Alkem Labs Fundamental Analysis and Future Outlook

thumbnail
Reading Time: 7 minutes

Alkem Labs was started in 1973 with a single manufacturing setup and now after 4 decades has grown to be one of the largest generic and speciality pharmaceutical company in India. Also, the company has a presence in 50+ countries and has consistently been ranked amongst the top 10 pharmaceutical companies in India. For over a decade, Alkem has maintained its market dominance in Anti-infective segment.

Alkem Labs Fundamental Analysis and Future Outlook

The company’s shares have 52 weeks price band of INR 2879-1660 and a total market capitalization of INR 321 billion which makes it a Large-Cap company. The shares have a P/E ratio of 29.24 and a dividend yield of 1.11 %

Now, let’s take a deep dive into the fundamentals of the company.
The company will be evaluated on 10 parameters and each would be given a rating out of 5 stars.

From this, we will arrive at a combined stock rating for the company. As the ratings are based on long term past performance, they are relevant for at least 3 years in the future until FY 2022.

The parameters are as follows:

1. Economic Moat
2. Business Model and Management
3. Growth Ratios
4. Profitability Ratios
5. Cash Flow Ratios
6. Liquidity and Solvency Ratios
7.Efficiency Ratios
8. Valuation Ratios
9. ROE (Du Pont Analysis)
10. Future Prospects
(All units are INR Millions except ratios and per share data)

1.Economic Moat (★ ★ ★ ★ ☆)

The company operates in the pharmaceutical industry where market dominance is achieved through R&D, regulatory approvals, scale and distribution network.

Alkem is the 6th largest pharmaceutical company in India in terms of the Market share. Further, the company has 21+ manufacturing facilities and a workforce of 14,500+ employees. Alkem is No.1 in anti-infective segments and No.3 in Gastro-intestinal and analgesics segments in India.

Also on the R&D and approvals front, the company has 5 global R&D centres along with 136+ ANDA filings, 81+ approvals and employing 500+ scientists.

On the distribution front, the company has 10,000+ field force, 7,000+ stockists and 40+ Sales depots and warehouses. Alkem’s portfolio includes brands like Clavam, Pan, Pan-D and Taxim-O, which feature amongst top 50 pharmaceutical brands in India.

Thus, the company has a wide economic moat due to its product portfolio, scale, branding and distribution. Therefore this category gets 4 stars in Alkem Labs fundamental analysis.

2. Business Model and Management (★ ★ ★ ★ ☆)

The business model is such that the company is focused on building value brands in its niche pharmaceutical segments to drive its growth.

Also Read on FinMedium:  Naval Ravikant on How to get Rich – Arthvigyan

Alkem has 8+ brands with annual sales of more than INR 1 billion. It has 4+ brands in the top 50 and 14+ brands in the top 300 pharmaceutical brands in India.

The key markets for the company includes India with 67.5% of revenue contribution, the US with 25.8% revenue contribution and the other 48+ countries driving 6.7% of the total revenue.

Further, the company has 4 major brands which include Clavam with an annual sales of INR 3600+ million and a market share of 15.6%. The Pan and Pan-D brands have annual sales of INR 2800+ and INR 2660+ million and a market share of 30.2% and 28.3% respectively. The Taxim-O brand has annual sales of INR 1978+ million and a market share of 21.3%.

Overall the business model is well diversified across products and geographies for the company.

Mr Sandeep Singh is the Managing Director of Alkem Labs and has 10+ years of experience in the pharmaceutical industry. Mr Dhananjay Singh is the Joint Managing Director and has over 30+ years of experience in the industry. Also, Mr Balmilki Singh, Mr Basudeo Singh, Mr Mrityunjay Singh, Mr Sarvesh Singh who are on the board of directors of the company.

The company’s board consists of many closely related individuals which can lead to a principal-agent conflict in the future. Therefore this category gets 4 stars in Alkem Labs fundamental analysis.

3. Growth Ratios (★ ★ ★ ★ ★)

Alkem Labs Fundamental Analysis and Future Outlook

The revenue has seen a 21% CAGR growth over the last 10 years.

The Operating Income and Net income has also increased by 19.1% and 14% CAGR respectively. This also indicates increasing operational expenses and reducing profitability as the scale increases.

The working capital has been positive and the Cap-Ex has increased over the years. This indicates good growth prospects in the future. Therefore this category gets 5 stars in Alkem Labs fundamental analysis.

4. Profitability Ratios (★ ★ ★ ★ ☆)

Alkem Labs Fundamental Analysis and Future Outlook

The gross margin has almost flattened over the years and this is due to the nature of the generics business.

The other margins along with return on assets have shown a slight decline over the years. This is due to increasing operating costs and competition.

However, the margins are likely to remain flattened in the future without any significant improvement. Therefore this category gets 4 stars in Alkem Labs fundamental analysis.

Also Read on FinMedium:  Five books to start your reading plans in 2020

5. Cash Flow Ratios (★ ★ ★ ★ ★)

The net income margin has declined and the Cap-Ex as a percentage of sales has increased in recent years.

The free cash flow as a percentage of net income has been fluctuating due to business integrations, acquisitions and new projects. The operating cash flow growth has also shown signs of improvement. This overall indicates a good cashflow position.

Therefore this category gets 5 stars in Alkem Labs fundamental analysis.

6.Liquidity and Solvency Ratios (★ ★ ★ ★ ★)

The company does not have any significant long term debt in its capital structure therefore the financial leverage and debt to equity ratio are very low.

The company also has good profitability and hence there is no significant concern regarding its solvency. The current and quick ratios are also stable and signify good asset liquidity for the company.

Therefore this category gets 5 stars in Alkem Labs fundamental analysis.

Alkem Labs Fundamental Analysis and Future Outlook

7. Efficiency Ratios (★ ★ ★ ☆ ☆)

The table in the excel model is colour formatted so the worst performance over the period is highlighted in red colour and the best performance is highlighted by green.

Overall the business efficiency has declined over the years as the company expanded into new formulations and across new geographies.

The inventory days are high and the payable period has increased from 100 days to 141 days. The receivable days have increased from 38 to 67 days but the cash conversion cycle has been positive and increasing.

This indicates deteriorating efficiency for the company, but it is due to the nature of the generics business. Therefore this category gets 3 stars in Alkem Labs fundamental analysis.

8. Valuation Ratios (★ ★ ★ ★ ★)

Alkem Labs Fundamental Analysis and Future Outlook

The shares have almost been trading at constant multiples in recent years which indicates that the market does not expect any aggressive growth in the near term.

The company has significant market share across its brands but this is now leading to declining margins as competition has increased. The multiples, however, are driven by some fundamental factors and are expected to improve in the near future.

Therefore this category gets 5 stars in Alkem Labs fundamental analysis.

9. ROE 5 way Du Pont Analysis (★ ★ ★ ★ ★)

The leverage ratio has flattened over the years and the asset turnover has improved. The tax efficiency and interest burden ratios have remained almost stable over recent years. The operating margin, however, has seen some decline during the period.

Also Read on FinMedium:  Mishra Dhatu Nigam LTD (MIDHANI) – Investometry

Overall the Return on Equity has been stable even with declining profitability due to improving asset turnover which indicates good operational efficiency.

Therefore this category gets 5 stars in Alkem Labs fundamental analysis.

10. Future Prospects (★ ★ ★ ★ ★)

Some insights for the coming years from management discussion & analysis (MD&A) and con calls are as follows.

  • The effect of Covid-19 outbreak will only be of temporary revenue loss due to production shutdowns and disrupted supply chains. The company’s direct dependence on China for API’s and raw materials is only 5%, therefore, it will not be significantly impacted due to trade and political disruptions with China.
  • As of last year, the company received 70 final ANDA approvals out of which 50 are commercialized till now. The management has guided for 13-15 ANDA filings and double-digit new product launches on a yearly basis.
  • The total Medical Representative strength of the company is approximately 10,000. Out of this, 7,000 cater to Acute segment, 2,100 to Chronic and 550 to generics segment. Average MR productivity for the company stands at INR 4.8 lacs. The management has guided for an addition of 300 more MRs for FY 2021. This number can increase as the company needs to penetrate deeper to sustain their revenue in these uncertain times.
  • The management expects the Acute segment to grow 1.5 times the market growth in the coming years. The expected tax rate was 10% for FY 2020 and would hover around 10-11% for FY 2021.

Overall the company has shown improved operational efficiency with increasing scale and has new product pipeline which will drive the revenue in the coming years.

The only concern is the reducing profitability but that is the nature of generic business as the competition and scale increases. Therefore this category gets 5 stars in Alkem Labs fundamental analysis.

The overall rating is arrived by taking the average of the above 10 category ratings and rounded up if it is above 0.5 and rounded down if it is below 0.5.

Overall Fundamental Rating:

ALKEM LABS SHARES (4.5/5)

Economic Moat ★ ★ ★ ★ ☆
Business & Management ★ ★ ★ ★ ☆
Growth Ratios ★ ★ ★ ★ ★
Profitability Ratios ★ ★ ★ ★ ☆
Cash Flow Ratios ★ ★ ★ ★ ★
Liquidity & Solvency ★ ★ ★ ★ ★
Efficiency Ratios ★ ★ ★ ☆ ☆
Valuation Ratios ★ ★ ★ ★ ★
ROE (Du Pont Analysis) ★ ★ ★ ★ ★
Future Prospects ★ ★ ★ ★ ★
Overall Fundamental Rating ★ ★ ★ ★ ★
Alkem Labs Fundamental Analysis

Source link

Every Wednesday and Saturday, we send Info-Graphic and FinMedium Weekly Digest newsletters to our 25000+ Subscribers.

Join Them Now!

Please Share :)
Billion Dollar Valuation
Billion Dollar Valuation shares thorough research into the Fundamentals of the businesses listed in India. With their insightful write-ups, they uncover a lot on the table.
Back To Top