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Unichem Laboratories
View: Positive
CMP: Rs257

Business back on track post restructuring and regulation changes

Key points
 

Growth returns in the domestic business: During FY2012-FY2015, Unichem Laboratories restructured its domestic business and added five new divisions, to maintain a product and therapy specific approach. Unichem’s key focus is on brand building, with four of its products finding a place in the top 300 brands in the Indian Pharmaceuticals Market (IPM). Unichem maintains a balance between the chronic segment (59% of Dec. 2016 sales in India) and the acute segment (41% of Dec. 2016 sales in India). It is sharpening its focus on chronic therapies, resulting in high profitability and rapid growth. To overcome the price cuts suffered from NLEM, Unichem has added new products in its portfolio. Unichem has also been investing in the anti-diabetic segment, with a sharper focus. Since this is a life-long ailment for patients, it is a regular and highly profitable business segment. We expect the company’s Indian business to grow at a CAGR of 13-14% during FY2016-FY2019.

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Enters new segment of OTC Wellness: During Q2FY2017, Unichem entered the OTC segment by launching Unienzyme (for the treatment of Gastritis). Unienzyme is a strong brand (~Rs50-60 crore) with no direct competition. But, it has a limited market presence. Unichem spent Rs8 crore on the TV advertising of the product in Q2FY2017. We expect the benefits of this decision to become visible in the next 2-4 quarters. The company also plans to tie up with innovator companies for the upcoming molecules in the anti-diabetic segment. It could launch some other gastro products through the OTC route in the next 2-3 years.

US business to be another catalyst for growth: Unichem’s strategy for the US business is to focus on low-competition products where it manufactures APIs in-house. The company has filed 38 ANDA’s, of which 21 have been approved. The company expects to file 2-3 ANDAs every quarter in FY2018 and FY2019. The management plans to focus mainly on the US market, as it is a high-volume business with good profit margins. The management expects 20-25% growth from the US business in FY2018-FY2019 due to new launches and approvals.

Capex and manufacturing facilities: Unichem has six manufacturing facilities, of which four are for Formulations and two are for APIs. Two Formulations facilities and two API facilities are approved by the USFDA. The Goa plant is the largest Formulations facility for Unichem after the company doubled the capacity by investing Rs100 crore. The capacity expansion in Goa will help it to improve growth in the US business from FY2018 onwards. The company commissioned two API plants in Pithampur in H1FY2017 and two more will be commissioned in H2FY2017. Major requirement for capex is from the Kolhapur API facility for in-house consumption. The Unichem management expects a capex of ~Rs300 crore in FY2017-FY2018 and has already spent ~Rs75 crore in H1FY2017.

Debt-free company: Unichem has been a debt-free company with a debt/equity ratio of 0.04x in FY2016. The company has a negligible amount of debt (~Rs20-25 crore) on its book. We expect Unichem to generate a positive free cash flow with a completely debt-free balance sheet by FY2019E.

Positive view with better upside: Unichem’s revenue growth and profitability improved after a business restructuring and price deregulation. Unichem will launch 5-6 new products in the US market in the coming quarters and has 15+ ANDA’s awaiting for USFDA approval, which could result in ~18-20% growth in the US market in the coming years. Higher revenue from the US and captive API consumption could result in margin expansion of 150-200BPS from the current level of ~12%. We remain positive on Unichem and foresee a potential upside of 20% from the current level over the next 3-6 months.

Risks: Key downside risks to our valuation assumptions are: (a) Regulatory actions from the USFDA; (b) Delay in new product approvals; (c) NLEM price control by the government with ceiling prices will have a negative impact on the topline in the short term; (d) Dependence on the top 10 products.