Unichem Laboratories Ltd - Stress Worsens; Result Update Q3FY15 :: Edelweiss

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Unichem Laboratories Ltd (ULL) reported a topline of INR 265.9 cr, which was 9.1% below our estimate of INR 289.1 cr, due to negative growth in the domestic API and formulation segment. Adverse product mix and higher operating expenses led to a decline in the operating margin to 3.2%, much below our estimate of 13.0%. The compression in margins led to a lower than expected PAT of INR 2.1 cr versus our estimate of INR 26.1 cr. The company expects realignment of the chronic business to help get its margins back on track. The company expects 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. However, we believe with the continuous underperformance of the company in the domestic market, along with its inability to get its distribution on track so far remains a big concern for growth going forward. We are thus scaling our earnings estimates down by 47.0%/26.8% for FY15E/16E, respectively.

Domestic growth disappoints

ULL’s growth in the Domestic Branded Generics business disappointed with a negative growth of 5.0% YoY vis-à-vis our expectations of 8.0% growth. Growth in the chronic segments continued to be impacted by the NLEM factor on brands like Losar & Trika. Further, the company continues to suffer from the realignment of the distribution network from a distribution based model to a C&F model. The API business de-grew by 20.2% YoY, with 42.9% degrowth in the domestic market and 12.2% in the export market. The company’s Formulations Exports business continued to show momentum, growing by 25.1% YoY even though it remained affected by muted demand in the CRAMS business.

Adverse product mix, higher costs lead to margin contraction

ULL has reported a 1498 bps YoY contraction in operating margin at 3.2% mainly on the back of degrowth in the domestic formulations business and higher contribution Acute segment.  Margins also contracted due to higher costs (employee and SG&A), as the newly recruited field force takes time to demonstrate productivity. Going forward, the company expects reduced focus on NLEM products, realignment of the chronic business, along with improved productivity of the newly added field force, which would help revive its 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 106.0% in 9MFY15, thereby leading to a profit of USD 0.98 mn. With traction in the existing product basket and expectations of at least more 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 7.7% YoY de-growth in topline for 9MFY15.

LINK
https://www.edelweiss.in/research/Unichem-Laboratories-Ltd--Stress-Worsens;-Result-Update-Q3FY15/10005621.html