Stock Review: Unichem Laboratories

 

 

Unichem Laboratories looks to be an attractive bet considering its strong fundamentals and future growth prospects

 

WITH a strong balance sheet, robust domestic formulation business, decent ANDA (abbreviated new drug applications) filings and future growth plans, Unichem Laboratories looks fundamentally sound. Long and medium-term investors can buy the stock at the current market price

BUSINESS:

Pharma firm Unichem engaged in manufacturing of formulations and active pharmaceutical ingredients (API). It has a presence in numerous therapeutic segments, such as cardiovascular, anti-infectives, neuropsychiatry, gastro-intestinal, nutraceuticals, musculo-skeletal, diabetes, respiratory and dermatology. The company has six manufacturing facilities in India spread across Maharashtra, Goa, Madhya Pradesh, Uttar Pradesh, Sikkim and Himachal Pradesh. It has also four whollyowned subsidiaries in South Africa, Brazil, the US and the UK

GROWTH DRIVERS:

Currently, overseas markets contribute only 25% of its consolidated revenues. The company has plans to increase this share. It has strategically divided its export formulation business into emerging markets and developed markets. In emerging markets, Unichem plans to enter 1-2 countries every year. The company is working on around 25 molecules and expects to file 1-2 ANDAs every quarter. The company generates 6% of its revenues from contractual tie-ups in Europe. Currently, it is in talks with US generic companies to cater to its supply from Ghaziabad and Baddi plants. If this goes through, it would provide good scope to increase the topline. It has very strong brands in its portfolio, including Ampoxin- 30th, Losar H-61st & Losar-73rd. 80% of its net sales is generated from four therapeutic segments. The company's UK subsidiary, Niche, reduced its losses to £0.19 million in FY10 from £1.3 million in FY09. According to the management's guidance and increased low cost sourcing from India, a turnaround can be expected in the current fiscal.

FINANCIALS:

In the past four years, net sales of the company have grown at a compounded annual growth rate (CAGR) of 8%, however, during the same period, net profit of the company has increased at a CAGR of 17% For the quarter-ended June, standalone revenues, EBITDA and net income grew 10.7%, 3.3% and 3%, respectively. EBIDTA margins were hurt due to higher raw material cost, R&D expenses, increased staff cost and commissioning of new plants at Baddi and Sikkim. As compared to the industry standards, the company has very low debt on its balance sheet. As of March 2010, the debt-equity ratio of the company was 0.06. In FY10, the return on capital employed (ROCE) for the company was 22 and on the standalone basis, trailing 12 months ended June 2010, ROCE was 24.

   The company has a healthy cash flow history and has recently implemented SAP as a step

towards their plan to make the company a negative working capital company in the next three years. This will enable the company to reduce inventory and debtor days. With the ambition to enter the high margin developed markets, the company has increased its R&D to sales ratio and it seems that it will remain high.

VALUATIONS:

With the current market price of 460, the company is currently trading at a FY10 price to earning (P/E) multiple of 13.5 and price to book value of 3. The company is consistent dividend payer. Its dividend to cash profit has consistently increased during the past four years. Considering its strong fundamentals and future growth prospects, the company is priced fairly and investors can consider buying this stock.