Unichem laboratories is mainly focused on formulations, API manufacturing and caters to various therapeutic areas like gastroenterology, cardiology, diabetology, anti-bacterials, anti-infectives etc. Company's domestic business accounts for ~58% revenue and has strong brands like Losar, Losar H, Ampoxin etc. Exports accounts for ~42% of revenue of which US business is major contributor with ~16-18% revenue. Company has 21 approved ANDAs in key USA market. In our recent interaction, management sounded optimistic about steady growth in domestic business and strong ANDA pipeline which could lead to robust growth in US and global business.
Revitalised domestic business
During FY12-15, Unichem restructured its domestic business and added 5 new divisions (now total 12) plus added marketing executives. Addition of new divisions was to maintain product andtherapy specific approach. Domestic business accounts for ~58% of revenue of which major portion is formulations. Chronic and acute portfolio account for ~58% and ~42% of domestic formulations. Cardio vascular segment accounts for ~42% of formulations business due to strong brands like Losar (revenue ~INR 1850 mn), Telsar (~INR 550 mn). Company's top 10 brands contribute ~45% of domestic revenue. Unichem tied up with Glenmark for marketing of Teneligliptin (anti-diabetic) under Unichem's brand name Teneza (~INR 100mn revenue). Company also plans to tie up with an innovator companies for upcoming molecules in diabetic segment. Unichem entered OTC market with Unienzyme as it is a strong brand (~INR 500-600 mn) with no direct competition but limited market presence. Company could launch some other gastro products through OTC route.
Niche Generics, UK based subsidiary, has direct sales operations in UK and European countries. It has manufacturing facility in Ireland. Company has total 37 products of which 34 are owned and 3 are in-licensed products. European countries mandate participation through tender route for which competition is fierce which has led to pricing pressure. Higher manufacturing costs and pricing pressure has resulted in squeezed margins and miniscule profits from UK subsidiary. Management is of the opinion that change in business model and addition of product could result in increased revenue and profitability.
Unichems USA subsidiary leverages on Unichem's production capability in India. It contributes to business development, distribution, marketing in US. Majority of R&D expenses are attributed to US business. Company has filed for 38 ANDA's of which 21 are approved. Company plans to focus majorly on US market as it is high volume business with good profit margins.
Unichems Brazilian subsidiary has got approvals for 2-3 minor products but it is making losses from last 5 years. Unichem is taking INR 70mn write off every quarter for Brazilian subsidiary. Management is hopeful that further approval of ~4-5 products in Brazilian market could result in self-sustaining and profitable business
Manufacturing facilities and capex
Unichem has 6 manufacturing facilities of which 4 are formulations and 2 are API facilities. Two formulations & two API facilities are FDA approved. Goa is the largest formulations facility for Unichem on account of doubling of capacity by investing INR 1000 mn+ in capex. Company has commissioned 2 API plants in Pithampur in H1FY17 and two more will be commissioned in H2FY17. Major requirement for capex is from Kolhapur API facility. Management expects ~INR 3000mn capex in FY17-18E and has already spent ~INR 750 mn in H1FY17.
Finance and valuations
Unichem laboratories reported meagre ~6.75% revenue growth whereas PAT declined ~7% between FY13-16 on account of restructuring of business, price control on Losar and slowdown in US FDA approvals. Revenue growth and profitability picked up after business restructuring and price deregulation. Losar has come out of NLEM and will be eligible for ~10% price hike every year. Chronic and acute portfolios are growing at ~16% and ~10% respectively. Hence steady ~10-11% growth is expected in domestic formulations business. Unichem will launch 5-6 products in US market in coming quarters and has 15+ pending ANDA's which could result in ~18-20% growth in US market in coming years. Introduction of Kolhapur facility would increase captive consumption of APIs. Higher revenue from US and captive API consumption could result in margin expansion of 150-200 bps from current ~11%. At current valuations, Unichem laboratories is trading at TTM P/E of 23.5x and EV/EBITDA of 15x.
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