Brokerages slashes Alkem Labs' target price despite surge in Q4 profits, sees 20% downside

Shares of Alkem Laboratories dropped by 6.9%, reaching ₹4,900 on the BSE during Thursday’s intraday trading. This decline occurred even though the company's profits had surged significantly year-over-year in the fourth quarter of the fiscal year 2023-24 (Q4FY24).

On Wednesday, Alkem Laboratories announced a 313.9% increase in its consolidated net profit, reaching ₹293.5 crore for the quarter ending March 31, 2024, up from ₹70.9 crore in the same period the previous year. In Q4FY24, the company's revenue from operations was ₹2,935.8 crore, a modest 1.1% rise from ₹2,902.6 crore in the same quarter last year, but down 12% sequentially, which left investors disappointed.

In the reviewed quarter, Alkem Laboratories' earnings before interest, taxes, depreciation, and amortisation (EBITDA) increased by 13.8% to ₹402 crore, with a 14% rise in margin. For the entire fiscal year 2023-24, the net profit grew by 82.4% to ₹1,795.7 crore, while revenue from operations experienced a 9.1% increase, totaling ₹12,662.5 crore.

Following Alkem Labs' Q4 performance, brokerage opinions were mixed. Some analysts assigned a neutral rating to the stock, while others labeled it as underperforming.

Analysts at Nuvama Research noted that Alkem's Q4FY24 revenue and EBITDA fell short of consensus estimates by 8 to 9%, while profit after tax (PAT) missed estimates by 13%. The domestic business remained flat year-over-year due to a high base and low seasonality. The brokerage described Alkem's guidance of 10% revenue growth and flat margins as conservative but anticipated a robust anti-infective season in FY25E. They projected an 11% year-over-year revenue growth and an EBITDA margin increase to 18.2% for FY25E.

“We are cutting FY25E/26E EPS by 5%/2% and rolling over to FY26E. We are downgrading the stock to ‘HOLD’ (from ‘BUY’) after the recent sharp rally and tax rate spike (25%) in FY27E. Our target price is ₹5,730 (earlier ₹6,130),” Shrikant Akolkar, Aashita Jain, and Gaurav Lakhotia of Nuvama wrote in a result update.

Analysts at Jefferies India Pvt Ltd reported that Alkem Laboratories' Q4FY24 revenues of ₹2,935.8 crore were 8% below their estimates. The Ebitda of ₹402 crore, down 43% sequentially, was 13% below their expectations. The net profit of ₹293.56 crore, down 51% sequentially, was 15% lower than their estimates. According to the analysts, the net profit was adversely affected by impairment losses associated with the Indore plant and the St. Louis, USA plant.

Analysts at Jefferies noted that Alkem Laboratories has been facing ongoing challenges in growth and normalizing its Ebitda margin, with no significant improvements expected in the near term. Consequently, they have reduced their earnings per share estimates for FY25 and FY26 by 5-6%.

Analysts at Motilal Oswal Financial Services have lowered their earnings estimates for Alkem Laboratories by 4% for FY25 and 2% for FY26. This adjustment considers increased operating expenses related to the Enzene facility in the US and higher spending on product development. The MOFSL analysts, who have given the stock a Neutral rating, anticipate a 10% compound annual growth rate (CAGR) in earnings over FY24-26, supported by a 12% and 20% sales CAGR in the Domestic Formulations Ex-US exports business and stable margins.

"Continuing our trend of improved performance, Q4FY24 builds on the momentum gained from previous quarters with significant gross margin enhancements backed by lower raw material cost and lower intensity of price erosion in the US," Alkem CEO Vikas Gupta said. Additionally, the pharmaceutical giant proposed a final dividend of ₹5 per equity share with a face value of ₹2 for FY24.