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Unichem Labs |
Disappointing quarter; Downgrade estimates |
ACCUMULATE
CMP: Rs 208 Target Price: Rs 243
n Unichem’s Q3FY11 results were disappointing with a) Revenues at Rs1.97bn (estd. Rs1.93) b) EBITDA at Rs394mn (estd. Rs405mn) and c) PAT at Rs 256mn (estd. Rs269mn)
n Revenue growth was driven by 11% growth in domestic formulations (branded business up 12%, chronic portfolio up 14%) and 36% growth in export formulations
n EBITDA margins at 20% (down 692bps) was on account of a) higher raw material cost b) increase in sales and marketing cost and b) commissioning of new plants at Sikkim & Baddi
n Revise FY11/FY12 earnings downwards; cut target price to Rs243 (earlier Rs268); Downgrade to Accumulate
Revenue growth led by branded domestic and export formulations
Unichem has reported 14% growth (est. of 11%) in revenue to Rs1.97bn driven by a)
11% growth in the domestic formulations and b) 36% growth in the export formulations
business. Within the domestic portfolio, Unichem’s branded portfolio grew by 12% (up
16% in 9MFY11) and the chronic portfolio grew by 14% (up 20% in 9MFY11). Going
ahead, we believe growth drivers for Unichem remain intact. Unichem continues to
make small inroads in other markets, which would contribute gradually to the top line.
The company is also negotiating generic supply agreements from the Ghaziabad
formulations and the Baddi cephalosporin blocks. While the company expects CMO
income from the two sites to start kicking-in from late Q4FY11 or early Q1FY12, we
believe site approvals may take a while. While the UK subsidiary, Niche Generics, has
reported improvement in performance during 9MFY11, it is unlikely to break-even in the
current year (9MFY11 Sales GBP6.8mn; Net loss GBP 0.65mn).
EBIDTA margins at 20%, below expectations
Despite 14% growth in top line, EBITDA margins declined by 692bps to 20% on account
of a) 24% increase in employee cost, mainly because of field force expansion in India,
b) 18% increase in raw materials (due to higher API sales and adverse product mix),
and c) 33% increase in other expenses, largely driven by increase in sales and
marketing expenses and commissioning of plants at Baddi and Sikkim. Going forward,
we expect its operating margins to remain under pressure for few more quarters
because of the on-going commissioning of assets and new recruitment in India, Brazil
and Mexico, the benefit of which will start reflecting from FY12E onwards.
Higher than expected rise in tax provision impacted PAT
Net profit for the quarter was down by 25% to Rs256mn (against our expectation of
Rs269mn) on account of a) poor operating performance, b) higher tax provisioning (24% of
PBT vs. est. of 22% and 19% of PBT in Q3FY10), and c) 28% YoY increase in depreciation
charges. EPS for the quarter works out to Rs2.84 (est. of Rs2.98) and Rs10.4 for three
quarters of FY11 against our full year estimation of Rs14.8.
Cut earning estimates; Downgrade one notch to Accumulate
Owing to subdued performance in Q3FY11 and delay in break-even of its subsidiaries
(primarily UK and US based), we cut our earning estimates for FY11E, FY12E and FY13E
by 9.3%, 9.2% and 10.6% respectively. In the near term, margins could be adversely
affected by increased costs from field force ramp up and commercialization of new facilities.
We downgrade our rating by one notch from Buy to Accumulate with a revised price target
of Rs243 (earlier Rs268). At CMP of Rs208, the stock is trading at 15.5x FY11E, 11.1x
FY12E and 8.8x FY13E EPS.
We believe that the company would achieve revenue CAGR of 20% over FY10-13E and
hence maintain our revenue estimates over the projected period.
We have factored-in pressure on margins and delay in break-even for its subsidiaries in
lowering our estimates. However, as we believe that the company’s growth drivers remain
intact and the valuations still attractive, we maintain our positive stance on the company.
We have not factored possible upsides from the CMO business in our estimates.
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