Cluster: Apple Green
Recommendation: Buy
Price target: Rs328
Current market price: Rs248
Unique(em)
Key points
- Unichem Laboratories (Unichem) is focusing on lifestyle drugs, like cardio vascular, neurology and diabetology drugs, which yield higher margins. With the help of new product launches it is building an excellent product portfolio, which is expected to result in higher margins.
- The new formulation plants being set up at Baddi shall increase its capacity by over 70%. The other upgradation programmes being carried out by the company shall improve its efficiency.
- The export market is expected to be the key growth driver of its formulation business. Unichem has shown a growth of 57% year on year (yoy) in FY2005 and a compounded annual growth of 118% over FY2000-05 in the formulation export market. We expect this strong growth to continue backed by the new product launches.
- The backward integration due to increasing captive use of bulk drugs by the company will lead to margin improvement. Unichem has strategically set up plants in Baddi where it can avail of tax benefits. The cumulative effect of the improved product portfolio, backward integration and tax savings will cause its net profit margins to rise from 11% in FY2005 to 15.3% in FY2007.
- The improvement in the margins due to the increased exports, a better portfolio and backward integration will lead to net profits of Rs80.8 crore in FY2007. At the current market price of Rs248 the stock is trading at 10.4x FY2007E earnings. Keeping in mind the company's growth prospects and efficiency improvements, we believe that a price of Rs328 with a price/earnings ratio (PER) of 13.8x FY2007E is a fair estimate for the stock. Hence we initiate coverage on Unichem with a Buy recommendation and a price target of Rs328.