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Stock pick of the week: What makes Alkem Lab a good long term buy

Alkem Lab is reasonably priced compared to its competitors and the recent correction has offered a good opportunity to long-term investors.

, ET Bureau|
Aug 21, 2017, 06.30 AM IST
The Alkem Lab's stock is trading at reasonable valuations and the company is likley to see a turnaround in 2018-19.
Despite weak results for the first quarter of 2017-18, analysts are bullish on Alkem Lab. This is because the weak numbers by Alkem Lab, the fifth-largest pharmaceuticals company in India, are attributable to external factors—key being the introduction of the goods and services tax (GST).

Domestic sales fell 21% year-on-year (y-o-y) in the first quarter due to destocking (not taking in new products) by pharmacists prior to the GST implementation. Overall sales fell 11% y-o-y, in the first quarter, despite a decent show by Alkem’s international business. High compensation to partners during this difficult period, mostly to make up for lost input credits, also brought down the net profit by 70% y-o-y.

The second quarter results may also not be great for Alkem Lab because there were some GST-related disturbances in the first few weeks of July. Small increase in the tax rates—12% GST compared to the effective tax rate of 9.5% earlier—is another hiccup. With the successful implementation of GST, analysts are hopeful that things will improve slowly from the third quarter onwards.

However, the second half of the year has traditionally been weak for the company due to seasonality, which is why the consensus estimates project a 4% fall in Alkem Lab’s net profit during 2017-18. Though the company may face pressure in 2017-18, investors can expect a recovery in 2018-19 and, according to consensus estimates, its net profit growth is pegged at 32%. Domestic business returning to normalcy will be the main factor for this. With leadership positions in several acute therapy areas in India, Alkem Lab should be able to make the most of its recovery.

The company’s international business is doing reasonably well now—sales grew 9% y-o-y during the first quarter—and is expected improve further because of new product launches. Alkem Lab made launched two new products in the first quarter and is expected to come out with six more in 2017-18. Since the current base of its international business is low, Alkem Lab’s international business is expected to report 25%-plus compound annual growth in revenue between 2017-18 and 2018-19.

Overall margin should also rise due to its improving business mix—increased contribution from exports—and operating leverage. The recent correction and resultant fall in its valuations are also factors that are attracting analysts to this counter. More importantly, Alkem Lab is reasonably priced compared to its competitors and the recent correction has offered a good opportunity to long-term investors.

Selection Methodology
We pick the stock that has shown the maximum increase in ‘consensus analyst rating’ in the past one month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search is restricted to stocks that are covered by at least 10 analysts. You can see similar consensus analyst rating changes during the past week in the ETW 50 table.

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