Update: 7^th December 2015, 1 pm: Competition Commission of India (CCI) has imposed a fine of Rs. 74.63 crore on Alkem Laboratories for indulging in unfair business practices, related to supply of medicines in Kerala’s Palakkad district. While this may get contested by the company, the impact on EPS will be to the tune of Rs. 6.25 for FY16, lowering our FY16 estimate to about Rs. 62 per share, which leads to discounting of 17 times, based on current year. Since this is a one-off item, without material impact, our view on the IPO remains unchanged at 'subscribe'.

By Geetanjali Kedia

Alkem Laboratories is entering the primary market on Tuesday 8^th December 2015, with an offer for sale of upto 1.29 crore equity shares of Rs. 2 each, by promoters and 12 individual shareholders, in the price band of Rs. 1,020 to Rs. 1,050 per share. Discount of Rs. 100 per share is announced only for eligible employees. The issue, representing 10.75% of the post issue paid-up capital, will raise Rs. 1,311 crore and Rs. 1,350 crore at the lower and upper price band respectively and will close on Thursday 10^th December.

India’s fifth largest pharma company in terms of domestic sales, having 5 brands in top 50 in the Indian pharma market such as Clavam, Taxim, Taxim O, Pan, Pan D, Alkem Laboratories makes branded generics, generics, APIs and nutraceuticals for domestic and 55 international markets, with latter accounting for one-fourth of revenues. Internationally, US is a key market, accounting for 19% of total revenues.

Company is focused on the acute therapeutic segments of anti-infectives, gastro intestinals, pain and analgesics, vitamins, minerals, nutrients, with a portfolio of over 700 brands. It has a strong market share of over 11% in anti-infectives, being consistently ranked number one in that segment, which also happens to be the largest therapeutic area in Indian pharma market. In other large segments of gastro intestinals and pain/analgesics, company ranks number three.

Having 16 manufacturing facilities (14 at 5 locations in India and 2 in US), its domestic distribution reach is very strong comprising field force of 5,745 medical representatives (as of 31-10-15), with 7 in 10 domestic prescribers prescribing company’s drugs. Having spent 4.5% of FY15 revenue on R&D, company has 2 R&D centres each in India and US and employs 480 scientists.  

During FY15, consolidated EBITDA (excluding other income) grew 19% YoY to Rs. 487 crore, as revenue from operations jumped 21% YoY to Rs. 3,789 crore, clocking EBITDA margin of 12.9%. Net profit, at Rs. 463 crore, was higher by 6% YoY in FY15, leading to an EPS of Rs. 38.7. Since the company enjoys many tax breaks/holidays for its manufacturing facilities and R&D investments, effective tax rates is low – 10.5% for FY15, and will continue to be in low teens for the next couple of years.

Financial performance during first half of FY16 was very strong, with revenue from operations rising 36% YoY to Rs. 2,570 crore and EBITDA margin strengthening to 17.8%, on EBITDA of Rs. 460 crore. Net profit for H1FY16 stood at Rs. 431 crore, translating into an EPS of Rs. 36.1, on equity of Rs. 23.91 crore, of face value Rs. 2 each. Thus, H1FY16 has nearly achieved results of the whole of FY15.

As of 30-9-15, net worth of this closely-held company stands at Rs. 3,400 crore, while gross debt is at Rs. 1,115 crore. Excluding cash and equivalents of Rs. 749 crore, net debt is only Rs. 366 crore, which is very low. Current promoter stake of 70.87% will shrink to 66.23% post IPO, whereas 17 individual investors owning 29.13% stake currently, will part sell, reducing their combined holding to 23.02%, post listing.  

At the upper end of the price band of Rs. 1,050 per share, company’s market cap will be Rs. 12,550 crore and enterprise value Rs. 12,900 crore. Based on annualized H1FY16 EBITDA of approximately Rs. 925 crore, EV/EBITDA multiple stands at 14 times, for the current year. On revenue run-rate of over Rs. 5,000 crore, EV/Sales multiple is 2.5, whereas the PE multiple is 15 times, on expected EPS of about Rs. 68 for FY16. This appears attractive, given the company’s presence in high growth markets of India and US, portfolio of strong brands coupled with distribution strengths.

Biggies like Aurobindo, Lupin, Cadila Healthcare, Torrent Pharma, Alembic Pharma all having posted strong growth in the past 9-12 months, similar to Alkem, albeit with a higher export mix, are ruling at PE multiples of 20 times plus, some, even as high as 40 times, whereas they are currently commanding sales multiple of about 4x. Thus, on peer comparison too, there is sufficient discount, in terms of valuation.

Given the company’s strong fundamentals, growth prospects and attractive pricing, the IPO is a ‘subscribe’, for investors both with short as well as long term horizon.

Disclosure: No interest.