Unichem Laboratories - Portfolio reshuffling, NLEM mar performance :: ICICI Securities

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Portfolio reshuffling, NLEM mar performance
• Revenues were flat YoY at | 265.85 crore, below I-direct estimate of
| 287 crore due to poor domestic formulations performance
• EBITDA margin declined to ~3.2% from 18.2%, 12.0% in Q3FY14,
Q2FY15 (our estimate: 13.3%), respectively. This was due to dismal
domestic formulation performance & higher operating expenses
• Net profit witnessed a YoY decline of 97.2% to | 2.06 crore (I-direct
estimate: | 21.9 crore) owing to the decline in EBITDA margins. But for
lower tax provision, the company could have reported a loss
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 higher proportion of chronic therapies,
the core business has grown at a CAGR of just 6% in FY09-14 on account
of 1) restructuring exercise and inventory rationalisation in FY10, FY11
and 2) NLEM implementation & 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 a 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. However, things are
taking much more time than earlier estimated. We expect branded
formulations to grow at a CAGR of ~7% between FY14 and FY17E.
Formulation exports still evolving but growing
Export formulations (25% of standalone sales) have grown at 24% CAGR
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 though, with customers
postponing or cancelling the requirements. For the rest of the exports, the
company is looking for US generics traction. Unichem has filed 33 ANDAs
with the USFDA and received approval for 17. It has so far launched 12
products. We expect formulation exports to grow at a CAGR of ~23.8% in
FY14-17E on the back of incremental US launches.
Restructuring yet to deliver expected results; maintain HOLD
The company is yet to get a grip on domestic formulations 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 Unichem’s profitability negatively
and the pains in the system are likely to sustain for some more time. In
this backdrop, we have cut down the FY15 and FY16 estimates. The
scenario is likely to change slowly as the management has indicated that
only 20% of domestic formulations are currently via 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
expect revenues, EBITDA and profit to grow at a CAGR of 14%, 14% and
11%, respectively, in FY14-17E. We reiterate our target price of | 206,
based on 10x FY17E EPS of | 20.6

LINK
http://content.icicidirect.com/mailimages/IDirect_UnichemLabs_Q3FY15.pdf