Strong growth and fair valuation make Alkem Labs a good bet

By Kiran Somvanshi

ET Intelligence Group: Mumbai-based Alkem Labs is the local market leader in anti-infectives. It earns three-fourths of its revenues from India – a significant portion of it coming from West Bengal, UP and Bihar. Its top 20 brands contribute over half of its total domestic revenues.

Over 40% of its portfolio comprises acute therapy products, which typically are the most penetrated and low-margin in nature. Marketing acumen and lowcost (brands) have been the company’s unique selling points. Alkem’s international business is building a pipeline of products for approval in the US.

Alkem is a debt-free, profitable company with double-digit growth. In the past three years, it expanded inorganically, taking a toe-hold in the US and beefing up presence in the market for lifestyle disorders.

These investments took a toll on profitability, pushing down operating margin to 12-13% from 16-17%. The margins are likely to improve steadily as the investments start accruing returns. But, the risk profile of Alkem’s is likely to increase as share of its regulatory-driven international business rises in total revenues.

VALUATIONS

The issue values the company at 19 times its FY16 estimated earnings per share of `55 per share. The company’s valuation of `12,600 crore also stands at 2.5 times its revenues for FY16. These are fair valuations when compared with peers like Torrent Pharma, Ipca Labs and Wockhardt, leaving room for post listing gains.