Emkay: Unichem Laboratories Gearing for growth

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Unichem Laboratories

Gearing for growth

BUY

CMP: Rs 530                                       Target Price: Rs 670

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n     Increased focus on prescription generation, penetration into tier-II to tier-IV markets and turnaround in Niche Generics to drive 25% earnings CAGR over FY10-13E

n     International business to start contributing positively from FY12E, expect 38% revenue CAGR over FY10-13E

n     Potential new contracts with MNCs to drive growth on account of higher capacity utilization and operational leverage

n     Strong balance sheet, zero debt and robust return ratios provide key comfort to investors; initiate coverage with Buy

Gearing up for a strong growth trajectory

In order to counter underperformance in the domestic business, management has taken

various initiatives such as increased focus on prescription generation, strong addition to

the field force, nurturing a second-tier of power brands and penetration into tier-II to tier-IV

markets. We believe that the phase of turbulence is behind us and that Unichem is gearing

up for a strong growth trajectory. Going forward, we expect earnings CAGR of 25% over

FY10-13E driven by 16% growth in domestic formulation business and turnaround in

Niche Generics.

International business at inflexion point

Unichem's international business (25% contribution to topline), which was so far, in

investment mode, is at an inflexion point as we expect them to start contributing profitably

from FY12E onwards. Losses incurred in international subsidiaries are expected to come

down to ~Rs50mn in FY11E and we expect a profitable contribution of Rs50mn in FY12E.

Overall, we expect its international business revenues to grow at a CAGR of 38% over

FY10-13E.

Tie-up with MNCs will drive growth in medium term

Unichem is in advanced stages of negotiations with 2-3 large MNCs for licensing and

supply contracts of Cephalosporins, Beta Lactam and other products. We expect these to

be signed in FY11E itself and likely start materializing from FY12E onwards. At an optimum

level, these contracts can contribute incremental revenue of over Rs2.5bn for Unichem.

Healthy balance sheet - key comfort for investors; Initiate coverage

with a Buy

Unichem is a zero debt company and has positive free cash flows. It has a strong balance

sheet with cash and investment equivalent to Rs23/ share (4% of CMP). The zero leverage

strategy offers stability to operations and positive operating cash flows implies headroom

for valuations to expand. Moreover, a shorter working capital cycle of 77 days as compared

to industry average of 115 days has kept the return ratios at healthy levels. Strong ratios are

also driven by a) higher contribution of formulation business, b) steady operating margins

and c) faster cash conversion cycle. We expect significant expansion in RoCE and RoE

from 28% and 23.4% in FY10 to 37% and 28% in FY13E. Revenues and earnings are

expected to clock 20% and 25% CAGR respectively over FY10-13E, with an EPS of Rs51.4

in FY12E. At CMP, the stock is trading at 10.3xFY12E EPS. Initiate coverage with a Buy rating

and a target price of Rs670.