Date: Jan 06, 2020
2
Page
Equity Research Pick of the Week – PCG Research
Leading player in AI and GI therapeutic area
Expect US Business to grow in double digits
India Business to outperform IPM in the medium term
Alkem Laboratories
INDUSTRY
CMP
RECOMMENDATION ed
Buying Range
TARGET
TIME HORIZON ed
Pharmaceuticals
Rs. 2094.65
Buy at CMP and add on declines
Rs. 1965 - 2120
Rs. 2380 - 2650 Rs. 1848
4 quarters
Increasing focus on chronic therapy augurs well
Newer products launches to aid in US revenues growth
Estimate 13% revenues and ~25% PAT cagr over FY19-21E
3
Page
Equity Research Pick of the Week – PCG Research
Shareholding Pattern % (Sep 30, 2019)
Promoters 66.0
Institutions 14.1
Non Institutions 19.9
Total 100.00
HDFC Scrip Code ALKLABEQNR
BSE Code 539523
NSE Code ALKEM
Bloomberg ALKEM:IN
CMP Jan 03, 2019 2094.65
Equity Capital (cr) 23.9
Face Value (Rs) 2
Eq- Share O/S(cr) 11.95
Market Cap (Rs cr) 25069
Book Value (Rs) 455
Avg.52 Wk Volume 48381
52 Week High 2149
52 Week Low 1660.4
Red Flag Price Level 1848
PCG Risk Rating * Yellow
India Business On Firm Footing Alkem Laboratories is the prominent player in Acute therapeutic segment in India. The company is working
to its strengths in the acute segment in domestic market and is focussed on growing its presence in the
chronic therapies as well. It is expected that acute season in India will be better this year, which should lead
to 12-15% growth in the company’s India business and around 100bps margin expansion in FY20. PAT
growth is expected to be 20-25%, aided by lower tax-rate. Alkem remains compliant to US FDA, which
augurs well for the US business. We are bullish on Alkem Laboratories given steady domestic acute business
and gaining traction from Chronic therapeutic segment in domestic market and double digit growth in the
US market in the next two years.
Company Profile:
Alkem Laboratories (Alkem) is a leading Indian pharmaceutical company with global operations. Alkem
produces branded generics, generic drugs, active pharmaceutical ingredients (APIs) and nutraceuticals. It
has a comprehensive portfolio of over 800 brands covering all the major therapeutic segments. Alkem is
ranked as the sixth largest pharmaceutical company in India in terms of market share. The company also
has presence in more than 50 international markets, with the United States being its key focus market. In
the US market, the Company has developed a strong pipeline of products with over 132 ANDA filings of
which half of them are yet to be commercialised. Alkem has an infrastructure comprising 21 manufacturing
facilities, out of which 6 are US FDA approved and 5 R&D centres located across India and the US. Domestic
business contributed 69% to total revenues while the US business contribution stood at 25% and other
international markets contributed to 6% of revenues.
View and valuation:
Last year, Alkem’s India business faced multiple headwinds including the ban on certain Fixed Dose
Combinations (FDCs), a relatively weak anti-infective season and a slow growth in their trade generic
business. However, on the positive side, the company’s chronic business continued to grow significantly
ahead of the market growth rate, leading to improvements in its market share and ranking in therapy
segments of CNS, anti-diabetic, cardiology and dermatology. International Business mainly led by the US,
delivered a robust performance on the back of new product launches and market share gains in the
company’s existing products. Alkem has more than 120 ANDAs filed with the US FDA and own front end to
distribute and market its products. Alkem is amongst the top 10 pharmaceutical companies in India and
during last fiscal, it outperformed the India Pharmaceutical Market (IPM) with growth of 14.3% compared
to IPM growth of 10.5%. We expect 13% cagr in revenues on the back of 15% growth in US business and
13% cagr in India business over FY19-21E. Strong revenues and steady margin expansion and lower tax
rate would lead to robust growth in PAT; estimate 25% PAT cagr over the same period. We recommend buy
on Alkem Labs at CMP of Rs 2095 and add on dips to Rs 1965 for sequential price target of Rs 2380 and Rs
2650 over the next four quarters. The stock trades at ~21x FY21E earnings and we have arrived to sequential
TP of Rs 2380 and Rs 2650 based upon 24x and 26.5x FY21E earnings respectively.
FUNDAMENTAL ANALYST
Kushal Rughani [email protected]
4
Page
Equity Research Pick of the Week – PCG Research
Key Highlights
Alkem Laboratories (Alkem) produces
branded generics, generic drugs, active pharmaceutical ingredients (APIs) and nutraceuticals. It has a comprehensive portfolio of over 800 brands covering
all the major therapeutic segments.
In the domestic market, company is amongst the prominent players in the acute therapy (~80% of its domestic
revenues) segments of anti-infective, gastro-intestinal, pain/analgesics and
vitamins/minerals/nutrients. In the fast-growing chronic therapy segments of Neuro/CNS, cardiology, anti-diabetes and dermatology, the
company is taking rapid strides to emerge as one of the faster growing companies in the country.
Domestic business contributed 69% to
total revenues while the US revenues contribution stood at 25% and other international markets contributed to 6% of revenues.
With increased government spending,
growth of the insurance and at the backdrop of a rising population, the pharmaceutical industry is bound to do
well in the future.
We expect 13% cagr in revenues on the back of 15% growth in US business and 13% cagr in India business over FY19-21E. Strong revenues and margin
expansion would lead to faster growth in PAT; estimate 25% PAT cagr over the
same period.
Investment Rationale: Strong growth strategy for leadership in domestic market
Alkem has been the No. 1 Anti-infectives company in India for over the last 15 years, it is the No. 3 Gastro-
intestinal and analgesics company in India, it’s brands feature amongst the top 2 ranked brands in India in
their respective molecule category, company has 8 Brands with annual sales of more than Rs 100 Cr, 4
Brands which features amongst the top 50 pharmaceutical brands in India, 14 Brands feature amongst the
top 300 pharmaceutical brands in India. Off late, Alkem has increased its focus on introducing new products
to meet identified therapy gaps across its established therapeutic segments. The company introduced two
novel molecules in India - Arbekacin in Anti-Infective segment and Evogliptin in Anti-Diabetic segment. Both
of these are in-license products and would be exclusively marketed by Alkem, as per the terms of the
agreement. In the gastro-intestinal segment, Alkem offers products to treat disorders like hyperacidity,
gastric ulcers, nausea, vomiting, diarrhoea, GERD (Gastroesophageal Reflux Disease) and worm infestation.
Alkem has also entered the areas of probiotics, prokinetics, laxatives and digestive enzymes. The
differentiated product offerings in these new therapy areas will enable the company to grow and diversify
its portfolio.
Alkem also has several new products lined up in the vitamins, minerals and nutrients segment along with
the nutraceuticals in the areas of pregnancy, bone-health, gastro-segment (GI), among others. Alkem is
consolidating its existing offerings in the pain/analgesic segment through brand building initiatives. Most of
the popular brands are in the high-growth segment and still have ample headroom to grow further. The
demographic and disposal income as well as government ’s spending on healthcare are all in favour of the
sector and the further growth is expected in the company going forward.
In the domestic market, company is amongst the prominent players in the acute therapy (~80% of its
domestic revenues) segments of anti-infective, gastro-intestinal, pain/analgesics and
vitamins/minerals/nutrients. In the fast-growing chronic therapy segments of Neuro/CNS, cardiology, anti-
diabetes and dermatology, the company is taking rapid strides to emerge as one of the faster growing
companies in the country. The Company looks to outperform in the chronic segments on the back of new
product launches including in-licensed products, effective sales and marketing strategies, improved sales
force productivity and building strong brands. Alkem ranks no.1 in Anti-Infectives (AI), no.2 in Gastro-
Intestinal (GI), no.3 in Pain Management and no.4 in Vitamins/Minerals/Nutrients (supplements) (VMS). In
Neuro Science/CNS, company is ranked no.6 and in Dermatology, the company is ranked at 13.
During the second quarter, the Company filed 5 abbreviated new drug applications (ANDAs) with US FDA
and received 7 approvals (including 2 tentative approval). For H1 FY20, the Company filed 7 ANDAs with
the US FDA and received 12 approvals (including 4 tentative approval). As on Sep 30, 2019, the Company
has filed a total of 131 ANDAs and 1 new drug application (NDA) with the US FDA. Of these, it has received
approvals for 77 ANDAs (including 11 tentative approvals) and 1 NDA.
5
Page
Equity Research Pick of the Week – PCG Research
Strategy for the domestic business
Alkem remains focussed on growing its India business through sustained efforts, to safeguard its dominance in acute therapies (85% of Alkem’s
India business) and create large brands in the chronic segment. It has 12 divisions in the acute segment and 7-8 divisions in the chronic segment.
Alkem plans to add 1,000 MRs in FY20, after 2,000 MRs additions in the past two years. Management believes that such efforts will help Alkem
outperform market growth in India by 200-300bps. Alkem’s India business can grow at 12-15% in the coming years.
Alkem’s India business needs to grow 12-15% in FY20 vs. 9% growth seen in FY19, for the company to deliver its stated margin improvement.
Given the better acute season this year vs. the weakness observed in the past two years, company is likely to deliver better numbers. Tax-rate is
also expected to come down, to 15-16% from 19% in FY18, driven by higher production at the tax-exempt Sikkim facility. All these factors are
expected to translate into 20-25% PAT growth for FY20. We estimate 200bps margin expansion over FY19-21E
Government Initiatives: In September 2018, ‘Ayushman Bharat’ or the National Health Mission Scheme was launched by the Government. The
largest Government-funded healthcare programme, PMJAY provides health insurance cover up to 5 lakh per family, covering 500 million citizens
who are most poor and vulnerable. Major focus of the PMJAY is on tertiary care and includes treatment for cancer, heart, respiratory and kidney
diseases. The PMJAY scheme has an outlay of Rs 6400 Cr. For FY20, Rs 61,398 Cr was earmarked as budgetary allocation for the health sector.
This is the highest in the last two financial years and 16% increase over FY19 allocation. Under the programme, nearly 1.5 lakh sub-centres and
primary health centres will be transformed as health and wellness centres by 2022. These centres will be equipped to provide treatment for
diabetes, cancer and other illnesses. The increased expenditure on healthcare is expected to benefit the pharmaceutical industry. Further, the
thrust on tertiary care and chronic therapy areas augurs well for specialty medicine manufacturers.
Focus on R&D & New Product Launches: Alkem has been focusing on R&D to strengthen its product portfolio and hence the future growth.
Research and Development (R&D) is one of the main pillars of growth for the Company. In the last five years, Alkem has invested over Rs 1500cr
in R&D to develop new products for its key markets. In FY19, company spent Rs 462cr or 6.3% of its revenues on R&D compared to 5.7% in the
previous year. The Company’s R&D team comprises over 500 scientists working across its 5 R&D centres located in India and the US to develop
products for its key focussed markets. It also has a 120 beds clinical research organisation facility for conducting bioequivalence and bioavailability
studies on healthy volunteers to prove the effectiveness of developed formulations. It has also set up new manufacturing facilities that are tax-
efficient as they avail fiscal benefits.
Alkem has increased their rate of ANDA filings to bolster product pipeline. Alkem filed 23 ANDAs during the year and received 21 approvals, which
includes 6 tentative approvals. This is the highest number of filings and approvals received by Alkem in a year. The company has a fairly strong
product pipeline of 127 ANDAs (as on March’19) already filed with the US FDA, with over half of them yet to be commercialised. Timely new product
approvals and commercialisation would be the key growth driver in the US market. The company has also made substantial investments in the
biosimilar segment through its subsidiary Enzene Biosciences - a biotech focussed R&D company situated in Pune, India. Over the medium to long-
term, Enzene aims to launch its biosimilar products, which are presently in preclinical and clinical development stage, in India and key international
markets.
6
Page
Equity Research Pick of the Week – PCG Research
Biosimilars are very similar, though not identical, to FDA-approved biological products in terms of safety and effectiveness. Alkem is focussing on
providing biosimilars in key areas like oncology, rheumatology and diabetes. While some of the biosimilars are in early stage s of development, a
few have reached advanced clinical stages and the company is also setting up a biosimilar manufacturing facility in Pune, India. The introduction
of biosimilars will be an important future growth driver for the company.
Growth in Developed Markets: Over the last four years (FY14-18), the developed markets have grown at 5.7% CAGR. While growth is expected
to slow down to 3-5% CAGR over the period FY19-23, these countries will continue to cumulatively account for the largest amount of pharmaceutical
spending. The launch of specialty products and orphan drugs (i.e. drugs intended to treat rare diseases) will drive spending in this region. The US
pharmaceutical market is the world’s largest pharmaceutical market with medicine spending exceeding US$ 480 billion in 2018. It is also the largest
importer of drugs in the world and hence the growth and dynamics of the US market has a considerable bearing on the overall g rowth of the
industry. Over the period FY14-18, the US pharmaceutical market has grown at 7.2% CAGR, the fastest amongst the developed markets. However,
in the recent past, increased scrutiny by the government and the public on the price increases, higher number of ANDA approva ls by the US FDA
and channel consolidation has led to deflationary price trends. Over the next five years, branded medicines with sales worth > US$ 80 billion would
be losing exclusivity in the US. This patent expiry provides significant market opportunity for generic manufacturers. After India, US is the second
largest market for Alkem, contributing 25.8% to its total revenues. During FY19, the US business registered operating revenue of Rs 1,898cr, grew
by 39% yoy. The strong growth during the financial year was mainly on account of market share gains in the existing products as well as
contributions from the new product launches. Favourable exchange rate movement also helped the reported yoy growth during the year. Alkem
has cumulatively filed 132 ANDAs including one new drug application (NDA) with the US FDA. Of these, it has received approvals for 77 ANDAs
(including 11 tentative approvals and 1 NDA). In-licensing opportunities, strategic alliances and partnerships, quicker ANDA filings through a strong
focus on R&D will enable Alkem to boost its capabilities and product portfolio and result in more opportunities for growth in the US pharmaceutical
market. The management is confident of sustained growth in the US despite its challenges.
Opportunities in the Domestic Business: During FY19, Alkem’s domestic business registered operating revenue of Rs 4,964.2cr, +8.4% yoy
Revenues during the year was impacted due to ban on selected FDC drugs and relatively slower growth in the acute therapeutic segments of anti-
infectives (AI) and gastro-intestinal (GI) which contributes more than half to the company’s domestic sales. Alkem maintained its rank amongst
the top ten pharmaceutical companies in India with leading position in the acute segments of anti-infective, gastro-intestinal, pain & analgesic and
vitamins/minerals/nutrients (supplements) (VMS). In the chronic therapeutic segments of neurology, dermatology, anti-diabetes and cardiology,
Alkem grew ahead of the market growth rate thereby not only gaining market share but also improving its market ranking. Alkem also has several
new products lined up in the vitamins, minerals and nutrients segment along with the nutraceuticals in the areas of pregnancy, bone-health, gastro-
segment, among others. Alkem is consolidating its existing offerings in the pain/analgesic segment through brand building initiatives. The chronic
segment is also poised to be an important driver of industry growth with cardiology and diabetology being amongst the fastest -growing therapy
areas in the country. Alkem has set up specialised divisions for cardiology, diabetology, urology, CNS and dermatology to focus on the right brands
within each of these segments. Alkem has already exclusively launched Evogliptin (an innovative DPP4 inhibitor for effective control of glucose)
which has received an encouraging response.
7
Page
Equity Research Pick of the Week – PCG Research
Top Selling Brands in Domestic Market
Pharma Exports registered ~10% growth in FY19
As per IQVIA data, Alkem features amongst the top 7 Neuro/Central Nervous System (CNS) companies in India and ranks amongst the leading
companies in the Alzheimer’s segment. The company has also gained market share and improved its rankings in the areas of dermatology,
cardiology and anti-diabetes. India is also the largest provider of generic medicines globally (20 - 22% of global export volume). Around 55% of
the total pharmaceutical exports from India are to the developed and regulated markets, speaking volumes about the quality, efficacy and pricing
of the Indian drugs. As per Pharmexcil Annual Report, pharmaceutical exports from India stood at ~US$ 19 billion for the financial year 2019 or
almost 10% higher than the previous fiscal. The growth is commendable as it was achieved against the demanding backdrop of increasing
competition in the generics space, price erosion due to competition intensification and channel consolidation, and heightened regulatory
environment, particularly in its key market. Indian pharmaceutical exports are likely to touch $22 billion (+14% yoy) this fiscal largely owing to
improving exports to and stabilising prices in the US market, which accounts for a third of India’s pharma exports, forecasts Pharmaceuticals Export
Promotion Council of India (Pharmexcil). With increased government spending, growth of the insurance and at the backdrop of a rising population,
the pharmaceutical industry is bound to do well in the future. The double digit growth returned in exports after three years, driven by formulation
exports largely to North America.
Alkem has 21 manufacturing facilities located across India and the US to serve its key markets. Six of these are US FDA approved and cater to the
US markets. Over the last three years, the company has invested significantly in these facilities to build sufficient capacit ies to support the
foreseeable demand for formulations and APIs over the next few years. Besides, successful debottlenecking projects have been carried out at the
facilities, which have bolstered production, while reducing production costs. These strategic investments in manufacturing capacities has created
a competitive advantage and will be fundamental in enabling the Company to capture significant market opportunities.
Brand Therapeutic area Sales (Rs cr) Mkt Share (%)
Clavam AI 361 16
Pan GI 283 30
Pan-D GI 267 28
Taxim-O AI 198 21
Taxim AI 138 77
Xone AI 132 14
A To Z NS Vitamins (VMS) 130 9
Gemcal Pain 106 14
Pipzo AI 92 18
Ondem GI 89 28
8
Page
Equity Research Pick of the Week – PCG Research
On the workforce front, Alkem has more than 14,500+ employees working across the globe, 500+ Scientists, 9,000+ Field force in India, 7,000+
Stockists in India, 40+ Sales depots and warehouses in India. This give the company feet-on-the-street to ensure improved reach of all its products.
Further, this significantly large field force enables each medical representative to focus on fewer products vis -à-vis several, leading to more
productivity.
Key Highlights from Q2 FY20 Concall
India business
Alkem’s Q2 FY20 17.6% yoy India growth stemmed from its acute (15%), and chronic (24%) therapies.
According to IQVIA, in Q2 FY20 Alkem’s anti-infective division sales grew 30.8% yoy vs. therapy growth rate of 19.9% yoy.
As Per IQVIA, Alkem gained one rank and featured among the top-four pharmaceutical companies in India.
During the quarter, the company also improved its ranking in chronic therapies such as neuro/CNS, derma and anti-diabetes.
The present MR strength is 10,000. Of 8,000, 65% is dedicated to acute therapies, the rest to chronic therapies and for remaining
2,000 (acute 1,200 and chronic 800).
US market
Management said that growth of its US business in Q2 FY20 (11.7%) stemmed from product launches and the scale-up of existing
products.
Management guided to ~10-12 product launches during FY20.
Recently, the company received EIR for its formulations manufacturing plants at Daman and Baddi (India), which were inspected
in Aug’19. Major ANDA filings are from the Daman and Baddi plants.
The St Louis facility contributes less than 3% of US sales.
Other highlights
Tax-rate guidance for FY20 was at 10-12%; for FY21, 12-15%.
The higher debt on account of working capital required will contract by end of FY20.
EBITDA margin guidance: – 100bp y/y improvement.
R&D guidance: 5.5 - 6% of sales.
9
Page
Equity Research Pick of the Week – PCG Research
View & Valuation:
Last year, Alkem’s India business faced multiple headwinds including the ban on certain Fixed Dose Combinations (FDCs), a relatively weak anti-
infective season and a slow growth in their trade generic business. However, on the positive side, the company’s chronic business continued to
grow significantly ahead of the market growth rate, leading to improvements in its market share and ranking in therapy segments of CNS, anti-
diabetic, cardiology and dermatology. International Business mainly led by the US, delivered a robust performance on the back of new product
launches and market share gains in the company’s existing products.
Medicine spending in the US is expected to grow at a steady clip and the region is also expected to witness a large number of products going off-
patent over the next five years. Given this, there is a good headroom for growth in the US market. The demographic and disposal income as well
as the government spending on healthcare trends are all in favour of the sector and the further growth is expected in Alkem going forward. Alkem
has more than 120 ANDAs filed with the US FDA, cGMP compliant manufacturing facilities and own front end to distribute and market its products.
Alkem is amongst the top 10 pharmaceutical companies in India and during last fiscal, it outperformed the India Pharmaceutical Market (IPM) with
growth of 14.3% compared to IPM growth of 10.5%. For FY19, overall revenues grew ~14% yoy to Rs 7357cr. Operating Margin was down 80bps
and stood at 15.2%. Strong revenues and lower tax expenses led to 12% yoy growth in PAT for the year. We expect 13% cagr in revenues on the
back of 15% growth in US business and 13% cagr in India business over FY19-21E. Strong revenues and steady margin expansion would lead to
stellar 25% cagr in PAT. We recommend buy on Alkem Labs at CMP of Rs 2095 and add on dips to Rs 1965 for sequential price target of Rs 2380
and Rs 2650 over the next four quarters. The stock trades at ~21x FY21E earnings and we have arrived to sequential TP of Rs 2380 and Rs 2650
based upon 24x and 26.5x FY21E earnings respectively.
Key Risks
Delay in approvals/launches may impact the US business
Any adverse US FDA action upon inspection of its US dedicated facilities
More number of drugs coming under DPCO coverage, thus impacting domestic business (price erosion)
10
Page
Equity Research Pick of the Week – PCG Research
Revenues Trend
Source: Company, HDFC sec Research
5853 6431 7357 8219 9430
16
10
14
12
15
5
10
15
20
2000
4000
6000
8000
10000
FY17 FY18 FY19 FY20E FY21E
Revenues Growth
EBITDA and Margin trend over FY19-21E
Source: Company, HDFC sec Research
999 1028 1115 1340 1622
17.1
16.0
15.2
16.3
17.2
5
10
15
20
300
600
900
1200
1500
1800
FY17 FY18 FY19 FY20E FY21E
EBITDA Margin
PAT trend over FY19-21E
Source: Company, HDFC sec Research
892 681 761 925 1191
20
-24
12
22
29
-25
-15
-5
5
15
25
35
300
600
900
1200
FY17 FY18 FY19 FY20E FY21E
PAT Growth
Strong Return Ratios (%)
Source: Company, HDFC sec Research
22
15 1516
18
22
14 1415
17
0
5
10
15
20
25
FY17 FY18 FY19 FY20E FY21E
RoE RoCE
11
Page
Equity Research Pick of the Week – PCG Research
Domestic Revenues over FY17-21E
Source: Company, HDFC sec Research
4215 4490 4874 5498 6222
16
79
13 13
3
6
9
12
15
18
500
1500
2500
3500
4500
5500
6500
FY17 FY18 FY19 FY20E FY21E
Revenues Growth
US revenues trend over FY17-21E
Source: Company, HDFC sec Research
1203 1367 1897 2061 2502
22
14
39
9
21
0
5
10
15
20
25
30
35
40
45
300
600
900
1200
1500
1800
2100
2400
2700
FY17 FY18 FY19 FY20E FY21E
Revenues Growth
Domestic Therapeutic Split (%)
Source: Company, HDFC sec Research
40
19
12
8
4
33
38
Anti-Infectives (AI)
Gastro Instetinal (GI)
Pain
Vitamins/Minerals
Neuro/CNS
Derma
Anti-Diabetic
Cardiac
Others
ANDA Filings in USA
Source: Company, HDFC sec Research
63
77
91
108
127132
19
3139
50
7077
0
20
40
60
80
100
120
140
FY15 FY16 FY17 FY18 FY19 H1 FY20
Total Filings Approved ANDAs
12
Page
Equity Research Pick of the Week – PCG Research
Income Statement
(Rs Cr) FY17 FY18 FY19 FY20E FY21E
Net Revenue 5853 6431 7357 8219 9430
Other Income 112 96 88 85 133
Total Income 5965 6527 7445 8303 9563
Growth (%) 15.9 9.9 14.4 11.7 14.7
Operating Expenses 4854 5403 6243 6879 7808
EBITDA 1111 1124 1202 1424 1755
Growth (%) 17.1 2.9 8.4 20.2 21.1
EBITDA Margin (%) 17.1 16.0 15.2 16.3 17.2
Depreciation 101 143 193 222 262
EBIT 1010 981 1009 1203 1493
Interest expenses 45 55 55 56 54
PBT 965 926 955 1147 1438
Tax 60 288 181 206 230
Minority Interest -13 -8 -13 -15 -17
RPAT 892 631 761 925 1191
Growth (%) 20.3 -23.7 11.7 21.7 28.8
EPS 74.6 57.0 63.6 77.4 99.6 Source: Company, HDFC sec Research
Balance Sheet As at March FY17 FY18 FY19 FY20E FY21E
SOURCE OF FUNDS
Share Capital 23.9 23.9 23.9 23.9 23.9
Reserves 4444 4840 5415 6100 6980
Shareholders' Funds 4468 4864 5439 6123 7004
Long Term Debt 209 131 231 206 181
Short Term Debt 451 867 713 713 713
Net Deferred Taxes -696 -654 -707 -707 -707
Long Term Provisions & Others 102 165 214 203 240
Minority Interest 115 122 133 133 133
Total Source of Funds 4649 5494 6023 6670 7564
APPLICATION OF FUNDS
Net Block (incl. CWIP) 1846 2367 2682 2860 2998
Goodwill 366 367 381 381 381
Investments 0 99 96 96 96
Other Non-Current Assets 484 165 126 146 173
Total Non-Current Assets 2696 2997 3285 3482 3647
Cash & Equivalents 952 923 890 1467 2045
Inventories 1206 1442 1500 1696 1818
Trade Receivables 714 1081 1248 1238 1550
Other Current Assets 304 568 578 578 578
Total Current Assets 2224 3091 3327 3513 3947
Trade Payables 741 961 962 1060 1204
Other Current Liab & Provisions 482 556 515 731 871
Total Current Liabilities 1223 1517 1478 1792 2075
Net Current Assets 1000 1574 1849 1721 1872
Total Application of Funds 4649 5494 6023 6670 7564
Source: Company, HDFC sec Research
13
Page
Equity Research Pick of the Week – PCG Research
Cash Flow Statement (Consolidated)
(Rs Cr) FY17 FY18 FY19 FY20E FY21E
Reported PBT 965 926 955 1,147 1,438
Non-operating & EO items -9 -3 -53 0 0
Interest Expenses -59 -23 -33 -29 -78
Depreciation 101 143 193 222 262
Working Capital Change -263 -564 -251 55 -140
Tax Paid -264 -203 -181 -206 -230
OPERATING CASH FLOW ( a ) 471 276 629 1,188 1,252
Capex -634 -677 -508 -400 -400
Free Cash Flow -163 -401 122 788 852
Investments -42 87 3 0 0
Non-operating income 390 223 61 70 116
INVESTING CASH FLOW ( b ) -286 -367 -445 -330 -284
Debt Issuance / (Repaid) 12 357 -54 -25 -25
Interest Expenses -64 -55 -55 -56 -54
FCFE -215 -99 13 707 773
Share Capital Issuance - - - - 1
Dividend -86 -218 -227 -241 -311
Others -429 530 117 42 0
FINANCING CASH FLOW ( c ) -567 614 -218 -281 -390
NET CASH FLOW (a+b+c) 952 923 890 1,467 2,045 Source: Company, HDFC sec Research
Key Ratios (Rs Cr) FY17 FY18 FY19 FY20E FY21E
EBITDA Margin 17.1 16.0 15.2 16.3 17.2
EBIT Margin 15.3 13.8 12.5 13.6 14.4
APAT Margin 15.2 10.6 10.3 11.3 12.6
RoE 21.9 14.6 14.8 16.0 18.2
RoCE 21.6 14.2 14.0 15.3 17.4
Solvency Ratio
Debt/EBITDA (x) 0.7 1.0 0.8 0.7 0.6
Net D/E -0.1 0.0 0.0 -0.1 -0.2
PER SHARE DATA
EPS 74.6 57.0 63.6 77.4 99.6
BV 374 407 455 512 586
Dividend 15.0 10.1 16.0 17.0 21.9
Turnover Ratios (days)
Debtor days 45 61 62 55 60
Inventory days 75 82 74 75 70
Creditors days 46 55 48 47 47
VALUATION
P/E 27.5 36 32.4 26.7 20.7
P/BV 5.5 5.0 4.5 4.0 3.5
EV/EBITDA 21.1 20.9 19.2 15.6 12.5
EV / Revenues 3.6 3.3 2.9 2.5 2.1
Dividend Yield (%) 0.8 0.6 0.9 1.0 1.2 Source: Company, HDFC sec Research
14
Page
Equity Research Pick of the Week – PCG Research
Ratings Chart
R E T U R N
HIGH
MEDIUM
LOW
LOW MEDIUM HIGH
RISK
Ratings Explanation:
RATING Risk - Return BEAR CASE BASE CASE BULL CASE
BLUE LOW RISK - LOW RETURN STOCKS
IF RISKS MANIFEST PRICE CAN FALL 20%
OR MORE
IF RISKS MANIFEST
PRICE CAN FALL 15% & IF INVESTMENT
RATIONALE FRUCTFIES
PRICE CAN RISE BY 15%
IF INVESTMENT RATIONALE FRUCTFIES
PRICE CAN RISE BY 20% OR MORE
YELLOW MEDIUM RISK - HIGH RETURN STOCKS
IF RISKS MANIFEST PRICE CAN FALL 35%
OR MORE
IF RISKS MANIFEST PRICE CAN FALL 20% &
IF INVESTMENT RATIONALE FRUCTFIES
PRICE CAN RISE BY 30%
IF INVESTMENT RATIONALE FRUCTFIES
PRICE CAN RISE BY 35% OR MORE
RED HIGH RISK - HIGH RETURN STOCKS
IF RISKS MANIFEST PRICE CAN FALL 50%
OR MORE
IF RISKS MANIFEST PRICE CAN FALL 30% &
IF INVESTMENT RATIONALE FRUCTFIES
PRICE CAN RISE BY 30%
IF INVESTMENT RATIONALE FRUCTFIES
PRICE CAN RISE BY
50% OR MORE
# Explanation of Red-flag Price level: If stock prices starts sustaining below red-flag level, the premise of the investment needs to be reviewed. Risk averse
investors should exit the stock and preserve capital. The downside of following red-flag level is that if the price decline turns out to be temporary and if
it recovers subsequently, one won’t be able to participate in the gains.
15
Page
Equity Research Pick of the Week – PCG Research
Price Chart
300
600
900
1200
1500
1800
2100
2400
Rating Definition:
Buy: Stock is expected to gain by 10% or more in the next 1 Year. Sell: Stock is expected to decline by 10% or more in the next 1 Year.
16
Page
Equity Research Pick of the Week – PCG Research
Disclosure:
I, Kushal Rughani, MBA, author and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. H SL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or
view(s) in this report.
Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial
ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the R esearch Report. Further Research Analyst or his relative or HDFC Securiti es Ltd. or its
associate does not have any material conflict of interest.
Any holding in stock –No HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475.
Disclaimer:
This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained her ein have been compiled or arrived at, based upon
information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to i ts accuracy,
completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicit ation of an offer, to buy or sell any securities or other financial instruments.
This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in any locality, state, co untry or other
jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation o r what would subject HSL or its affiliates to any registration or licensing requirement within such
jurisdiction.
If this report is inadvertently sent or has reached any person in such country, especially, United States of America, the same should be ignored and brought to the attention of the sender. This document may not be
reproduced, distributed or published in whole or in part, directly or indirectly, for any purposes or in any manner. Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived from them. In addition,
investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency ri sk.
It should not be considered to be taken as an offer to sell or a solicitation to buy any securi ty. HSL may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mail and/or
its attachments.
HSL and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any
other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financia l instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other relat ed information and opinions.
HSL, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investm ents made or any action taken on basis of this report, including
but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc.
HSL and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities a nd financial instruments dealt in the report, or may make sell or purchase or other deals
in these securities from time to time or may deal in other securities of the companies / organizations described in this repo rt.
HSL or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months.
HSL or its associates might have received any compensation from the companies mentioned in the report dur ing the period preceding twelve months from t date of this report for services in respect of managing or co -
managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory se rvice in a merger or specific transaction in the normal course of business.
HSL or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neithe r HSL nor
Research Analysts have any material conflict of interest at the time of publication of this report. Compensation of our Resea rch Analysts is not based on any specific merchant banking, investment banking or brokerage
service transactions. HSL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this re port. Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject company. We have not received any
compensation/benefits from the subject company or third party in connection with the Research Report.
HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496
5066
Compliance Officer: Binkle R. Oza Email: [email protected] Phone: (022) 3045 3600
HDFC Securities Limited, SEBI Reg. No.: NSE, BSE, MSEI, MCX: INZ000186937; AMFI Reg. No. ARN: 13549; PFRDA Reg. No. POP: 11092018; IRDA Corporate Agent License No.: CA0062; SEBI Research Analyst Reg. No.:
INH000002475; SEBI Investment Adviser Reg. No.: INA000011538; CIN - U67120MH2000PLC152193
Mutual Funds Investments are subject to market risk. Please read the offer and scheme related documents carefully before inve sting.