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Pharmaceuticals June 25, 2014
Unichem
Bloomberg: UL IN Reuters: UL.BO
BUY
Institutional Equities
India Research
COMPANY UPDATE
Recommendation
CMP: Rs206
Target Price: Rs256
Previous Target Price Rs311
Upside (%) 24%
Stock Information Market Cap. (Rs bn / US$ mn) 19/311
52-week High/Low (Rs) 238/137
3m ADV (Rs mn /US$ mn) 18/0.3
Beta 0.7
Sensex/Nifty 25,369/7,580
Share outstanding (mn) 91
Stock Performance (%) 1M 3M 12M YTD
Absolute 6.0 (2.2) 30.1 6.3
Rel. to Sensex 3.2 (15) (4.9) (11.3)
Performance
Source: Bloomberg
Earnings Revision
(%) FY15E FY16E
Revenue 7.3 8.9
EBITDA 15.1 18.8
PAT 14.5 20.1
Source: Company, Karvy Institutional Research
Analyst Contact
Rahul Sharma
022 - 6184 4310
130 150 170 190 210 230 250
15,500 17,500 19,500 21,500 23,500 25,500 27,500
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Sensex (LHS) Unichem Labs. (RHS)
Light at the end of Tunnel; Maintain “BUY”
The company’s stock price has corrected by ~10% post its annual results
announcement. Margin compression due to low growth in domestic
formulations, shift from distributor to C&F (sales impact Rs50 mn) and tepid
growth in exports formulations resulted in this underperformance. The price
increase of 6.3% on NLEM products kicking in from May 2014, low base
impact of NLEM from Q2 and new launches in USA should aid revenue and
margin traction going forward. We reiterate our BUY rating as we believe the
current valuation of 10.1x FY16E factors in majority of the negatives.
DF Biz – low base impact: The domestic formulations sale which was
impacted in Q4FY14 due to shift of 5 distributors to C & F and lower growth in
Q4FY14 should see 6.3% price growth on NLEM products from May 2014E.
Q2FY15E should see the impact of the low base kicking in (growth of 1.1% in
Q2FY14E). Scale up in MR strength by 300 to 2700 to impart more focus on
CVS and older brands and enhance reach in Neuro psychiatry in North and
East will enable this franchise to grow rapidly.
Subsidiaries losses to be muted: The Company has received 3 additional
USFDA approvals in H2FY14. With the current run rate and additional
approvals the company should be able to cross USD 17 mn revenues in the
current year and USD 23 mn in FY16E. EU subsidiaries (Niche Generics and
Ireland subsidiary) are expected to be profitable on a combined basis, while
Brazil will see turnaround only on back of new launches in FY16E. We believe
subsidiaries should be contributing to profits in FY16E.
Outlook & Valuation
We lower our revenue estimates by 7.3% to Rs 13.1bn for FY15E and by 8.9% to
Rs 15.5bn for FY16 due to downgrade in domestic formulations. We lower our
FY15E EBDITAM by 140bps to 17.3% and by 170bps to 18.4% due to lower
revenue traction. We downgrade our EPS estimates for FY15E by 14.5% to Rs.
15.7 and for FY16E by 20.1% to Rs. 20.5. We believe FY16E would be a crucial
year and serve as an inflection point for the company as the initiatives in
chronic and acute segments will start bearing fruit in FY16E. USA should be
profitable while Brazil would make lower losses. The company’s revenue
growth for FY14-16E should be 17% with 140bps improvement in EDBITAM
YoY till FY16E. We lower our price target by 18% to Rs256 based on 12.5x
FY16E EPS. We however maintain our BUY rating on the stock.
Key Financials
Y/E Mar. (Rs mn) FY12 FY13 FY14 FY15E FY16E
Net sales 8,755 10,808 11,334 13,090 15,545
EBITDA 1,183 1,743 1,778 2,261 2,866
Net Profit 712 1,132 1,282 1,414 1,853
EPS(Rs) 7.9 12.5 14.2 15.7 20.5
EPS growth (%) -19.9 59.0 13.2 10.3 31.0
EBITDA margin (%) 13.5 16.1 15.7 17.3 18.4
PER(x) 26.2 16.4 14.5 13.2 10.1
EV/EBITDA (x) 16.0 10.6 9.9 7.9 6.0
Source: Company, Karvy Institutional Research Indian GAAP Consolidated
2
June 25, 2014
Unichem
Domestic Formulations – Low Base Impact
The company’s domestic formulations tepid growth of 3% for FY14 to Rs6.55bn
has been due to Rs860 mn of business coming under price control (price reduction
of 25-28 %) as two of its major brands Losartan and Trika have come under price
control from June 2013. In the non- NLEM space, out of 11 therapeutic segments,
the company has underperformed in Cardiac, Anti- Diabetic, Respiratory,
Nutraceuticals and Derma while in the NLEM space, the company has
underperformed in CVS segment ( Losar impact) and in Neuropsychiatry (Trika).
In the Top 10 of the company’s products, Losar and Trika have had the major
impact due to price action on account of NLEM. The products which have shown
double digit growth are Serta, Unienzyme, Telsar and Vizylac.
Pioglitazone was also banned which also impacted revenues. The total impact on
account of NLEM as well as banned products had been to the tune of Rs168 mn
(2.5% of revenues). Despite volume growth, company has had a de- growth of
10.6% for the year in the NLEM products category.
Exhibit 1: Non NLEM & NLEM Represented/Covered Market
MAT Mar'14 REPRESENTED MARKET UNICHEM LABORATORIES
Non-NLEM NLEM Non-NLEM NLEM
Therapy Market
Segment
Size
(Rs.Mn)
%
GR
Size
(Rs.Mn)
%
GR
Size
(Rs.Mn)
%
Share % GR
Size
(Rs.Mn)
%
Share
%
GR
Cardiac Care 45340 14.6 15210 -6.4 2680 5.9 8.5 830 5.5 -12.3
Anti-Infectives 62990 2.8 30900 -6.1 1200 1.9 14.2 100 0.3 34.1
Neuro-Psychiatry 23540 8.6 1720 -7.0 670 2.9 15.9 270 15.9 -14.2
Gastroenterologicals 39320 6.0 6850 -8.7 880 2.3 12.9 0 0.0 -28.7
Musculosketals 30000 6.3 2760 -16.9 280 0.9 18.1 20 0.6 -2.6
Anti Diabetic 23760 15.0 2040 4.0 270 1.1 9.1 0 0.1 -7.2
Respiratory 11800 11.6 1030 -22.1 150 1.3 -7.5 40 4.1 -21.7
Nutraceuticals 37160 3.7 90 -23.6 150 0.4 0.2
0.0 -
Dermatologicals 14890 16.7 1480 -20.9 110 0.7 -9.3 0 0.0 -47.3
Gynaecological 16740 5.2 1300 -6.7 50 0.3 53.2 0 0.1 100.1
Others 9080 7.7 370 -12.6 0 0.0 616.4 0 0.0 -98.2
Total 314630 7.7 63750 -7.5 6450 2.0 10.6 1270 2.0 -10.6
Source: Company ,AIOCD, Karvy Institutional Research
An area which had reasonable growth has been acute (post the realignment in the
sector) which constitutes around 40 % of the company’s revenues. The company
has delivered 9 % growth as against industry growth of 2.7%.
New Strategies for growth:
Losar and Trika have been facing challenges in the market. The onslaught of
Telmisartan, Olmesartan or other newer sartans coming in, the share of voice and
mindshare for Losartan has reduced. Studies undertaken by IMS on behalf of the
company also indicate that the doctors still believe Losartan to be on par with
Telmisartan and Olmesartan.
To revamp that share of voice and share of mind, the expansion of these new
verticals will definitely create a huge noise in the market levels and thus company
will be able to generate better revenues for Losar and Trika. The company has
3
June 25, 2014
Unichem
dedicated a workforce of 300 people for these older brands. Chronic realignment
should pave the way for a robust growth in FY16E.
In CNS, the company’s volumes are bound to grow around 18% to 20% on account
of one more vertical which is currently being launched in North and East and after
first half of the financial year, the company will be launching in South and West.
This vertical will also help the company penetrate more into CNS business which
was a languishing business for the company, contributing hardly ~Rs. 480 mn to
Rs. 500 mn. These initiatives are expected to help the company in volume as well
as value growth in the CNS business. The company has also carved out a new
division Uni Foreva out of the existing division Neu Foreva to impart more focus.
The company is currently at 16th rank in prescription, with a 20% increase in
business, the company could be in Top 10. Unichem’s marketing to specialists was
less compared to peers. The company has addressed this problem. The CNS
growth in May 2014 has been 42% while on a MAT basis it is 25%. Unichem wants
to double its revenues in CNS in 2-2.5 years.
The company has seven verticals in chronic today, as compared to four verticals in
acute as the company wants to position itself as a strong company in
antihypertensive and also leverage the potential of Statins in the market. Unichem
also wants to leverage the potential of oral anti-diabetic drugs. The company does
not have much presence and its portfolio has been growing at a slower pace
compared to the market. The company now has four vibrant verticals manned
with almost 1180 people who are focusing on the right kind of molecules. With
these initiatives, the company is hopeful of growing in line with the market.
The company’s Chronic, Acute mix will change from 61: 39 in FY14E to 59: 41 in
FY15E. On the acute front, the company has managed a volume growth of 7.8%
and a value growth of 9% in FY14, both are higher than the IPM growth. The
company wants to re-position three of the company’s top brands – Ampoxin (Rs
640 mn), Unienzyme (Rs530 mn) and Vizylac (Rs250 mn) in the acute market.
These three brands contribute Rs 1.4 bn in the acute basket. The company has
given the work to agencies to map the market, but this needs to be done in terms
of using the equity of these brands on pan India basis across NGP, GPs, CPs and
all specialists. Ampoxin could be made a bigger brand (mkt size Rs 640 mn). New
product launches will be line extensions of both these brands. They will promote
the same to specialists and GP. The liquid range of Unienyzme will be moved to
OTC as it is a Quasi OTC product. These products are expected to grow at 10% as
against the current growth rate of 4% which they are enjoying.
The company has also introduced the Criticare division last year which deals with
the critical patients and is now named as Life Care Division. The company plans to
double the revenues from the Life Care Division in the current year (revenues in
FY14- Rs30 mn) as the team has set and have made entry into some of the
corporate segments.
4
June 25, 2014
Unichem
Exhibit 2: Brand wise MAT Value
(Rs Mn) BRAND MAT VAL
MAR 13
MAT VAL
MAR 14
MAT VAL
MAR 15E
MAT VAL
MAR 16E
CHRONIC
1 LOSAR GROUP 1,705 1,627 1,725 1,897
2 TELSAR GROUP 415 455 524 613
3 TRIKA GROUP 361 318 324 344
4 OLSAR GROUP 271 311 367 440
5 METRIDE
GROUP 183 187 219 262
6 SERTA 128 173 207 255
7 UNISTAR
(UNICHEM) 102 166 250 374
8 TOLOL GROUP 133 150 172 198
9 TG-TOR GROUP 160 136 141 146
10 CORVADIL
GROUP 116 111 120 134
ACUTE
1 AMPOXIN
GROUP 614 641 667 693
2 UNIENZYME 433 526 578 647
3 VIZYLAC 218 247 271 325
4 LINOX 163 175 184 206
5 LEZYNCET
GROUP 119 107 116 129
Source: Company ,AIOCD, Karvy Institutional Research
Another growth segment would be products in the 11-25 category, the company is
growing at 11% in the current year, and it has aims to grow by 20% over the next
couple of years.
In the 26-50 product categories, company is growing by 36% in the current year.
Key brands which have shown supernormal growth are in the last couple of years
are:
Cefipower from zero to Rs 80 mn in two years.
Unistar from zero to Rs17 mn in three years
Xt Para zero to Rs40 mn in two and half years
Reasons for low growth in Q4FY14
Unichem low growth in Q4FY14 can also be partly be attributed to the shift from
distributors to C & F agents. This is also likely to continue in Q1 as the company
wants to target the remaining 45% of the trade which is yet under distributors.
The company wants to shift the same to C & F agents. However, the company is
expected to be careful going ahead so as not to impact the company’s reported
sales. Q1FY15 would continue to show tepid domestic formulations sales.
The price hike would come into effect from May15, while the impact of the low
base would show in Q2FY15 onwards.
US biz: The Company has 31 ANDAs filed and 10-15 are in the pipeline. They plan
to file 1-2 ANDAs every quarter. The company is expected to file some complex
filings in FY15E. Unichem so far has 10 products in the market and has recently
got 3 approvals in Q4FY14. They are expected to launch the same in Q2FY14E. 3 of
the company’s products are more than 30 months old, 4 products are more than
5
June 25, 2014
Unichem
mid 20 months old and has two tentative approvals. The current 3 approvals will
be launched in current year while approvals expected from the above list of more
than 20-30 mths old will be launched in FY16E. The current revenues of the
company are expected to move up from USD 12.3 mn in FY14 to USD 23 mn in
FY16E.
Niche Generics & Ireland: Revenues in Niche Generics & Ireland could also do
double digit growth for both the years. Niche had a good year in FY14 due to
market constraints in one of the products. Profitability should continue in FY15 on
back of product launches (CVS, Diurteics, Pain mgt, CNS). With better tender
participation, the Irish business also should see scale going ahead.
Brazil: Unichem has test launched two products in Brazil and further approvals
will pave the way for scalability of business. Brazil is expected to reduce losses in
FY16E.
CRAMs Biz: should see an uptake in H2 of current year as negotiations are in
advanced stage. However the contribution is not expected to be meaningful.
Capex For expansion Unichem is likely to invest Rs2500-3000 mn in FY15E & FY16E
towards investment in Pithampur and Roha API facility of Rs500-600 mn,
upgradation, modernisation of a newly acquired API facility at Kolhapur
Maharashtra in phases (Rs400 mn), Scale up in Biosciences facility and investment
in formulations facility in Goa Rs1200-1400 mn (warehouse, storage, capacity
expansion, packaging need to expand).
Exhibit 3: Change in Estimates
Y/E Mar. Rs Mn
FY15E FY16E Comments
New old % change New old % change
Revenues 13090 14122 -7.3 15545 17060 -8.9
Domestic 7655 8064 -5.1 8814 9273 -4.9 lower base impact
Exports 5351 6027 -11.2 6628 7744 -14.4
US 680 1000 -32.0 889 1353 -34.3 reducing revenues to USD 17 mn in FY15 and to USD 23 mn in FY16
Brazil 72 180 -60.0 108 270 -60.0 factored lower traction
Raw Material 4327 4797 -9.8 5157 5818 -11.4
Raw Material/Net Sales % 34 34 - 34 34 -
Personnel Cost 2155 2199 -2.0 2478 2594 -4.5 based in FY 14 numbers
Other Expenses 4347 4462 -2.6 5045 5117 -1.4
EBITDA 2261 2664 -15.1 2866 3530 -18.8
EBITDA margin (%) 17.3 18.9 - 18.4 20.7 -
Interest 32.1 41.1 -21.9 32.1 41.1 -21.9 lowered interest rate
Depreciation 502 524 -4.2 591 616 -4.1 lower capitalisation
PBT 1843 2179 -15.4 2393 2983 -19.8
Tax 428 524 -18.3 540 664 -18.7
Tax rate (%) 23.3 24.1 - 22.6 22.3 -
Net Profit 1414 1655 -14.5 1853 2318 -20.1
EPS (in Rs.) 15.7 18.3 -14.5 20.5 25.7 -20.1
Source: Company, Karvy Institutional Research
6
June 25, 2014
Unichem
Financials
Exhibit 4: Profit & Loss
Y/E Mar. (Rs mn) FY12 FY13 FY14 FY15E FY16E
Net Revenues 8,755 10,808 11,334 13,090 15,545
Raw Material 3,153 3,949 3,875 4,327 5,157
Staff 1,401 1,649 1,874 2,155 2,478
Other Expenses 3,018 3,467 3,808 4,347 5,045
Total Expenditure 7,571 9,065 9,556 10,829 12,679
EBITDA 1,183 1,743 1,778 2,261 2,866
EBITDA margin (%) 13.5 16.1 15.7 17.3 18.4
Other income 73 134 423 115 150
Interest 41 33 32 32 32
Gross Profit 1,245 1,844 2,169 2,344 2,984
Depreciation 304 383 457 502 591
Profit Before Tax 940 1,461 1,712 1,843 2,393
Tax 228 328 430 428 540
Effective tax rate (%) 24.3 22.5 25.1 23.3 22.6
Net Profit 712 1,132 1,282 1,414 1,853
Extra ordinaries 0 0 411 0 0
Reported Net Profit 713 1,132 1,693 1,414 1,853
EPS (Rs) 7.9 12.5 14.2 15.7 20.5
Source: Company, Karvy Institutional Research
Exhibit 5: Balance Sheet
Y/E Mar. (Rs mn) FY12 FY13 FY14 FY15E FY16E
Equity 181 181 181 181 181
Reserves 6,425 7,090 7,985 8,816 9,926
Net worth 6,606 7,271 8,166 8,997 10,108
Total Loans 694 523 494 494 494
Deferred Tax 386 390 418 418 418
Liabilities 7,685 8,184 9,077 9,908 11,019
Gross Block 5,993 6,759 6,883 8,088 9,538
Depreciation 1,908 2,281 2,690 3,191 3,782
Net Block 4,084 4,478 4,193 4,897 5,756
Capital work-in-progress 1,128 1,322 905 1,200 500
Investments 145 388 924 924 924
Inventories 1,580 1,430 2,035 1,826 2,170
Debtors 1,833 2,070 1,965 2,566 3,046
Cash 232 246 522 365 932
Other Current assets 864 791 903 984 1,116
Total Current assets 4,509 4,538 5,424 5,741 7,264
Creditors 1,403 1,566 1,505 1,719 2,049
Other current liabilities 658 843 754 1,024 1,266
Total current liabilities 2,061 2,409 2,259 2,743 3,315
Provisions 120 132 110 110 110
Net current assets 2,328 1,996 3,055 2,888 3,839
Total Assets 7,685 8,184 9,077 9,908 11,019
Source: Company, Karvy Institutional Research
7
June 25, 2014
Unichem
Exhibit 6: Cash Flow Statement
Y/E Mar. (Rs mn) FY12 FY13 FY14 FY15E FY16E
EBIT 879 1,359 1,321 1,760 2,275
(Inc.)/Dec in working capital 31 346 (784) 11 (384)
Cash flow from operations 910 1,705 537 1,771 1,891
Other income 73 134 423 115 150
Depreciation 304 383 457 502 591
Interest paid (-) (41) (33) (32) (32) (32)
Dividends paid (-) (317) (476) (845) (583) (742)
Tax paid (-) (228) (328) (430) (428) (540)
Deferred Tax Liability 6.6 5.0 28.0 0.0 0.0
Extra ordinaries 0.4 0.0 411.5 0.0 0.0
Minority Interest 0.0 0.0 0.0 0.0 0.0
Net cash from operations 708 1,390 550 1,344 1,317
Capital Expenditure (-) (952) (971) 244 (1,500) (750)
Free Cash Flow (244) 419 794 (156) 567
Inc./(Dec.) in short-term borrowing 266 84 18 70 20
Inc./(Dec.) in long-term borrowing (72) (254) (48) (70) (20)
Inc./(Dec.) in borrowings 194 (171) (30) - -
(Inc)/Dec in Investments 68 (243) (536) - -
Equity issue/(Buyback) 31 9 51 (0) -
Cash from Financial Activities 293 (404) (515) (0) -
Others 32.4 (1.0) -3.7 0.0 0.0
Opening cash 152 232 246 522 365
Closing cash 232 246 522 365 932
Change in Cash 81 14 275 (156) 567
Source: Company, Karvy Institutional Research
Exhibit 7: Ratios
Y/E Mar. FY12 FY13 FY14 FY15E FY16E
EV/EBDITA (x) 16.0 10.6 9.9 7.9 6.0
ROE (%) 11.1 16.3 16.6 16.5 19.4
ROCE (%) 13.3 18.8 20.2 19.7 23.2
PE(x) 26.2 16.4 14.5 13.2 10.1
P/BV (x) 2.8 2.6 2.3 2.1 1.8
P/S(x) 2.1 1.7 1.7 1.4 1.2
Debt/Equity (x) 0.1 0.1 0.1 0.1 0.0
Source: Company, Karvy Institutional Research
Institutional Equities Team Rahul Sharma
Head – Institutional Equities /
Research / Pharma +91-22 61844310 [email protected]
Gurdarshan Singh Kharbanda Head - Sales-Trading +91-22 61844368/69 [email protected]
INSTITUTIONAL RESEARCH
Analysts Industry / Sector Desk Phone Email ID
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INSTITUTIONAL SALES
Celine Dsouza Sales +91 22 61844341 [email protected]
Edelbert Dcosta Sales +91 22 61844344 [email protected]
INSTITUTIONAL SALES TRADING & DEALING
Bhavesh Gandhi Institutional Sales/Trading/ Dealing +91-22 61844361 [email protected]
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For further enquiries please contact:
Tel: +91-22-6184 4300
Disclosures Appendix
Analyst certification
The following analyst(s), who is (are) primarily responsible for this report, certify (ies) that the views expressed
herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of
his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views
contained in this research report.
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Stock Ratings Absolute Returns Buy : > 15% Hold : 5 - 15% Sell : < 5%
