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.

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Margins Stable: EBITDA Margins have been reported at 19.1% with
significant improvement of 110bps YoY. It is mainly on account of better
gross margins. However, Staff cost has increased significantly this Quarterto
Rs.413mn compared toRs.347mn in preceding Quarter.
Valuation and Outlook
We have reduced our revenues by 1.8 % to Rs 12.4 bn for FY 14E and by 1.6
% to Rs 14.9 bn for FY 15E. The downgrade has been on account of lower
growth of 10 % and 14 % factored for domestic formulations. We downgrade
our price target by 2 % to Rs 240 based on 11.8x FY 2014E. We maintain our
BUY rating on the stock. Additional trigger could be announcement of
CRAMS deal which has not been factored.

KeyTakeaways
 Management is expecting Capex to the tune of Rs. 1250 mn for FY14. It will be
expensed mainly on the expansion of Goa plant, development of Bio‐sciences
Pilot plant and on the regularrepair and maintenance work. It will be financed
through internal accruals and proceeds coming from sale of SEZplant‐ Rs 1600
mn.
 Niche Generics‐ subsidiary of Unichem – have recorded sales of GBP 2.53mn
(Gr‐9.5%YoY) and Net profit of GBP 0.15mn in Q1FY14.
 In US, company has filed for 28products till date. It has launched 10 products
in the market and it is expecting 3‐4 approvals to come in FY14. 2 approvals
are 30 months old. Unichem has identified 16 ANDAs to be launched between
2016‐2022. The company plans to file 1‐2 ANDAs every quarter for the 8
quarters. The US subsidiary has shown dollarrevenue growth of 12.6%YoY to
USD 2.23mn butregistered loss to the tune of USD 0.21mn in Q1FY14.
 In Brazil, Subsidiary has filed for 16 drugs. However, it has launched only 2
products (Anti‐infective and Pain mgt) in the market. Management is
expecting to get 2‐3 approvals in FY14 in the CVS and the CNS segments.
 Management has decided to focus more Anti‐diabetic portfolio. They will be
co‐promoting its Anti‐diabetic products along with cardiac to gain more
traction than promoting them independently. The company is seeing ban on
Pioglitazone (Rs 8.8bn product) as an opportunity forthe company.It is selling
Metformin and voglibose combination to give an option on Pioglitazone to
Diabetic patients. Currently, Anti‐diabetic portfolio constitutes 3.5% of its total
revenues.
 Increase in personal expenses is on the back of higher field force this year
compared to last year. Company has added 550 employees in FY13, majority
of them are in plant, and some managers have also been added. On a Q‐o‐Q
basis the company has added 130‐140 people in the last quarter. The company
currently has 3000 managers and MRs.
 NLEM impact is expected to be 2‐3% of its revenues. 17‐18% of Unichem drugs
come under NLEM list. The impact should be to the tune of Rs 180 mn for a
year.
 The company is negotiating forthe Baddi plant for contractual business which
is currently in negotiation stage. The company is hopeful of additional
contractualrevenues in FY15.