Motilal Oswal maintains a Neutral rating on Alkem Laboratories with a target price of INR6,030, representing a 1% downside from the current market price. The brokerage believes that while Alkem is boosting its growth prospects in the bio-CDMO and med-tech segments, and its revamped domestic formulation (DF) strategy is yielding improved results, the current valuation adequately reflects a 13% earnings CAGR for FY24-FY26E.
Key takeaways from the report:
- Neutral rating maintained with a target price of INR6,030.
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- Alkem is focusing on profitable growth in domestic formulations, exports, bio-CDMO, and med-tech.
- New initiatives in bio-CDMO and med-tech are entering an investment phase.
- Strategic reset in the DF segment is yielding improved results, with potential for higher growth in the chronic space.
- Current valuation adequately reflects expected earnings growth.
Crucial Points from the Report:
Expanding into Bio-CDMO and Med-tech: After successfully establishing biosimilar R&D and manufacturing capabilities in India, Alkem is setting its sights on the US. The company plans to invest INR4b-INR4.5b in a new CDMO facility, expected to be operational by Q4FY25. Alongside, Alkem is venturing into med-tech with an asset-light model, focusing on in-licensed products and outsourced manufacturing.
Domestic Formulation Segment Recovering: Alkem’s revised strategy for its DF business, including changes in MR incentives, focus on key brands, and digital interventions, is showing positive results. The company has experienced a 5% reduction in attrition rates and expects continued growth, particularly in the chronic segment.
US Generics Focus Shifting to Profitability: Alkem is reassessing its US generics strategy, prioritizing product-specific economics and margin improvement over top-line growth. While this may impact near-term growth, it’s expected to enhance profitability in the long run.
Strong Financial Performance but Valuation Concerns: Alkem has delivered an impressive 18% CAGR earnings growth over FY18-FY24 and is projected to maintain a healthy 13% growth rate over FY24-FY26, driven by margin expansion. However, Motilal Oswal believes the current valuation already factors in this growth trajectory.
Potential Risks and Challenges:
The report highlights potential headwinds for Alkem’s US generics business, where industry-wide slowdown and increased focus on profitability could impact near-term growth. Additionally, the success of new initiatives in bio-CDMO and med-tech will depend on execution and market acceptance.
Forward-Looking Outlook:
Motilal Oswal expects Alkem to deliver healthy earnings growth over the next few years, driven by its established presence in DF and exports, coupled with the expansion into bio-CDMO and med-tech. The brokerage also highlights the potential for margin expansion in the base business.
Valuation Methodology:
Motilal Oswal used a 12-month forward Price-to-Earnings (P/E) multiple of 27x to arrive at the target price of INR6,030.
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