Maintain Hold on Unichem Laboratories - Restructuring Continues - Emkay

Unichem's Q3FY12 results were inline with our expectations a) Revenues at Rs2.2bn (up 13% YoY) b) EBITDA at Rs368mn (down 7% YoY) and c) APAT at Rs245mn (down 4% YoY)

- Commencement of CRAMS contract with US MNC for 3 products driven 83% growth in export formulations
- Inventory rationalization and restructuring in domestic business let to 6% decline during the quarter. Pain to persist for two more quarters
- We revise our FY12 & FY13 earnings estimates, due to weak outlook in domestic market for two more quarters and slow offtake in CRAMS contract. We maintain Hold with a revised target price of Rs144 (11x FY13E EPS of Rs13.1)

Inventory rationalization in domestic business led to subdued Q3FY12

- Unichem had initiated inventory rationalization at the distributor level in order to improve internal processes and reduce inventory by 21-30 days. This has led to 6% YoY decline in domestic formulation revenues in Q3FY12. Among the companies top 10 brands, 6 brands reported negative YoY growth

- Export formulation business grew 83% YoY led by commencement of new CRAMS contract. This contributed Rs100mn in the top line Growth will remain subdued for next two quarters

- In the domestic market –

* We believe pain in domestic market will continue for 2-3 quarters on the back of inventory rationalization
* In FY13 domestic business is expected to grow by 8-10%

- In the exports market –

* Company initiated CRAMS supplies to MNC customer in Q3FY12. We expect this contract to generate revenues of Rs250mn in 4QFY12 & Rs1bn in FY13E
* US business (contributes 3% to sales) to grow at 39% CAGR over FY11-13E

Valuation

We expect Unichem to report 8% revenue growth in FY12E and 15% growth in FY13E. We expect EBIDTA margins to move from 18.2% in FY11 to 15.1% in FY12E and 17.7% in FY13E. Earnings will grow by 11% CAGR over FY11-13E. We revise our target price on the stock at Rs144 (11x FY13 EPS) with a Hold rating. At current price, the stock trades at 16x FY12E EPS of Rs9.0 and 10.9x FY13E EPS of 13.1.

Source : Equity Bulls

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