Hold Unichem Laboratories; target of Rs 305: ICICI Direct

ICICI Direct's research report on Unichem Laboratories

Domestic formulations, which constitute 56% of total revenues, are at the core of the overall performance. The acute: chronic: sub-chronic ratio for the company was 46:50:3. Despite having higher proportion of chronic therapies, the core business has grown at a CAGR of just 10% in FY10-16 on account of 1) restructuring exercise and inventory rationalisation and 2) NLEM implementation and the resulting channel disturbances in FY13, FY14. The situation is likely to change, going ahead, as the company plans to convert from a distribution-driven model to C&F driven model for better working capital management. It plans to realign its portfolio to minimise losses on account of NLEM by rationalising the MR team and pushing for more non-NLEM products (21% of domestic portfolio is currently under NLEM). However, it is taking much more time than earlier estimated. We expect branded formulations to grow at a CAGR of 15% to Rs 1129 crore in FY16-19E.

H1 demonstrated strong revenue growth on the back of a recovery in domestic formulation growth and an all-round export performance. On the domestic formulations front, the company seems to have overcome sticky issues of NLEM, FDCs. This was on the heels of 15% growth in FY16. The management’s focus on restructuring the matured portfolio, which comprises legacy but slow moving brands, seems to be working. Also, foray in OTC segment (Unienzyme) in domestic market augurs well to grow in the non-prescription space. Export formulations are likely to maintain the growth tempo mainly on the back of incremental US launches. However, EBITDA margin constraints continue due to 1) manpower addition at Goa plant 2) increase in R&D 3) foray in domestic OTC and 4) high cost base in the US. Despite a recovery in revenue growth, the margin scenario is still not up to the mark due to suboptimum operating leverage. We continue to monitor the margin scenario. We believe this could be the main trigger for valuation. Our new target price is Rs 305 (12x FY19E EPS of Rs 25.4). We downgrade the stock to HOLD.