Unichem Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs360
Current market price: Rs265
Gearing up
Key points
- The domestic formulation business of Unichem Laboratories (Unichem) contributes 65% of its consolidated revenues. With a therapy-focused field force, expanding reach in semi-urban and rural areas, a steady stream of new product launches and a strong brand building ability, we believe, this business will organically grow at a CAGR of 12.8% over FY2006-08E.
- Niche Generics (Niche), which has recently become a wholly owned subsidiary of Unichem, will be used to expand into the European market. With the shift of Niche's manufacturing base to India, Unichem will also derive cost synergies. Against the current turnover of GBP12.3 million, we expect Niche to record sales of GBP12 million in FY2007E and of GBP13 million in FY2008E. Further, Niche is expected to report losses to the tune of GBP1-1.5 million in FY2007 and break even in FY2008.
- For the USA Unichem plans to develop a portfolio of 25-30 products over the next two to three years. These products will be sold through its marketing partners in the USA. Unichem has already filed two ANDAs, and plans to file another two to three in the current fiscal and eight to ten per year from FY2008 onwards. Even though the US revenues will start flowing in towards the second half of FY2008, the full potential of the US business will be realised only from FY2009 onwards.
- Unichem has set up wholly owned subsidiaries in South Africa, Brazil, the UK (Niche) and the USA in order to carry out its operations in those markets. The subsidiaries have not started generating revenues as yet. With increasing product registrations, the management expects the subsidiaries in South Africa and Brazil to start generating revenues in FY2008 and break even in FY2009.
- We expect Unichem's margin to improve by 70 basis points over FY2006-08. While the rising R&D cost due to a ramp-up in filings will put pressure on the margin, the improving product mix, the rising share of exports and excise savings arising from the shift of domestic manufacturing to the Baddi plant will aid the margin growth.
- In view of the M9FY2007 financial performance of Unichem, we are revising our estimates for the company. We are downgrading our FY2007 sales projections by 3.2%, and the profit and EPS projections by around 3.8% each. We are also marginally upgrading our FY2008 estimates. Our revised earnings estimates now stand at Rs23.8 per share for FY2007 and Rs28.5 per share for FY2008. At the current market price of Rs265, the stock is trading at 11.1x its FY2007E earnings and 9.3x its FY2008E earnings, on a stand-alone basis. We maintain our Buy recommendation on Unichem with a price target of Rs360.