Accumulate Unichem Laboratories; target of Rs 318: KR Choksey

KR Choksey's research report on Unichem Laboratories

Unichem’s Q2FY17 revenues were above our estimates with a beat on all fronts. Revenues grew by 19%, EBITDA stood at INR 396mn and margins 10.9% as compared to our estimates of INR 386mn and 9.5% for Q2FY17 on account of superior operating efficiency with gross margins at 63.8%. Domestic business posted robust growth of 18.2% YoY from INR 1.9bn in Q2FY16 to INR 2.3bn in Q2FY17. International operations posted robust growth of ~26% YoY at INR 1.1bn. PAT for the quarter stood at INR 205mn down 11% YoY and 11% QoQ on account of higher tax rate.

We expect gradual pickup in growth over the next few quarters on account of pick up in domestic business backed by volume growth of chronic portfolio. Exports formulations improvement on account of enhanced focus in the US & UK markets and expansion in select EM’s such as South Africa and Brazil to drive growth momentum. We expect Unichem to face moderate pressure in the domestic business on account of 16% of its portfolio under NLEM and currency headwinds on its EM portfolio. We expect operating margins to improve in FY17E & FY18E on account of increase in gross margins as the US geography starts churning out superior product margin mix. We maintain our ‘ACCUMULATE’ rating with a target price of INR 318 at 18x FY18E EPS.