Expansion to boost Unichem prospects

Mumbai-based Unichem Laboratories, a leading midsize player in the pharmaceuticals space, stands to benefit from its ongoing restructuring and expansion initiatives in the domestic and international markets, in the long term.

Business
Unichem Laboratories is an integrated pharmaceutical company engaged in manufacture and marketing of pharmaceutical formulations and active pharmaceutical ingredients (API) in India and abroad.

The company offers pharmaceutical formulations in various therapeutic areas, including cardiology, neurology, psychiatry, gastrointestinals, diabetes, anti-infectives, pain management and dermatology.

The company also offers contract research and manufacturing services. It has six manufacturing plants in India and four wholly owned overseas subsidiaries in the UK, the US, Brazil and South Africa.

The company derives close to 90% of its annual consolidated revenues from formulations segment and the rest from APIs.
It has a modest market share of 1.5% (as per IMS MAT Nov 2010 data) in the overall domestic formulations market and almost

3.05% in its represented market. It generates close to 73% revenues from domestic formulations and has over 200 products in its portfolio, including key brands like Ampoxin, Losar-H, Losar, Trika and Unienzyme that feature in the top 200 Indian pharma brands (as per MAT Nov 2010 data). The company is pretty strong in chronic therapeutic segments with cardiovascular, neuropsychiatry and anti-diabetes generating 41%, 12% and 3% revenues, respectively.

The company in its international business has presence in over 20 countries with more than 484 valid product registrations and over 300 regulatory filings. Though the company generates almost 25% revenues from international operations, the overseas subsidiaries continue to make losses.

Investment rationale
The domestic pharma industry is expected to continue growing at 12-14% over the next few years on the back of changing lifestyles, leading to higher instances of chronic diseases, increasing affordability and better healthcare facilities.

The company, which has some powerful brands catering to cardiovascular and diabetic ailments, would see its revenues and income from high-margin chronic segment grow at a faster pace as this segment is expected to grow at 14-18% in the next four years.

The company is highly dependent on its top five brands for revenues and has started developing its second tier of power brands like Tgtor, Telsar, Olsar, Metride etc to derisk and grow its revenues. It has also started to make its presence felt in under represented segments like dermatology by launching new products, expanding and reorganising its sales force.

The company, which has recently commissioned new plants at Sikkim and Baddi, is also investing to create additional capacities at Indore SEZ, new packaging line and biotech plant at Goa.

These additonal capacities would help it increase volumes and cater to new products in coming years.

The company is also pursuing contract manufacturing opportunities, which would help bring in more revenues going forward.

The company’s strong balance sheet, with very little debt, high cash component and decent return ratios offer further confidence.

Concerns
Unichem, which is recruiting additional sales force and investing in capex, may see its operating margins remain under pressure in the near term. Further, in a highly competitive environment, its growth would be dependent on expanding its second line of power brands and newer products more effectively as currently it is highly dependent on its top brands.

Valuations
Led by its focus on higher margin chronic segments, newer product launches to cater to unrepresented segments and utilisation of additional capacities, Unichem’s revenues are expected to grow at a CAGR of 19% over FY10-FY12E, while its net profits are expected to grow at a CAGR of 15% over the same period. At the current market price of `190.40, the stock trades at a P/E of 13.64 times its expected FY11 earnings per share and 10.54 times its FY12E earnings, respectively. Investors with a long-term view can keep an eye out for the stock.

Disclaimer: The writer does not hold any share in the company