Alkem Laboratories knocked it out of the park in the second quarter, surpassing the market's expectations with higher-than-expected net profit, revenue, and overall profitability
NSE !! Alkem Laboratories, a pharmaceutical company, delivered a strong performance in the July-September quarter, which has left brokerages impressed and led to upgrades in their ratings and price targets for the stock.
During Q2, the company’s net profit surged by an impressive 87.5% year-on-year to reach Rs 620.50 crore, and its revenue showed substantial growth, increasing by nearly 12% to Rs 3,440 crore. Both net profit and revenue exceeded CNBC-TV18’s estimated figures of Rs 436.40 crore and Rs 3,366 crore, respectively.
Additionally, the operational performance saw significant improvement, with the EBITDA margin expanding to 21.7% in the September quarter, compared to 14.7% in the same period last year. This EBITDA margin also outperformed market estimates, which were at 16%.
The impressive earnings for the quarter can be attributed to a more favorable product mix in the US market and reduced input costs, which boosted margins. Nomura, a brokerage firm, highlighted lower costs and a reduced tax rate as contributing factors to Alkem’s stellar performance.
In light of Alkem’s better-than-expected Q2 earnings, Nomura upgraded its rating for the stock to ‘buy’ and set a price target of Rs 4,963. The firm also expressed optimism about Alkem’s pursuit of inorganic growth opportunities
Thanks to its extra cash, Alkem is on the lookout for opportunities in chronic therapies and the consumer healthcare sector through acquisitions or partnerships.
At the same time, Alkem anticipates a high-single-digit growth in its India business for the fiscal year 2024. During Q2, the Indian business only saw a modest 5% growth, mainly due to an unusual monsoon season that resulted in fewer viral infections.
Furthermore, the company has slightly adjusted its margin guidance for fiscal year 2024, increasing it to 16.5% from the previous 16%. Even Macquarie, which holds a ‘underperform’ rating on the stock with a price target of Rs 3,175, is positively surprised by Alkem’s margin guidance. However, Macquarie predicts that the company’s profitability may remain weak in Q4 due to seasonal factors
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.
Our positive outlook for Alkem is based on its strong presence in the domestic market, expansion in chronic treatments, improved exports, and cost-cutting measures. Nuvama, for instance, not only increased its FY24 EPS estimates for Alkem by 7% to reflect the robust earnings but also raised its price target for the stock by 3% to Rs 4,980. They continue to recommend buying Alkem Labs.
Motilal Oswal also revised its earnings estimates for Alkem, increasing them by 21% for FY24 and 11% for FY25. They took into account a higher share of more profitable products in the US generics sector, cost savings from lower raw material costs, and a reduced effective tax rate.
Motilal Oswal predicts an impressive 28% annual earnings growth (CAGR) from FY23 to FY25. This is expected to be driven by an 11% and 10% sales growth CAGR in the US generics and domestic formulations segments, along with a 350 basis point margin expansion.
However, Alkem’s price-to-earnings multiples are quite consistent with its five-year average, which MOFSL believes already considers the potential earnings increase. As a result, they have a ‘neutral’ rating on the stock with a target price of Rs 3,920.
As of 9:19 am, Alkem Labs shares were trading at around 3% higher at Rs 4,135.50 on the NSE. Following the earnings announcement on November 7, the stock had settled 5.3% higher at Rs 4,027.35 on the NSE
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