ALKEMs business model has the potent combination rev. CAGR in the US segment continuing.
Bloomberg ALKEM IN of both growth and sustainability, well supported by Sequential margin contraction of ~90bps was largely on
No. of Shares (mn) 120 the businesses in India and the US. This is the 3rd account of higher R&D at 5.7% of sales (v/s 4% in
MCap (Rs bn) / ($ mn) 219/3,274 consecutive quarter in which ALKEM has beaten 2QFY17) and higher incentive payouts in 3Q. Going
6m avg traded value (Rs mn) 92 market estimates and grown substantially in both ahead, with operating leverage coming into play in
segments. We expect it to maintain this growth both the US and the India chronic segments, we expect
STOCK PERFORMANCE (%)
momentum going ahead. This is expected to flow margins to expand ~200bps over FY17-19E.
52 Week high / low Rs 1,856/1,153
through to the bottom line, driving ~19% earnings Highlights of the quarter
3M 6M 12M
CAGR over FY17-19E. At CMP, the stock trades at Con-call takeaways: (1) ALKEM filed 1 ANDA during the
Absolute (%) 11.4 17.7 38.6
21.4x FY18E and 17x FY19E, a ~5-10% discount to the quarter and received 1 TA, (2) Tiger Balm tie-up to
Relative (%) 8.4 15.7 19.3
sector. Reiterate BUY with a revised TP of Rs 2,150 boost OTC segment (3) 5 products launched so far in
SHAREHOLDING PATTERN (%) (21x on Dec-18E). FY17; filing guidance unchanged at 12-15 for the year.
Promoters 67 Against the odds, the domestic business performed Hence we expect a significant number of filings in 4Q
FIs & Local MFs 2.9 admirably, recording 13.5% growth YoY. Headwinds (4) R&D to remain at 5-6% of sales, (5) higher incentive
FIIs 3.9 from demonetisation, a decline in the anti-infective payouts during the quarter led to the increase in
Public & Others 26.2 market, expansion in the NLEM list and WPI- led price employee costs, (6) tax guidance of 18-19% for FY18,
cuts were successfully countered by continued gain in (7) Daman facility received EIR during 3QFY17.
Source : BSE
Financial Summary
(Rs mn) 3QFY17 3QFY16 YoY (%) 2QFY17 QoQ (%) FY16 FY17E FY18E FY19E
Amey Chalke Net Sales 14,819 12,747 16.3 16,383 -9.5 48,769 58,546 69,178 81,543
amey.chalke@hdfcsec.com EBIDTA 2,681 2,354 13.9 3,105 -13.6 8,482 10,564 13,414 16,436
+91-22-6171-7321 APAT 2,336 1,889 23.6 2,828 -17.4 6,731 9,098 10,239 12,895
Diluted adj. EPS (Rs) 56.3 76.1 85.6 107.9
Siddhant Mansukhani P/E (x) 32.0 23.7 21.0 16.7
siddhant.mansukhani@hdfcsec.com RoE (%) 20.7 23.5 22.1 23.3
+91-22-6639-2476 Source: Company, HDFC sec Inst Research # Consolidated
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
 ALKEM: RESULTS REVIEW 3QFY17

Quarterly Financials Snapshot (Consolidated)

The India and US businesses Particulars 3QFY17 3QFY16 YoY (%) 2QFY17 QoQ (%) 3QFY17E Var (%)
drove the strong top line Net Sales 14,819 12,747 16.3% 16,383 -9.5% 14,523 2.0%
growth in 3QFY17 Material Expenses 5,405 5,089 6.2% 6,414 -15.7% 5,751 -6.0%
Employee Expenses 2,843 2,337 21.7% 2,760 3.0% 2,643 7.6%
Other Expenses 3,890 2,967 31.1% 4,105 -5.2% 3,660 6.3%
EBITDA 2,681 2,354 13.9% 3,105 -13.6% 2,469 8.6%
Depreciation 264 244 255 295
Employee costs were above EBIT 2,418 2,109 14.6% 2,850 -15.2% 2,174 11.2%
Other Income 254 330 339 352
estimates on account of
Interest Cost 117 170 120 85
higher incentive payouts
PBT 2,554 2,270 12.5% 3,069 -16.8% 2,441 4.6%
during the quarter
Tax 192 345 187 345
RPAT 2,363 1,925 22.8% 2,882 -18.0% 2,095 12.7%
Minority interest + Share of Asso. (27) (35) (53) (30)
APAT 2,336 1,889 23.6% 2,828 -17.4% 2,065 13.1%
Source: Company, HDFC sec Inst Research
EBITDA margin contracted
sequentially due to higher Margin Analysis
R&D 3QFY17 3QFY16 YoY (bps) 2QFY17 QoQ (bps) 3QFY17E Var (bps)
Material Expenses % Net Sales 36.5 39.9 (345) 39.1 (268) 39.6 (313)
Employee Expenses % Net Sales 19.2 18.3 85 16.8 234 18.2 98
Other Expenses % Net Sales 26.3 23.3 297 25.1 120 25.2 105
EBITDA Margin (%) 18.1 18.5 (37) 19.0 (86) 17.0 109
Tax Rate (%) 7.5 15.2 (771) 6.1 140 14.2 (665)
APAT Margin (%) 15.8 14.8 94 17.3 (150) 14.2 154
Source: Company, HDFC sec Inst Research

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 ALKEM: RESULTS REVIEW 3QFY17

Sales Trajectory Gross Margin Trend

ALKEMs revenue scale up Sales (Rs bn) Gross Profit (Rs bn) Gross margin (%)
continued in 3QFY17, with
~16% top-line growth YoY 63.5
62.6 60.9
60.3
60.7 60.2 60.1
58.3
57.1
Gross margins were higher on
account of a better product
mix in the international 10 9 12 14 13 11 15 16 15 6 5 7 8 8 7 9 10 9
business. The management

3Q FY15

4Q FY15

1Q FY16

2Q FY16

3Q FY16

4Q FY16

1Q FY17

2Q FY17

3Q FY17

3Q FY15

4Q FY15

1Q FY16

2Q FY16

3Q FY16

4Q FY16

1Q FY17

2Q FY17

3Q FY17
expects to maintain at least
61-62% GM going forward
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

EBITDA margin contracted EBITDA Margin Trajectory EPS Trend

YoY by ~40 bps, mostly on
account of increase in R&D EBITDA (Rs bn) EBITDA margin (%) EPS (INR/sh)
spend 18.5 18.5 18.6 19.0 18.1
17.3 17.1
14.5 13.8

EPS growth momentum

continues and we expect this
to further scale up as 2 1 2 3 2 2 3 3 3 10.9 16.8 20.7 15.8 13.2 20.0 23.7 19.5
operating leverage comes

4Q FY15

1Q FY16

2Q FY16

3Q FY16

4Q FY16

1Q FY17

2Q FY17

3Q FY17
3Q FY15

4Q FY15

1Q FY16

2Q FY16

3Q FY16

4Q FY16

1Q FY17

2Q FY17

3Q FY17

into play

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

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 ALKEM: RESULTS REVIEW 3QFY17

Segmental Quarterly Performance

(Rs mn) 3QFY17 3QFY16 YoY (%) 2QFY17 QoQ (%) 3QFY17E Var (%)
US sales have grown 30%YoY
India 10,298 9,074 13.5 12,258 -16.0 10,050 2.5
on the back of a better US 3,385 2,602 30.1 3,023 12.0 3,148 7.5
product mix in international RoW 939 1,041 -9.8 869 8.1 1,124 -16.5
markets and five new Total 14,622 12,717 15.0 16,150 -9.5 14,323 2.1
product launches in FY17 Source: HDFC sec Inst Research

Assumptions
FY16 FY17E FY18E FY19E
India 36,182 42,344 49,160 57,172
India business growth was Growth (%) 28% 17% 16% 16%
robust on the back of US 9,907 12,529 17,677 21,520
continued market share gain Growth (%) 53% 26% 41% 22%
in established therapies like RoW 3,826 3,673 4,334 5,201
anti-infectives, gastro- Growth (%) 23% -4% 18% 20%
intestinal, pain and vitamins. Total 49,915 58,546 71,171 83,892
Growth (%) 32% 17% 22% 18%
Source: HDFC sec Inst Research
The management is not keen
on stretching themselves
across too many geographies
and will continue to
rationalise the markets it
operates in

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 ALKEM: RESULTS REVIEW 3QFY17

Income Statement (Consolidated) Balance Sheet (Consolidated)

Year ending March (Rs mn) FY15 FY16 FY17E FY18E FY19E Year ending March (Rs mn) FY15 FY16 FY17E FY18E FY19E
Net Revenues 37,070 48,769 58,546 69,178 81,543 SOURCES OF FUNDS
Growth (%) 22.2 31.6 20.0 18.2 17.9 Share Capital - Equity 239 239 239 239 239
Material Expenses 16,906 19,612 23,442 27,600 32,211 Reserves 29,752 34,818 42,084 50,017 60,009
Employee Expenses 6,375 9,171 10,623 11,588 13,463 Total Shareholders Funds 29,991 35,057 42,323 50,256 60,248
SG&A Expenses 1,696 2,146 2,967 4,214 5,203 Minority Interest 857 965 965 965 965
Other Expenses 7,466 10,504 11,750 13,414 15,280 Long-term Debt 2,197 5,343 4,843 4,843 4,843
EBITDA 5,445 8,482 10,564 13,414 16,436 Short-term Debt 10,863 1,212 1,212 712 462
EBITDA Margin (%) 14.7 17.4 18.0 19.4 20.2 Total Debt 13,059 6,554 6,054 5,554 5,304
EBITDA Growth (%) 32.8 55.8 24.5 27.0 22.5 Net Deferred Taxes 964 945 945 945 945
Depreciation 703 1,006 1,038 1,575 1,736 Long-term Provisions & Others 1,410 1,111 1,333 1,600 1,920
EBIT 4,742 7,477 9,526 11,839 14,700 TOTAL SOURCES OF FUNDS 46,279 44,633 51,621 59,321 69,383
Other Income (Incl EO Items) 1,810 1,645 1,218 1,365 1,692 APPLICATION OF FUNDS
Interest 811 671 378 290 271 Net Block 10,322 10,885 13,727 15,678 16,647
PBT 5,741 8,451 10,366 12,914 16,121 CWIP 1,107 1,725 2,845 1,819 1,614
Tax (Incl Deferred) 542 1,606 1,140 2,531 3,063 Intangible assets 3,421 3,531 3,531 3,531 3,531
RPAT 5,199 6,845 9,226 10,383 13,058 LT Loans & Advances 6,924 8,004 9,516 11,261 13,244
Minority Interest - 114 127 144 163 Total Non-current Assets 21,774 24,144 29,619 32,289 35,035
EO (Loss) / Profit (Net Of Tax) 574 - - - - Inventories 7,842 9,094 10,707 12,470 14,521
APAT 4,625 6,731 9,098 10,239 12,895 Debtors 5,271 5,645 6,712 7,942 9,341
APAT Growth (%) 6.2 45.5 35.2 12.5 25.9 Other Current Assets 5,063 3,237 3,237 4,250 5,250
Adjusted EPS (Rs) 38.7 56.3 76.1 85.6 107.9 Cash & Equivalents 12,715 12,184 13,654 16,925 22,437
Source: Company, HDFC sec Inst Research Total Current Assets 30,892 30,160 34,309 41,588 51,549
Creditors 4,619 5,793 6,820 7,943 9,250
Other Current Liabilities &
1,767 3,878 5,487 6,612 7,952
Provisions
Total Current Liabilities 6,386 9,671 12,307 14,555 17,201
Net Current Assets 24,505 20,489 22,002 27,032 34,347
TOTAL APPLICATION OF FUNDS 46,279 44,633 51,621 59,321 69,383
Source: Company, HDFC sec Inst Research

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 ALKEM: RESULTS REVIEW 3QFY17

Cash Flow Key Ratios

Year ending March (Rs mn) FY15 FY16 FY17E FY18E FY19E FY15 FY16 FY17E FY18E FY19E
Reported PBT 5,142 8,451 10,366 12,914 16,121 PROFITABILITY (%)
Non-operating & EO items 652 240 - - - GPM 54.4 59.8 60.0 60.1 60.5
Interest expenses (1,196) (593) (840) (1,075) (1,421) EBITDA Margin 14.7 17.4 18.0 19.4 20.2
Depreciation 703 1,006 1,038 1,575 1,736 APAT Margin 12.5 13.8 15.5 14.8 15.8
Working Capital Change (963) 137 (1,333) (3,237) (3,466) RoE 16.6 20.7 23.5 22.1 23.3
Tax Paid (1,056) (1,982) (1,140) (2,531) (3,063) RoIC (or Core RoCE) 16.6 23.7 32.1 31.9 36.7
OPERATING CASH FLOW ( a ) 3,281 7,259 8,090 7,645 9,907 RoCE 16.7 22.0 26.8 26.1 29.4
Capex (1,354) (2,535) (5,000) (2,500) (2,500) EFFICIENCY
Free cash flow (FCF) 1,928 4,724 3,090 5,145 7,407 Tax Rate (%) 9.4 19.0 11.0 19.6 19.0
Investments 1,028 325 - - - Fixed Asset Turnover (x) 2.6 3.2 3.0 3.0 3.2
Non-operating Income 3,406 4,280 1,218 1,365 1,692 Inventory (days) 77.2 68.1 66.8 65.8 65.0
INVESTING CASH FLOW ( b ) 3,081 2,071 (3,782) (1,135) (808) Debtors (days) 51.9 42.2 41.8 41.9 41.8
Debt Issuance/(Repaid) 871 (6,710) (500) (500) (250) Other Current Assets (days) 49.9 24.2 20.2 22.4 23.5
Interest Expenses (793) (713) (378) (290) (271) Payables (days) 45.5 43.4 42.5 41.9 41.4
FCFE 6,441 1,906 3,430 5,720 8,578 Other Current Liab & Provns (days) 17.4 29.0 34.2 34.9 35.6
Share Capital Issuance - - - - - Cash Conversion Cycle (days) 116.1 62.2 52.0 53.3 53.3
Dividend (596) (1,850) (1,960) (2,449) (3,066) Debt/EBITDA (x) 2.4 0.8 0.6 0.4 0.3
FINANCING CASH FLOW ( c ) (518) (9,273) (2,839) (3,240) (3,588) Net D/E (x) (0.1) (0.2) (0.2) (0.3) (0.3)
NET CASH FLOW (a+b+c) 5,845 56 1,470 3,271 5,512 Interest Coverage (x) 5.8 11.1 25.2 40.8 54.1
EO Items, Others - - - - - PER SHARE DATA (Rs)
Closing Cash & Equivalents 5,845 56 1,470 3,271 5,512 EPS 38.7 56.3 76.1 85.6 107.9
Source: Company, HDFC sec Inst Research Dividend 4.0 5.6 12.9 16.3 20.5
Book Value 250.8 293.2 354.0 420.3 503.9
VALUATION
P/E (x) 47.3 32.5 24.0 21.4 17.0
P/BV (x) 7.3 6.2 5.2 4.4 3.6
EV/EBITDA (x) 40.2 25.1 20.0 15.5 12.3
EV/Revenues (x) 5.9 4.4 3.6 3.0 2.5
OCF/EV (%) 1.5 3.4 3.8 3.7 4.9
FCF/EV (%) 0.9 2.2 1.5 2.5 3.7
FCFE/Mkt Cap (%) 2.9 0.9 1.6 2.6 3.9
Dividend Yield (%) 0.2 0.3 0.7 0.9 1.1
Source: Company, HDFC sec Inst Research

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 ALKEM: RESULTS REVIEW 3QFY17

RECOMMENDATION HISTORY
Alkem TP Date CMP Reco Target
2,400 20-Oct-16 1,654 BUY 2,030
2,200 15-Nov-16 1,640 BUY 2,060
2,000
23-Jan-17 1,655 BUY 2,060
11-Feb-17 1,830 BUY 2,150
1,800
1,600
1,400
1,200
1,000 Rating Definitions
BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period
Aug-16
Apr-16

Jan-17
Feb-16

Jul-16

Sep-16

Feb-17
Nov-16
Jun-16
May-16

Dec-16
Mar-16

Oct-16
NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period
SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

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 ALKEM: RESULTS REVIEW 3QFY17

Disclosure:
We, Amey Chalke, MBA and Siddhant Mansukhani, CA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect
our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or
view(s) in this report.
Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its
Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further
Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest.
Any holding in stock No

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HDFC securities
Institutional Equities
Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park,
Senapati Bapat Marg, Lower Parel, Mumbai - 400 013
Board : +91-22-6171-7330 www.hdfcsec.com

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