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

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

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

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

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Unichem Labs Poised for strong growth; Maintain Buy:: Sunidhi

Domestic growth to be back on track backed by focused promotional strategy
Domestic formulation business faced hurdles in the market during Q1FY14 mainly on account
of inventory adjustment in domestic market on the onset of drug pricing policy, trade issues
in Maharashtra & lower industry growth. But we believe domestic business growth will be on
track as the company has already strengthened its field force domestically to 3000 including
managers and is now looking to improve its productivity (currently 2.9mn). Attrition rate has
also come down significantly to 11-12% (earlier 35%). The domestic restructuring exercise at
distributor’s end is almost over and now company has started focusing more on C&F agents &
inventory days have been reduced to 30 from 80. Currently 1/3rd business comes from C&F
agents & rest from distributors.
Unichem’s top 10 brands & top 50 brands contribute nearly 50% & 83% of domestic revenues
respectively. Among top 10 brands, Tg-Tor group & Ampoxin are posting flat growth due to
stiff competition from low cost players. Company is trying to improve growth in its matured
brands through focused promotional strategy on general physicians & also focusing on other
high growth brands like Unienzyme & Telsar group to improve its overall domestic growth.
We expect revenue CAGR of 12% over FY13-15E driven by sales productivity through
increased sales force & marketing strategies taken by the management.
Exports will post flat growth due to slowdown in contract manufacturing
Export formulation business is impacted due to pressures in contract manufacturing business
from Ghaziabad facility on account of price erosion seen in existing products supplied by the
company. We expect revenues of around `800mn from CMO business in FY14E & FY15E
respectively. However Emerging markets business & US will continue to do well. In Brazil 16
products have been filed out of which 2 products (Anti-infective & Pain therapy) are in
market. Management expects 2 more approvals (CNS & Cardiac therapy) in FY14. Company’s
total ANDA filings in US stands at 29 and received 15 approvals out of which 10 products have
been commercialized till date. Management gave guidance of 1-2 ANDAs filings per quarter
to increase total filings to 34-35 & 3-4 product launches in FY14.
Management has identified 10 molecules to be filed in FY14-15 mainly from CNS, CVS & pain
management & 10-15 oral prefilled syringes to be filed beyond FY15. Company sold its Indore
SEZ unit to Mylan for `1600mn & proceeds will be used for capex plan at its formulation, API
plants & pilot plant in bioscience segment. We have not built in any gain from this sale in our
estimates which will be done after FIPB approval. Company has excess capacity due to delay
in ANDA approvals & foresees a long gestation period for SEZ project to effectively contribute
to its topline & profits. On the contrary company intends to expand its Goa facility as it is
already approved which could be done at a lower cost & lower gestation period which in turn
will improve margins.
Retain Buy rating with the target price of `223
We expect company to post domestic growth better than industry growth on account of
improved productivity through increased field force however pricing policy impact will be
around 2-3% on domestic business. Overall Margins too are expected to improve by 120bps
in FY14E on back of strong growth from both the domestic business & focus on emerging
markets. We maintain our Buy rating with the revised target price of `223 based on
12xFY15E EPS of `18.6.

Unichem:: Margins Outperform, Maintain BUY :: Karvy research

Unichem’s revenues decreased by ‐0.4% YoY to Rs. 2,622mn in Q1FY14, as
against our estimates of Rs. 2,633mn. Operating margins improved to
19.1% as compared to 18.0% in Q1FY13. Net Profit has grown by 8.9% YoY
to Rs.361mn.
 Revenue Details: The Company’s Domestic Formulations (DF) business
grew 4.2% YoY to Rs. 1756 mn on account of high base last year, while
Exports Formulations de‐grew by 14.2% YoY to Rs. 563mn. The key
reason is lower offtake in contractual supplies in quarter. International
API Capital has grown 22% YoY to Rs260mn in quarter. There has been
growth YoY in this segment since last 2 quarters. However, Domestic
API has shown de‐growth of 47.5% YoY. According to Awacs, Unichem’s
CVS (+10.8%YoY) and Integra Division (+12.9%YoY) have grown in
excess of 10%YoYforthe quarter.

Unichem Laboratories :Benefits from re-structuring :Centrum

Benefits from re-structuring
We recently met the management of Unichem Laboratories (ULL). Key take aways from the meeting are:
The company has undergone re-structuring over last six quarters and is now poised for good
growth.
On a standalone basis, ULL derives 69% of its revenues from the domestic market and 30% from
the international markets.
ULL entered into acute segment (70% of the domestic market) in FY11 and commenced a new
division for acute segment with 400MRs. However, the company faced higher attrition rate of 35-
38%. ULL also witnessed sharp fall in EBIDTA margin from 25% to 13%.
The company is now focused on cost structure and the EBIDTA margin has grown on QoQ basis.
In Q4FY12, the EBIDTA margin improved by 60bps QoQ.
ULL has been able to achieve inventory level reduction at distributors from 80 days to 40 days
over the last 6 quarters. The company also streamlined the credit norms and corrected the
product portfolio.
The management expects 100bps improvement in EBIDTA margin over next 3 quarters due to
the change in distribution strategy.

Technicals-VST Industries, IndiaBulls Financial, HDFC, Gujarat State Fertilizers, Unichem, Hyderabad Ind, :: Business Line

Hold Unichem Laboratories; Target : Rs 134 :: ICICI Securities

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R e s t r u c t u r i n g   d e l a y s   r e m a i n   a   c o n c e r n …
Unichem Laboratories’ Q3FY12 numbers were slightly above our
expectations. The revenues on a standalone basis increased by 13% YoY
to | 222.6 crore, slightly above our expectation of | 209 crore mainly due
to the depreciation of the rupee against major currencies, which boosted
exports realisation. Exports formulation grew by 84.1% to | 49.4 crore.
EBITDA margins declined ~340 bps to 16.5% YoY. Net profit declined by
4% to | 24.5 crore slightly above our expectation of | 22 crore on the
back of lower taxation. We maintain our HOLD rating on the stock.
ƒ Starts supply to US customer
From November, the company has started supplying a couple of
products to a US customer under the CRAM agreement. It recorded
sales of | ~| 9.5 crore. We expect the company to generate around
| 25 crore in Q4FY12 from this business.
ƒ Plans to launch one product in US market
Unichem is planning to launch one more product in the US market
in Q4FY12. So far, it has launched seven products in the US market.
Till date, the company has filed 23 ANDAs with the USFDA, received
approval for 11 and plans to file two more in Q4FY12. Unichem also
expects approvals for three to four ANDAs in FY13 as these ANDAs
were filed 30 month earlier.
ƒ Niche Generic records cash profit
Niche Generics, the 100% UK Subsidiary, recorded sales of £ 2.3
million and net loss of £ 0.05 million in the quarter. It recorded cash
profit during the quarter. We expect Niche to break even at a net
level from Q2FY13.
V a l u a t i o n
We have cut our FY13E EPS by 4% on account of more delays in the
restructuring of the domestic formulations business than anticipated. The
company is also witnessing a poor performance from its key brands in the
domestic market. The stock is trading at 10.5x FY13E EPS of | 13.4. We
have ascribed a target of | 134, based on 10x FY13E EPS of | 13.4. We
are maintaining our HOLD rating on the stock.

Hold Unichem Laboratories ; Target :Rs 140 ::ICICI Securities

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S  t  i l l   n  o  t   o u  t   o f   t h e   w  o o d s …
Unichem Laboratories’ Q2FY12  numbers were inline with our
expectations. Revenues on a standalone basis declined by 2% YoY to |
198.8 crore inline with our expectation of |195 crore due to de-growth in
domestic formulation business. This was worse than our expectation
(3%) as key brands de-grew during  the quarter. The fall in the domestic
formulation business was however compensated by strong growth in
exports, thanks to rupee depreciation. EBITDA margins declined by 920
bps to 14.3% YoY. Net profit declined by 45% to | 19.1 crore on the back
of higher interest and depreciation cost. As domestic business growth
remains a matter of concern, we have downgraded the stock from Buy to
Hold.
ƒ Plans to launch 2 products in the US market  
So far Unichem launched 7 products in US market. It is planning to
launch 2 products in US market in  the second half. Till date, the
company filed 21 ANDAs with USFDA and received approval for 9
ANDAs. It is planning to file 4 more ANDAs in the second half taking
total count to 25 ANDAs by the end of current fiscal.
ƒ Subsidiary continue to post loss  
Niche Generics, the 100% UK Subsidiary recorded sales of £ 2.4
million and net loss of £ 0.29 million during the quarter. Unichem
Pharmaceuticals USA Inc., another  100% US Subsidiary recorded
sales of US$0.93  million and net loss of USD 0.27 million. We don’t
expect both these subsidiaries to turn around in the current fiscal.  
V a l u a t i o n
We have reduced our FY12E and FY13E by | 3.2 and | 1.8 respectively
owing to recurring poor growth numbers in the domestic formulations.
Despite recent correction, we don’t see any reversal in the trend as the
corrective measures to improve the performance will take some more
time. Unichem is trading at 9.4x FY13E EPS of | 14. We have ascribed a
target of | 140, based on 10x FY13E  EPS. We have reduced our rating
from BUY to HOLD.

Hold Unichem Laboratories; Target : Rs 158 ::ICICI Securities,

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T e p i d   g r o w t h ,   M a r g i n   p r e s s u r e …
Unichem Laboratories’ Q1FY12 numbers were below our expectations.
Standalone revenues grew by 1% YoY to | 188.7 crore below our
expectation of | 198 crore due to de-growth in both domestic formulation
& API businesses. EBITDA margins sharply declined by ~1450 bps to
14.3% due to 1) decline in the high margin domestic formulation
business, 2) increase in overheads on account of new addition of ~600
medical representatives, and 3) commissioning of new manufacturing
facilities at Baddi and Sikkim. Net profit declined by 53% YoY to | 18.6
crore. We are reducing the target price by ~19% as the company is still
languishing under margin pressure on the top of tepid domestic growth.    
ƒ Domestic formulation sales continued to affect  
The domestic formulation business declined by 5% to | 139.2 crore
mainly due to inventory correction in the distributor channel.
Around 66% of domestic formulation business comes from
distributor’s channel and remaining 34% come from C&F agents. To
avoid tax related issues when GST roll out takes place, the company
started inventory correction in its distribution channel. It is in the
process of decreasing inventory in the distribution channel from 60
to 25-30 days. The company also witnessed de-growth in its acute
portfolio. As per IMS, its leading brand Ampxin group witnessed
de-growth of 21% YoY.
ƒ Subsidiaries continued to post loss
During the quarter, Niche Generics, the 100% UK Subsidiary
recorded sales of £ 2.62 Million and net loss of £ 0.11 million.
Unichem Pharmaceuticals USA Inc., the 100% US Subsidiary
recorded sales of US$ 0.7 million and net loss of US$ 0.35 million.    
V a l u a t i o n
We have cut our EPS estimates  for FY12/FY13 by 12.7% and 10.7%,
respectively. The stock is currently  trading at ~12x FY12E EPS of | 12.3
and ~9x FY13E EPS of |15.8. We have revised our target price downward
(by reducing multiple by one notch) on account of inventory
rationalisation and margin pressure for the next 1-2 quarters. We have
ascertained a price target of |158, based on 10x FY13E EPS of |15.8.

Buy Unichem Laboratories:: “core strength remain unchanged, near term hurdles priced in”:: LKP

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Investment Rationale
 Unichem Laboratories Ltd (UL), an integrated pharmaceutical company with a strong presence in domestic formulation market witnessed a bad first quarter with EBIDTA margins falling to 14% led by pricing pressures in anti-infectives, cost pressures led by field force addition and increased marketing and distribution spend.
 Inventory destocking in the distribution channel and a change in its primary distribution network from distributors to C&F agents in line with practices followed by industry also impacted profitability.
 Commissioning of new facilities in Baddi and Sikkim and higher promotional expenses on Tier 2 brands is a conscious strategy and this too impacted margins this quarter as the company was not able to arrest the declining trend in its anti-infective brand – Ampoxin which is an ageing brand not able to grow in line with the 12% growth witnessed in the anti-infective market.
 However with a domestic business of `6.5bn, UL has clearly demonstrated its ability to build large brands in growing categories like its `1.5bn brand – Losar in cardiac care and given its brand franchise with key opinion builders, we believe that UL would get back on track from H2 of the current fiscal as secondary sales have not been impacted.
 Significant spare capacity and the commissioning of its SEZ in MP and expansion at Goa would spur growth next fiscal. CRAMS as a segment could be a big opportunity for UL and despite an expected 19% de-growth in earnings this fiscal we believe UL can bounce back strongly next fiscal with a 56% earnings growth.
Valuation
Despite UL domestic portfolio not growing in line with some of its more well known peers like Sun, Torrent, Cadila & Ipca we believe that the company is taking the right steps to correct the situation and this in our opinion shall put UL back on the growth track next fiscal. Field force addition during the past one year would in our view turn productive next fiscal and UL trading at 11xFY’13E earnings with a P/BV of 1.8x looks attractive as it has a healthy balance sheet with negligible debt.
In our view most of the negatives seem to be priced into the stock price and we recommend a BUY on UL with a one year price target of `200 which offers a potential 40% upside.

Unichem Labs In Restructuring Phase – Downgrade to Hold ::Emkay

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Unichem Labs

In Restructuring Phase – Downgrade to Hold

HOLD

CMP: Rs 161                                        Target Price: Rs 167

---

n     Unichem is restructuring its distribution model in domestic market and moving from distributors to C&F agents which will result in loss of one months domestic sales in FY12

n     Higher attrition rate & recruitment of new MR’s will take a toll on domestic business resulting in 8-10% growth in FY12

n     Outsourcing contract with MNC generic company will commence in H2FY12E; potential revenues of Rs600mn & Rs1.2bn in FY12/13E respectively

n     Inventory rationalization and addition of new MR’s will continue to pressurize margins, cut earnings by 17%/ 15% to Rs11.2/ Rs15.2 for FY12/FY13E; re-rate the stock to hold

UNICHEM LABORATORIES :: IDFC Emerging Stars Conference

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UNICHEM LABORATORIES 
OUTPERFORMER (RS196, MCAP: RS7.1BN / US$156.8M)


• Unichem Labs is one of the India’s leading integrated pharma companies, with a strong presence in the domestic
formulations market. It is ranked 25th in the domestic formulations market (IMS data, December 2010). It derives 76%
of its revenues from the domestic market, 20% from regulated markets and the rest from emerging markets.
• Unichem's five brands – Ampoxin, Losar H, Losar, Trika and Unienzyme – feature among the top 300 (ORG IMS
data). Unichem's top 10 brands – Ampoxin, Losar, Losar H, Trika, Unienzyme, TG-Tor, Vizylac, Telsar, Telsar H and
Serta – contribute 51% of domestic sales. The largest brand/ brand extensions clock revenues in excess of Rs1.48bn,
while 13 brands contribute more than Rs100m/ year. Unichem enjoys the No. 1 position in 19 therapeutic sub-groups.
• The company clocked a revenue CAGR of 12% in FY05-10, with its focus portfolio clocking over 20% yoy growth in
9MFY10. Unichem achieved decent growth rates in the domestic market despite the impact of DPCO. About 20% of its
domestic portfolio (in value terms) is under price control. Its key products, Metronidazole (API), Ampoxin (antiinfective)
and Zator Plus (Spirolactum with Torsilomide), are also under price control.
• The management remains focused on the domestic market, and has taken several measures to enhance its footprint:
o Potential entry into uncovered market segments like hospitals and gynecology
o Product portfolio optimization and field resource allocation relating to chronic therapy
o Focus on field productivity and enhanced field force to support growth
o Optimal use of manufacturing assets.
• Unichem maintains a balanced mix of chronic and acute therapies in the domestic formulation market, with chronic
care accounting for 58% of sales and acute therapy contributing the rest.
• Sales have suffered over the past few quarters due to pricing pressure on Ampoxin, especially the injectable
formulation, which has led to value erosion. The company is now focused on reversing this and is hopeful of
stemming the decline by FY12. This should provide support to overall domestic business growth.
• Unichem has added nearly 400 people in the domestic business in Q4FY10. The full impact of these additions on
productivity would be visible from FY12. Unichem is also looking to hire 200 people, including 150 for the gynecology
segment. The company has also set up a team to cater to the hospital segment.
• The management also cautioned that the acute segment, which accounts for ~42% of the business, has not been
growing over the past few months and may impact overall growth.
• On the international front, Unichem has more than 565 product registrations across the world and more than 416
regulatory filings (DMFs, EDMFs. e-CTDs, ACTDs, etc). It has filed 15 ANDAs so far, of which nine have been
approved. The company is positive about the product pipeline and has guided for R&D spend of up to 4% of sales
going forward.
• Unichem is also hopeful of closing 2-3 contract manufacturing deals in antibiotics and non-antibiotics over the next 2-
3 quarters. These deals can add Rs1.2bn-1.5bn revenues at peak sales, with potential increases as the deals are
expanded.
• RoW currently contributes 4% of overall sales. The company is looking to expand this sharply over the next 4-5 years
as it seeks to leverage its 700-800 registrations (secured / under way) in this market segment.

Unichem Laboratories- Incremental overheads put extra pressure:: ICICI Securities

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Unichem Laboratories- Incremental overheads put extra pressure… 


Unichem’s Q3FY11 numbers were below our expectations. Total
revenues grew 14.1% YoY to  | 197.1 crore, almost in line with our
expectation of | 201 crore. EBITDA margins sharply declined ~ 660 bps
against our expectation of ~250 bps dip. This was mainly due to higher
sales & marketing expenses (up ~| 9 crore YoY), incremental sample
cost and change in the product mix. Niche generics, the wholly-owned
subsidiary of the company, recorded sales of £2.17 million and net loss
of £0.38 million. We believe most of the incremental sales & marketing
expenses during the quarter were one-off in kind although we have
some concern over the performance  of antibiotic drug Ampoxin. We
expect ULL’s profits to normalise from Q4FY11 onwards. We have
revised our target price on the stock to | 227 with a BUY rating.

Emkay: Result Preview: HT Media; Result Update: Rallis India; Unichem Labs; Axis Bank; Larsen & Toubro; Tata Consultancy Services

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Contents

n        Research Views

Rallis India Q3FY11 Results – Below estimates

Despite higher than estimated topline, Q3FY11 results for Rallis were below estimates – mainly due to lower than estimated operating margins. The company surprised with a strong revenue growth of 31% yoy to Rs 2.7 bn (we estimated Rs 2.4 bn). However, EBITDA margins for the quarter at 18.9% were disappointing and significantly below estimates resulting in overall EBITDA of Rs 512 mn (+20% yoy). Due to lower than estimated operating performance, APAT remained below estimates at Rs 337 mn, +14% yoy (we estimated Rs 388 mn). AEPS for the quarter stood at Rs 17.3 versus Rs 12.4 in Q3FY10.

RPAT for the quarter at Rs 337 mn, increased by 40% over previous year, as the company reported EO loss of Rs 55 mn (on account of ex gratia ammortisation).

For 9MFY11 the company has reported revenues of Rs 8.4 bn (+21% YoY), EBITDA of Rs 1.6 bn (+18% YoY) and APAT of Rs 1.07 bn (+21% YoY). AEPS for 9MFY11 stood at Rs 55.2.

On the back of lower than estimated Q3FY11 results, we are likely to downgrade our earnings for FY11E by ~7% from Rs 77.7, while broadly maintaining our FY12E and FY13E EPS at Rs 96.3 and Rs 120.5 respectively.

We maintain our positive bias on the stock and re-iterate BUY recommendation with a target price of Rs 1,800.

n        Research Update Included

Emkaynomics; Dec 31, 2010; Fortnightly round up of key banking and economic indicators

n    The growth in non food credit has moved up to 24.3% for the week ended December 31, 2010 as growth in deposit mobilisation saw an increase to 16.6%

n    The CD ratio has marginally inched down to 75.7% for the week ended December 31, 2010 with TTM CD ratio down to 105%. The incr. CD ratio has moderated to 108%

n    Money supply growth has increased to 17.3% and the money multiplier grew to 5x

n    Call money rates have risen to 6.29% as on January 17, 2011 from 5.65% last fortnight

n    The shortage of liquidity in the system eased and stood at Rs179bn.  The net repo balances stood at ~ Rs843bn for the week ended January 07, 2011

n    The spread between the long and short end OIS has risen to 44bps as opposed to 30 bps last fortnight

Unichem Labs Q3FY11 Result Update; Disappointing quarter; Downgrade estimates; Accumulate; Target: Rs 234

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

Axis Bank Q3FY11 Result Update; Upgrade as concerns on slippages allayed; Hold; Target: Rs1,300

n    Axis Bank (AXSB) Q3FY11 earnings at Rs8.9bn was better than our as well as street expectation driven by better than expected NIMs and NII

n    Key highlights: (1) NII growth of 28.5% led by 45.7% growth in advances (2) 13bps qoq expansion in NIMs and (3) lower slippage rate during the quarter to 1.1%

n    We believe that NIMs may contract by 12-15bps in Q4FY11 due to PSL loans but our key concerns on NPAs and provisions are allayed

n    With slippages coming under control we believe that AXSB could trade at its historic average valuations at 2.5x 1-year forward. Upgrade to HOLD with TP of Rs1,300

Larsen & Toubro Q3FY11 Result Update; Favorable Risk-to-Reward; Upgrade to ‘BUY’; Target: Rs 2,015

n    Q3FY11 performance ahead of EMKAY and consensus estimates – revenues up 41% yoy to Rs114 bn and APAT up 32% yoy to Rs8.1 bn

n    Notable disappointment is muted order inflows (-25% yoy to Rs134 bn) – implied run-rate jumps to Rs287 bn or 21% yoy for Q4FY11

n    L&T reiterates guidance for FY11E – revenues growth 20% and stable operating margins – retain FY11E earnings of Rs69.1, but revise FY12E earnings by -3% to Rs82.4

n    Risk-to-reward is favorable, post 21% fall in stock price in last 2 months – Upgrade from ‘ACCUMULATE’ to ‘BUY’ with revised target price of Rs2,015/Share (Rs2,129/Share earlier)

Tata Consultancy Services Q3FY11 Result Update; Moving from strength to strength; Accumulate; Target: Rs 1,275

n    Inline revenues at US$ 2,144 mn(+7% QoQ). Margins improve further by ~20 bps QoQ to 30.2%, despite currency appreciation, normalization of rentals and strong hiring

n    Profits at Rs 23.3 bn (+10.6% QoQ,+29.6% YoY) driven by better margins and higher other income(include Rs 522 mn of forex gains) 

n     Solid operating metrics show with strong hiring(~12k+ net additions coupled with campus hiring targets of ~37k lend support to volume momentum thesis

n    Tweak estimates marginally driving a 0.5/0.3/2.4% upgrade in FY11/12/13E EPS to Rs 43.8/51.3/61.6 respectively. Retain ACCUMULATE with TP upped to Rs 1,275(V/s Rs 1,250 earlier)

Unichem Labs : Disappointing quarter; Downgrade estimates:: Emkay

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Unichem Labs

Disappointing quarter; Downgrade estimates

ACCUMULATE

CMP: Rs 208                                        Target Price: Rs 243

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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

Emkay: Unichem Laboratories Gearing for growth

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Unichem Laboratories

Gearing for growth

BUY

CMP: Rs 530                                       Target Price: Rs 670

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n     Increased focus on prescription generation, penetration into tier-II to tier-IV markets and turnaround in Niche Generics to drive 25% earnings CAGR over FY10-13E

n     International business to start contributing positively from FY12E, expect 38% revenue CAGR over FY10-13E

n     Potential new contracts with MNCs to drive growth on account of higher capacity utilization and operational leverage

n     Strong balance sheet, zero debt and robust return ratios provide key comfort to investors; initiate coverage with Buy

Edelweiss research on Unichem Laboratories

Unichem Laboratories (UL IN, INR 535, Not Rated)

We recently met the management of Unichem Laboratories (Unichem). Key highlights of the discussion are summarised below:

n  Potential new contracts to buoy steady business

Unichem’s medium-term growth strategy remains intact, with reasonable traction in domestic formulations (72% of FY10 sales) and scale up in the US business.  The company’s current negotiation for additional CRAMs contracts could materialise by Q4FY11, contributing 20% to potential FY10 revenues. FY11 revenue growth will be led by domestic branded formulation growth (15% Y-o-Y), with muted outlook for Niche subsidiary (10% of revenues) and single-digit growth in other external sales.

n  Healthy EBITDA margin impacted by losses in subsidiaries

Unichem’s standalone EBITDA margins of 26% are healthy and higher than most peers, reflecting the profitability of domestic franchise. This is, however, offset by losses in international subsidiaries, which has negatively impacted FY10 margins by 300-400bps. In the near term, margins could be adversely affected by increased costs from field force ramp up and commercialisation of new facilities. The impact will, however, be capped to some extent by marginal gains in subsidiaries. Newer contracts could likely have lower margins than company average.

n  Strength of balance sheet a key positive

Unichem is a zero debt company and has positive free cash flows. Moreover, it expects to fund its estimated ~INR 1.5 bn capex over FY11-13 through internal accruals only. The zero leverage strategy offers stability to operations, and positive operating cash flows give headroom for expansion. The company has ROCE of 26% and ROE of 24% in FY10.

n  Outlook and valuations: Strong fundamentals; ‘Not Rated’

At current CMP of INR 535, the stock is trading at 16x FY10 and 11x FY12E EPS (based on consensus EPS estimate of INR 48 per share).