May 24, 2016 ICICI Securities Ltd | Retail Equity Research Result Update Revenues in line but margins under pressure… • Revenues grew 17.8% YoY to | 301.5 crore (I-direct estimate: | 311.1 crore) on account of 17.1% YoY growth in domestic sales to | 171.3 crore (I-direct estimate: | 171.1 crore) and 21.7% growth in export sales to | 100.7 crore (I-direct estimate: | 114.8 crore). • EBITDA margins increased 456 bps YoY to 10.4% (I-direct estimate: 12.3%) due to high gross margins and low other expenditure. EBITDA increased 110.6% YoY to | 31.2 crore (I-direct estimate: | 38.1 crore). • Net profit witnessed a YoY increase of 186.7% to | 28.1 crore (I-direct estimate: | 28.1 crore) owing to tax write-back. Domestic formulations crawling back to normal post NLEM, realignment Domestic formulations, which constitute ~55% of total revenues, are at the core of overall performance. The acute: chronic: sub-chronic ratio for the company is 37:57:6. Despite having higher proportion of chronic therapies, the core business have grown at a CAGR of just ~5% between FY11-16P on account of 1) restructuring exercise and inventory rationalisation in FY10 / FY11 and 2) NLEM implementation and the resulting channel disturbances in FY13 / FY14. The situation is likely to change going ahead as the company plans to convert from distribution- driven model to C&F driven model for better working capital management. It plans to realign its portfolio to minimise the losses on account of NLEM by strengthening the MR team and pushing for more non-NLEM products (~21% of Domestic portfolio is currently under NLEM). However things are taking much more time than earlier estimated. We expect branded formulations to grow at a CAGR of 13.5% to | 957 crore between FY16P-18E. Formulation exports still evolving but growing Export Formulations (~27% of total revenue) have grown at a CAGR of 27% during FY11-16P on the back of significant investments in the infrastructure to push exports. New product launches in the US and a ramp-up in CRAMS for US and EU based customers have contributed to the growth. CRAMS business off-late has struggled though, with customers postponing or cancelling the requirements. For the rest of the exports the company is looking for US generics traction. Unichem has filed 36 ANDAs with the USFDA and received approval for 20 ANDAs. It has so far launched 14 products. We expect formulation exports to grow at CAGR of 26.4% between FY16P-18E to | 587.7 crore on the back of incremental US launches. Margin improvement the key for re-rating… Q4 revenues were driven by strong growth in Domestic formulations (62% of total sales). Domestic formulations growth has shown sign of recovery in FY16. The management’s focus on restructuring the matured portfolio which accounts for 46% of the overall pie and which comprises of legacy but slow moving brands seems working. Despite better product mix the margin remained under pressure. Higher employee expenses and one-off pertaining to provision of subsidiary investment have dent in margins. The next task for the management is to bring the dwindling margins to the industry level. Export formulations are likely to maintain the growth tempo on the back of incremental US filings and subsequent launches. We expect revenues, EBITDA, profit to grow at a CAGR of 16.8%, 29.1% and 34.1% respectively, in FY16P-18E. We maintain our target price of | 310, based on 14x FY18E EPS of | 22.1. Rating matrix Rating : Buy Target : | 310 Target Period : 12 months Potential Upside : 17% What’s Changed? Target Unchanged EPS FY16P Changed from | 11.0 to | 12.3 EPS FY17E Changed from | 15.7 to | 15.5 EPS FY18E Unchanged Rating Unchanged Quarterly Performance Q4FY16 Q4FY15 YoY (%) Q3FY16 QoQ (%) Revenue 301.5 256.0 17.8 306.3 -1.5 EBITDA 31.2 14.8 110.6 34.1 -8.5 EBITDA (%) 10.4 5.8 456 bps 11.1 -78 bps Adj. Net Profit 28.1 9.8 186.7 22.7 24.1 Key Financials (| crore) FY15 FY16P FY17E FY18E Revenues 1201.8 1334.6 1569.4 1821.7 EBITDA 101.3 163.9 204.0 273.2 Adj. Net Profit 75.3 111.6 140.9 200.6 Adj. EPS (|) 8.3 12.3 15.5 22.1 Valuation summary FY15 FY16E FY17E FY18E PE (x) 31.8 22.0 17.0 12.0 Target PE (x) 37.3 25.2 19.9 14.0 EV to EBITDA (x) 23.3 14.7 11.7 8.4 Price to book (x) 2.8 2.5 2.3 2.0 RoNW (%) 8.7 11.7 13.4 16.8 RoCE (%) 8.5 13.8 16.2 20.4 Stock data Particular Market Capitalisation Debt (FY16P) Cash (FY16P) EV 52 week H/L (|) 334/174 Equity capital Face value | 2 | 18.2 crore | 2418 crore Amount | 2402 crore | 36 crore | 20 crore Price performance (%) 1M 3M 6M 1Y Unichem Labs 14.2 31.3 -7.7 32.8 Indoco Remedies -7.4 -1.0 -13.9 -30.1 Alembic Pharma -1.3 -8.6 -14.4 4.6 Research Analyst Siddhant Khandekar [email protected]Mitesh Shah [email protected]Nandan Kamat [email protected]Unichem Laboratories (UNILAB) | 264
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May 24, 2016
ICICI Securities Ltd | Retail Equity Research
Result Update
Revenues in line but margins under pressure… • Revenues grew 17.8% YoY to | 301.5 crore (I-direct estimate: | 311.1
crore) on account of 17.1% YoY growth in domestic sales to | 171.3 crore (I-direct estimate: | 171.1 crore) and 21.7% growth in export sales to | 100.7 crore (I-direct estimate: | 114.8 crore).
• EBITDA margins increased 456 bps YoY to 10.4% (I-direct estimate: 12.3%) due to high gross margins and low other expenditure. EBITDA increased 110.6% YoY to | 31.2 crore (I-direct estimate: | 38.1 crore).
• Net profit witnessed a YoY increase of 186.7% to | 28.1 crore (I-direct estimate: | 28.1 crore) owing to tax write-back.
Domestic formulations crawling back to normal post NLEM, realignment Domestic formulations, which constitute ~55% of total revenues, are at the core of overall performance. The acute: chronic: sub-chronic ratio for the company is 37:57:6. Despite having higher proportion of chronic therapies, the core business have grown at a CAGR of just ~5% between FY11-16P on account of 1) restructuring exercise and inventory rationalisation in FY10 / FY11 and 2) NLEM implementation and the resulting channel disturbances in FY13 / FY14. The situation is likely to change going ahead as the company plans to convert from distribution-driven model to C&F driven model for better working capital management. It plans to realign its portfolio to minimise the losses on account of NLEM by strengthening the MR team and pushing for more non-NLEM products (~21% of Domestic portfolio is currently under NLEM). However things are taking much more time than earlier estimated. We expect branded formulations to grow at a CAGR of 13.5% to | 957 crore between FY16P-18E.
Formulation exports still evolving but growing Export Formulations (~27% of total revenue) have grown at a CAGR of 27% during FY11-16P on the back of significant investments in the infrastructure to push exports. New product launches in the US and a ramp-up in CRAMS for US and EU based customers have contributed to the growth. CRAMS business off-late has struggled though, with customers postponing or cancelling the requirements. For the rest of the exports the company is looking for US generics traction. Unichem has filed 36 ANDAs with the USFDA and received approval for 20 ANDAs. It has so far launched 14 products. We expect formulation exports to grow at CAGR of 26.4% between FY16P-18E to | 587.7 crore on the back of incremental US launches. Margin improvement the key for re-rating… Q4 revenues were driven by strong growth in Domestic formulations (62% of total sales). Domestic formulations growth has shown sign of recovery in FY16. The management’s focus on restructuring the matured portfolio which accounts for 46% of the overall pie and which comprises of legacy but slow moving brands seems working. Despite better product mix the margin remained under pressure. Higher employee expenses and one-off pertaining to provision of subsidiary investment have dent in margins. The next task for the management is to bring the dwindling margins to the industry level. Export formulations are likely to maintain the growth tempo on the back of incremental US filings and subsequent launches. We expect revenues, EBITDA, profit to grow at a CAGR of 16.8%, 29.1% and 34.1% respectively, in FY16P-18E. We maintain our target price of | 310, based on 14x FY18E EPS of | 22.1.
Revenue 301.5 311.1 256.0 306.3 17.8 -1.5 YoY growth was mainly due to 21.7% YoY growth in export formulations and 17.1% growth in domestic formulations
Raw Material Expenses 107.8 112.0 96.6 108.4 11.6 -0.5 YoY improvement in gross margin (197 bps) was mainly due to better product mix
Employee Expenses 56.3 54.4 46.3 58.9 21.6 -4.5Other Expenditure 106.2 106.5 98.3 104.9 8.1 1.3 Provided for | 22.78 crore in FY16 for diminition of long term investment in Brazilan
Subsidery. Major portion of this provision has been registered in Q4FY16
EBITDA 31.2 38.1 14.8 34.1 110.6 -8.5EBITDA (%) 10.4 12.3 5.8 11.1 456 bps -78 bps Increase in EBITDA margin was mianly due to improvement in gross margin and
lower base. Miss vis-à-vis I-Direct estimates was due to higher-than-expected employee cost and other expenditure
Interest 0.8 0.4 0.4 0.4 85.4 77.1Depreciation 8.8 8.7 8.0 8.7 10.4 1.0Other Income 5.8 6.2 5.5 4.6 5.7 26.9PBT before Exceptional Items 27.4 35.2 11.9 29.5 130.1 -7.0EO 0.0 0.0 0.0 2.8 0.0 0.0PBT after Exceptional Items 27.4 35.2 11.9 26.7 130.1 2.6Tax -0.7 7.0 2.1 6.2 PL PLEffective Tax Rate (%) -2.6 20.0 17.7 23.2 PL PL Tax right back was due to higher deferred tax owing to postponement of Goa plant
capitalization and some R&D spend Adj. Net Profit 28.1 28.1 9.8 22.7 186.7 24.1 Strong YoY growth was largely due to robust operational performance and tax write-
backEPS (|) 3.1 3.1 1.1 2.3 186.2 37.0Key MetricsDomestic formulations 171.3 171.1 146.2 188.9 17.1 -9.3 Domestic growth was driven by ~7% price hike, 2% due to new products launches
and more than 5% YoY growth in volume
Exports formulations 100.7 114.8 82.8 93.8 21.7 7.4 In constant currency terms, US, UK and Brazil revenue increased 8.0%, 15.0% and 80.6% to US$ 8.8 million, GBP 2.5 million and Real 0.7 million respectively. Miss vis-à-vis our expectation was mainly due to lower-than-expected US sales
APIs 11.3 23.2 10.3 10.7 9.5 6.2
Source: Company, ICICIdirect.com Research Change in estimates
ICICI Securities Ltd | Retail Equity Research Page 3
Company Analysis
Established in 1944, the company has five subsidiaries and one associate company. It remained confined to selected therapeutic groups such as Anti-hypertensives, Anti-infectves, Neurology, Gastrointerology etc. with some legacy products Losar, Telsar and Trika. Despite having higher proportion of chronic therapies in domestic market, slow growth in domestic Pharma over past five years was mainly due to restructuring and NLEM impact. However, as per the management, the situation is likely to change going ahead as the company has converted majority of its domestic business from distribution-driven model to C&F driven model for better working capital management. Also, It focus on restructuring the matured portfolio which accounts for 46% of the overall pie and comprises of legacy but slow moving brands started providing traction. Export business is largely driven by the US followed by Europe and Brazil. Despite being in the business for a long period, the company is yet to achieve the kind of scalability achieved by other Indian peers with similar pedigree given the infrastructure it owns i.e. 4 formulation plants (2 USFDA, UKMHRA approved) with no critical observations from USFDA and 2 USFDA approved API plants. However, US sales have started giving tractions, which increased more six fold to US$ 33 million from 12-16P mainly due to enhanced USFDA approvals and improvement in product pipeline. Emerging traction especially from the US is likely to neutralize the self-inflicted pains in the domestic formulations. Overall we expect revenues to grow at a CAGR of 16.8% in FY16P-18E to | 1821.7 crore. Exhibit 1: Revenues growth to be driven by traction from formulation exports
747.4824.0 875.5
1080.8 1133.4 1201.81334.6
1569.4
1821.7
0
200
400
600
800
1000
1200
1400
1600
1800
2000
FY10 FY11 FY12 FY13 FY14 FY15 FY16P FY17E FY18E
(| c
rore
)
Revenue
Source: Company, ICICIdirect.com Research
Domestic formulations- The company ranks 29th in the IPM with a market share of 0.91%. Domestic formulations constitute ~55% of the standalone turnover. The acute: chronic: sub-chronic ratio for the company is 37:57:6. Despite having higher proportion of chronic therapies, the core business have grown at a CAGR of just 5.2% between FY11-16P on account of 1) restructuring exercise and inventory rationalisation in FY10 / FY11 and 2) NLEM implementation and the resulting channel disturbances in FY13 / FY14. It plans to realign its portfolio to minimise the losses on account of NLEM by strengthening the MR team and pushing for more non-NLEM products. We expect domestic formulations to grow at a CAGR of 13.5% to | 957 crore between FY16P-18E. Formulation Exports They constitute 27.3% of standalone sales. As the CRAMS business (~30% of Exports formulations) struggles to get momentum, the company is looking for US generics traction to push formulation exports. It has filed 36 ANDAs with the USFDA and received approval for 20 ANDAs. We expect formulation exports to grow at CAGR of 26.4% to | 587.7 crore between FY16P-18E on the back of incremental US launches.
10.1% CAGR
16.8% CAGR
ICICI Securities Ltd | Retail Equity Research Page 4
Exhibit 3: US to provide impetus for formulation exports growth
81.8111.8
161.9
252.7 255.2312.8
368.1
475.0
587.7
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700
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(| c
rore
)
Export Formulations
Source: Company, ICICIdirect.com Research
Exhibit 2: Domestic formulation growth likely to improve going ahead
538.5 575.8 534.3635.3 655.0 651.0
742.9839.5
957.0
0
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800
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1200
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(| c
rore
)Domestic Formulations
Source: Company, ICICIdirect.com Research
Exhibit 4: API to grow at 5% CAGR in FY16P-18E es
63.670.3
98.7108.9
118.7113.1
93.4 98.0 102.9
0
20
40
60
80
100
120
140
FY10 FY11 FY12 FY13 FY14 FY15 FY16P FY17E FY18E
(| c
rore
)
APIs
Source: Company, ICICIdirect.com Research
5.2% CAGR13.5% CAGR
26.9% CAGR
26.4% CAGR
ICICI Securities Ltd | Retail Equity Research Page 5
EBITDA to grow at a CAGR of 29.1% in FY16P-18E
170.9150.1
118.3
174.3 177.8
101.3
163.9
204.0
273.222.9
18.2
13.5
16.1 15.7
8.4
12.3 13.015.0
0
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100
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300
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E(|
cro
re)
0
5
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(%)
EBITDA EBITDA margins (%)
Source: Company, ICICIdirect.com Research
Exhibit 5: Adjusted net profit to grow at a CAGR of 34.1% in FY16P-18E
122.9
95.1
71.2
113.1
136.5
75.3
111.6
140.9
200.616.4
11.5
8.1
10.512.0
6.3
8.4 9.0
11.0
0
40
80
120
160
200
240
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
(| c
rore
)
0
2
4
6
8
10
12
14
16
18
(%)
Adj. Net profit Adj. Net profit margins (%)
Source: Company, ICICIdirect.com Research
Exhibit 6: Trends in return ratios
15.616.7
8.7
13.4
17.9
12.6
21.8
15.4
10.811.7
16.8
24.4
18.019.0
8.5
13.8
16.2
20.4
6
12
18
24
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
%
RoNW (%) RoCE (%)
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 6
SWOT Analysis Strengths- Chronic focus, clean balance sheet, decent dividend payout ratio, Availability of facilities to scale up the operations. Weakness- One of the lowest MR productivity, matured domestic portfolio. US traction still in nascent state. Opportunities- The US Generics space. Threats- Increased USFDA scrutiny across the globe regarding cGMP issues and consolidation in the US pharmacy space. Increased competition in the domestic formulations space. Quarter / Concall Highlights
• Total ANDAs filing stood at 36 of which, the company has launched 14 products and awaiting approvals for 16 ANDAs. The company reported cumulative DMF filings to 46.
• CRAMS business accounts for 10% of total stand alone sales of | 1222.4 crore. YoY growth for CRAMS was flat in FY16
• The company plans 1-2 ANDA filings every quarter and 6-8 filings annually. The company plans two product launches in Q1FY17 and 1-2 launches in Q2FY17.
• The company received Establishment Inspection Report (EIR) post re-inspection of three plants in Goa, Ghaziabad and Roha.
• 6-7 new products were added in the NLEM list in FY16. Currently, 21-22% of the domestic portfolio is under NLEM, while 2-2.5% of the portfolio is under the FDCs banned by the Indian government.
ICICI Securities Ltd | Retail Equity Research Page 7
• The company’s domestic business growth was on account of 7-7.5% price increase and ~5% due to volume increase each and ~2% due to new product launches.
• The company has ~250 scientists, more than 2500 MRs and a total of ~5500 employee strength.
• The company plans | 150-200 crore of capex for FY17 and FY18, mostly for API facility in Kolhapur. Rest of the capex would be utilized for maintenance and de-bottlenecking of its existing facilities.
• The capacity utilization at the company level is 60-70%. • ~90% of the company’s formulation business is backward
integrated. • The company has launched two products in the Brazilian markets
and plans to launch two more products (approved by ENVISA) by Q2FY17.
• The company has launched more than 15 products from its Niche Generics subsidiary, UK.
• Operating margins are expected to improve 100-150 bps in FY17 on account of better product mix and sales growth.
• R&D expenses for FY16 were 4-5% of total sales. It has guided R&D spend to be ~5% of total sales going forward.
• The company guided for tax rate of ~24% for FY17 and FY18.
Roha API ISO 9001 - 2000, WHO cGMP, TGA, USFDA, ISO 14001 - 2004, ISO 18001 – 1999, EDQM
Pithampur API USFDA , EUGMP, COFEPRIS
Ireland Formulations Irish Medical Board and Kazakhstan
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 8
Valuation Q4 revenues were driven by strong growth in Domestic formulations (62% of total sales). Domestic formulations growth has shown sign of recovery in FY16. The management’s focus on restructuring the matured portfolio which accounts for 46% of the overall pie and which comprises of legacy but slow moving brands seems working. Despite better product mix the margin remained under pressure. Higher employee expenses and one-off pertaining to provision of subsidiary investment have dent in margins. The next task for the management is to bring the dwindling margins to the industry level. Export formulations are likely to maintain the growth tempo on the back of incremental US filings and subsequent launches. We expect revenues, EBITDA, profit to grow at a CAGR of 16.8%, 29.1% and 34.1% respectively, in FY16P-18E. We maintain our target price of | 310, based on 14x FY18E EPS of | 22.1. Exhibit 9: One year forward PE [
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Price 18.8x 6.4x 15.7x 12.6x 9.5x
Source: Company, ICICIdirect.com Research
Exhibit 10: One year forward PE of company vs. CNX Pharma
ICICI Securities Ltd | Retail Equity Research Page 12
RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;
ICICI Securities Ltd | Retail Equity Research Page 13
ANALYST CERTIFICATION We /I, Siddhant Khandekar, CA INTER and Mitesh Shah, MS (finance), Nandan Kamat MBA Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.
Terms & conditions and other disclosures: ICICI Securities Limited is a Sebi registered Research Analyst having registration no. INH000000990. ICICI Securities Limited (ICICI Securities) is full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities is a wholly-owned subsidiary of ICICI Bank which is India’s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. (“associates”), the details in respect of which are available on www.icicibank.com. ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. 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