Unichem Laboratories - India will drive valuations; but near-term pain may persist - Avendus

UL's headline revenue growth at 8% in the Mar12 quarter was higher than our estimates. However, the performance was led by exports, while the domestic formulation business continued to wither under pressure, marking the fifth consecutive quarter of revenue deceleration. In FY12, domestic formulation sales stood at INR5.3bn, down 8% y-o-y. The deficit in the domestic operation was bridged by a growth of over 50% in exports. We largely maintain our revenue estimates over the projected period, but lower our PAT forecast up to 8%. UL's valuation is likely to be driven by its delivery in the domestic formulations pie. In FY13f, we estimate that growth would move into the positive territory on a low base; however, this is likely to be backended. We rollover the TP to Mar13 and raise it marginally to INR162; upgrade rating to Buy.

Sales rise, but mix shift continues with thrust from exports

UL's headline revenue growth at 8% to INR1.9bn for the Mar12 quarter was higher than our estimates. However, carrying forward the trend of the Dec11 quarter, the positive swing to the overall performance was brought forth by the export segment. Formulation exports stood higher at 56% y-o-y, while APIs grew 40% during the quarter. The domestic formulations business, on the other hand, slid for the fifth consecutive quarter (down 9% y-o-y). Mar12 is also the first quarter during which segmental sales declined, despite a low base in the previous period. For FY12f, domestic formulation sales were at INR5.3bn, down 8% y-o-y. From a contribution of 76% to the total standalone sales in FY11, domestic formulations now account for 67% of the company's turnover.

Higher sales, lower tax lead PAT growth first time since Sep10

With higher-than-estimated sales and low tax provisioning (10.3%), standalone PAT for the Mar12 quarter stood at INR232mn, up 57% y-o-y. After Sep10, this is the first quarter of profit rise. The steady improvement in operating margins, despite weak GMs, is a silver lining. However, if the domestic formulations business were to continue its slide, margin expansion is likely to be capped. The segment continues to enjoy higher-than-company level profitability; higher COGS indicates its influence on the EBITDA.

Upgrade to Buy, but continued pain may sway near-term valuations

We largely maintain our revenue estimates over the projected period. However, we lower our PAT forecasts by up to 8%. We rollover the TP to Mar13 and raise it marginally to INR162; upgrade to Buy. Irrespective of the performance in exports, the valuation driver for UL would be, more likely than not, its delivery in the domestic formulations pie. In FY13f, we estimate growth would move into the positive territory, on a low base; however, this is likely to be back-ended. Meanwhile, the extended period of pain is likely to continue to influence valuations over the near term. Slower-than-estimated growth in the domestic formulations portfolio is the key risk.

Source : Equity Bulls

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