Alkem Laboratories delivered an earnings beat in Q2 with its net profit, revenue as well as profitability topping the Street's estimates.
The company also marginally raised its margin guidance for FY24 to 16.5 percent from the earlier 16 percent.
Pharmaceutical company Alkem Laboratories posted better-than-expected earnings for the July-September quarter despite modest growth in the India business which impressed brokerages across the board, prompting some to either upgrade their rating or price targets for the stock.
The drugmaker's net profit surged 87.5 percent on year to Rs 620.50 crore in Q2 while revenue rose nearly 12 percent to Rs 3,440 crore. Not just that, the net profit as well as revenue came well above CNBC-TV18's estimate of Rs 436.40 crore and Rs 3,366 crore, respectively.
Meanwhile, the operational performance also improved as EBITDA margin expanded sharply to 21.7 percent in the September quarter as against 14.7 percent in the year-ago period. EBITDA margin was also ahead of the Street's estimate of 16 percent.
The earnings beat in the quarter gone by was aided by an improved product mix in the US and markedly lower input cost that aided margins. In addition, brokerage firm Nomura attributed lower costs and tax rate in the quarter as factors behind the stellar performance by the drugmaker.
Buoyed by Alkem's better-than-expected Q2 earnings, Nomura upgraded its rating for the stock to 'buy' with a price target of Rs 4,963. The firm also remains positive on Alkem's intent to pursue inorganic growth opportunities.
Given its surplus cash, Alkem is looking for inorganic opportunities in chronic therapies and the consumer healthcare space.
Meanwhile, the company has also guided for high-single digit growth for its India business in FY24. The India business reported a modest 5 percent growth in Q2 on account of a weak acute season due to a sporadic monsoon that led to a slower offtake in viral infections.
The company also marginally raised its margin guidance for FY24 to 16.5 percent from the earlier 16 percent. Macquarie, which has an 'underperform' call on the stock with a price target of Rs 3,175 also stands impressed by the drugmaker's margin guidance. However, the firm expects the drugmaker's profitability in Q4 to remain weak due to an adverse seasonality effect.
Analysts' views
On the contrary, Nuvama Institutional Equities doesn't see any risks to sustained margin improvement for Alkem on the back of softening input prices, easing US price pressure and management putting weight behind India productivity.
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"Our positive stance on Alkem is underpinned by its strong domestic franchise, chronic expansion, export turnaround and cost savings," Nuvama stated in a note. Accordingly, the firm not raised its FY24 EPS estimates for Alkem by 7 percent to factor in the strong earnings but also increased its price target for the stock by 3 percent to Rs 4,980. Nuvama also retained its 'buy' call on Alkem Labs.
Motilal Oswal also followed suit and raised its earnings estimates for Alkem by 21 percent and 11 percent for FY24 and FY25, respectively, factoring in an increased share of relatively high-margin products in the US generics segment, benefits from reduced raw material costs, and reduction in the effective tax rate.
The brokerage expects 28 percent earnings CAGR (Compounded Annual Growth Rate) over FY23-25 on the back of 11 percent and 10 percent sales CAGR in the US generics and domestic formulations segments, respectively, along with a 350 basis point margin expansion.
However, the P/E multiples of Alkem are largely in-line with its five-year average, which MOFSL believes adequately factors in the earnings upside. On that account, the firm has a 'neutral' call on the stock with a target price of Rs 3,920.
At 09.19 am, shares of Alkem Labs were trading nearly 3 higher at Rs 4,135.50 on the NSE. On November 7, post the earnings announcement, the scrip settled 5.3 percent higher at Rs 4,027.35 on the NSE.
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