Unichem Laboratories - Stress Remains; Result Update Q2FY15 :: Edelweiss

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Unichem Laboratories Ltd (ULL) reported a topline of INR 278.2 cr, which was 7.0% below our estimate of INR 299.1 cr due to negative growth in the domestic API and formulation segment. Adverse product mix and higher employee costs led to a decline in the operating margin to 12.0%, much below our estimate of 16.0%. The compression in margins led to a lower than expected PAT of INR 22.3 cr versus our estimate of INR 31.4 cr. The management expects price hikes in the NLEM products as per WPI, changing almost the entire distribution to C&F in the next two quarters. Realignment of the chronic business would also help the company to get its margins back on track. We believe that with an anticipated revival in the domestic economic growth and continued improvement in the export markets, ULL will deliver steady growth over the long run with improved margins. But, on account of the subdued margin performance during H1FY15, we are scaling our earnings estimates down by 23.0%/14.9% for FY15E/16E, respectively.

Domestic growth disappoints

ULL’s growth in the Domestic Branded Generics business disappointed with a negative growth of 4.2% YoY vis-à-vis our expectations of 8.0% growth. The company grew its acute business at a faster rate of 26.0% vs industry growth rate of 11.7%, while the chronic business continued to struggle, growing by only 4.0% vs 13.7% industry growth during the quarter. Growth in the chronic segments continued to be impacted by the NLEM factor on brands like Losar & Trika. The therapies that outpaced industry growth for the quarter included Anti-infectives, Musculosketals, Gastro and Gynaec. The API business grew by 2.0% YoY, mainly on account of higher sales in the international market. The company’s Formulations Exports business continued to show momentum, growing by 24.5% YoY even though it remained affected by muted demand in the CRAMS business.

Adverse product mix, higher employee costs lead to margin contraction

ULL has reported a 662 bps YoY contraction in operating margin at 12.0% mainly on the back of degrowth in the domestic formulations business and higher contribution from API and Acute segments.  Margins also contracted due to higher employee costs, as the newly recruited field force takes time to show productivity. Going forward, price increase in NLEM products, realignment of the Chronic business, along with improved productivity of the newly added field force would help to revive margins.

US subsidiary continues to perform

ULL continues to report good traction in its US subsidiary. In the US, the company’s subsidiary has reported an impressive growth of 104.1% in H1FY15, thereby leading to a profit of USD 0.38 mn. With traction in the new product filings and expectations of at least three products being launched in the US, the American market will contribute substantially to the company’s growth going forward.   Niche Generics turned profitable at the end of FY13, although it has been under some stress on account of pricing pressure. The company reported a 7.2% YoY de-growth in topline for H1FY15.

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https://www.edelweiss.in/research/Unichem-Laboratories--Stress-Remains;-Result-Update-Q2FY15/10005124.html