HDFC Securities has valued Alkem at 22x Sep 22 EPS and arrived at a target price of Rs 3315. HDFC Securities has also initiated coverage on Alkem with a BUY based on the following factors:
 
(a) Recovery in acute therapies is likely to benefit Alkem the most, given its dominant position in the segment (rank 1 in Anti-infective, rank 3 in Gastro, rank 3 in Vitamins)
(b) Steady market share gains in chronic (+50bps over the past five years) will contribute to higher growth and profitability
(c) Rising scale in U.S. generics (USD 300 mn, growing at double digit CAGR) will contribute 20% to FY23 EBITDA vs. single digit in FY20.
 
Acute dominance, consolidating market share in top four therapies: 
 
Despite being acutely focused, Alkem’s India business (2/3rd of revenues and 85%+ profits) grew by 13% CAGR over FY15-20, outperforming the Indian pharma market (IPM) by 340bps over the same period. Leadership in the acute segment (4.6% market share, ranks 5th) with strong brands is expected to further drive market share gains. Analysis of top six therapies which accounts for 65% of IPM suggests that bigger companies with leading brands are outperforming the category average
 
Chronic scale up is noteworthy, albeit on a low base: 
 
Alkem’s market share in the chronic segment has increased from 1.1% to 1.6% in the past five years. Its rank improved from 22nd in FY15 to 17th in FY20. Cardiac/Anti-diabetes/CNS therapies have outperformed the IPM by 13%/14%/9% in the same period.
 
U.S. business to witness improved margin trajectory: 
 
Despite being a late entrant in the U.S. market, Alkem has demonstrated good execution (fair market share in the products launched) in the past five years. With increasing scale, margins in the U.S. are expected to inch up to 15-20% (from single digit in FY20) in the next three years. New product launches (10-12 p.a, 56 pending ANDAs) would offset base business erosion (mid-single-digit) and drive 13% revenue CAGR during the same period.
 
Levers for margin expansion in place: 
 
Higher profit contribution from the chronic portfolio, improving MR productivity (from Rs 5 mn to Rs 6.1 mn in the next three years), and rising scale in the U.S. market should drive margin expansion of 460 bps over FY20-23e.
 
Downside risks:
 
Expansion of the National list of Essential Medicines (30% portfolio is under price control), lower growth in India, higher price erosion in the U.S.