Conversion process affects overall performance • Unichem :: ICICI Securities, PDF link

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Conversion process affects overall performance
• Revenues grew just~3% YoY to | 278.2 crore (I-direct estimate:
| 296.6 crore) on the back of 25% growth in export formulations to
| 78.9 crore. Domestic formulations continued to struggle and
declined 4% to | 166.6 crore
• EBITDA margins declined 660 bps YoY to 12% (I-direct estimate:
16%) on account of a sharp decline in gross profit margins and
higher employee cost. Gross profit margins declined 480 bps to
60.3% due to negative growth in the high margin domestic
formulations business
• Net profit declined 38% YoY to | 22.3 crore, below I-direct estimate
of | 28.4 crore due to a decline in EBITDA margins
Restructuring, NLEM take toll on domestic formulations
Domestic formulations, which constitute 60-65% of standalone sales, are
at the core of the overall performance. The acute-chronic ratio for the
company is 40:60. Despite having a higher proportion of chronic
therapies, the core business has grown at just 6% CAGR in FY09-14 on
account of 1) restructuring exercise and inventory rationalisation in FY10,
FY11 and 2) NLEM implementation and the resulting channel disturbances
in FY13, FY14. The situation is likely to change, going ahead, as the
company plans to convert from a distribution-driven model to C&F driven
model for better working capital management. It plans to realign its
portfolio to minimise losses on account of NLEM by strengthening the MR
team and pushing for more non-NLEM products. We expect branded
formulations to grow at a CAGR of ~5.8% between FY14 and FY17E.
Formulation exports still evolving but growing
Export formulations (25% of standalone sales) have grown at a CAGR of
24% during FY09-14 on the back of significant investments in
infrastructure to push exports. New product launches in the US and a
ramp-up in CRAMS for US and EU-based customers have contributed to
the growth. The CRAMS business, of late, has struggled, however, with
customers postponing or cancelling the requirements. For the rest of the
exports, the company is looking at US generics traction. Unichem has
filed 33 ANDAs with the USFDA and received approval for 17. We expect
formulation exports to grow at a CAGR of ~23.8% between FY14 and
FY17E on the back of incremental US launches.
Exports growth picking up but domestic holds key; maintain HOLD
Unichem is yet to come to grips with the domestic formulations business
despite owning a sound product basket with chronic focus. Whether it is
the so-called conversion exercise from distributor-driven model to C&F
driven or the impact of NLEM, this core segment has underperformed
expectations in the last few quarters. This is affecting the company’s
profitability negatively and pains in the system may sustain for some
more time. In this backdrop, we have cut down our FY15, FY16 estimates.
The scenario is likely to change slowly as the management has indicated
that only 25% of domestic formulations are currently via the distribution
channel. Export formulations, on the other hand, are likely to provide
some solace on the back of incremental US filings and subsequent
launches. We have rolled over our estimates to incorporate FY17
numbers to capture normalised growth. We expect revenue, EBITDA and
profit to grow at a CAGR of 10.4%, 14.7% and 10.9%, respectively, in
FY14-17E. Our new target price is | 206, based on 10x FY17E EPS of
| 20.6.


LINK
http://content.icicidirect.com/mailimages/IDirect_UnichemLabs_Q2FY15.pdf