Alkem Laboratories (Alkem) reported Q3FY21 performance broadly in line with our estimates. Revenue growth stood at 6.2% YoY to Rs23.2bn (I-Sec: Rs23.6bn) driven by 6.3% increase in India sales. India business contributed ~65% to the revenues and we believe it would be the key value driver for Alkem. EBITDA margin improved 200bps YoY to 22.8% (down 260bps QoQ) largely benefiting from continuous cost control initiatives with 190bps decline in S, G&A expenses. We remain positive on the long-term outlook given sustainable growth in the domestic market, which has started improving in Q3FY21, continued scale-up in US generic business and potential for operating leverage.

India growth recovers; US steady: Domestic revenues reported a growth of 6.3% YoY, vs estimated 7% growth, in line with the industry growth. Outperformance in large brands helped the recovery and the company witnessed market share increase in key large brands. Trade generics also witnessed a robust growth during the quarter. Overall, the growth in 9MFY21 has been impacted due to COVID-19 related lockdown and we expect the growth recovery to continue in coming quarters. US revenues remained steady QoQ/YoY at US$83mn. The company continued to maintain clear FDA status across its plants and has received 12 ANDA approvals during 9MFY21 which would support growth in the coming quarters. ROW markets revenue grew strong 11.7% YoY.

EBITDA margin remains healthy: EBITDA margin improved 200bps to 22.8% on back of lower S,G&A expenses, however, dropped 260bps QoQ with increasing expenses as lockdown restrictions ease. Gross margin remained flattish YoY and improved 120bps QoQ led by pick up in India growth. We believe the cost savings implemented by the company is partially sustainable. Overall, we expect EBITDA margin improvement of 390bps over FY20-FY23E driven by increasing contribution from chronic segments in India, improving MR productivity and controlled costs.

Outlook: We expect Alkem to register 9.1% revenue and 16.8% PAT CAGRs over FY20-FY23E with margin expansion of 390bps to 21.6%. Strong earnings growth along with limited capex requirement would help in high free cashflow generation of ~Rs42bn over FY21E-FY23E. It would also drive the return ratios, RoE and RoCE higher to 20.0% and 18.4% respectively by FY23E. We remain positive on the stock considering higher proportion of India sales with consistent track record of outperformance and potential for operating leverage.

Valuations and risks: We raise earnings estimates by 2-6% for FY21E-FY23E to factor in lower S,G&A expenses. We reiterate BUY on the stock with a revised target of Rs3,758/share based on 25xFY23E EPS (earlier Rs3,566/share based on Sep'22E). Key downside risks: regulatory hurdles, addition of products in NLEM and delay in product approvals in the US.