Unichem Laboratories - India growth in positive territory can reinforce valuations - Avendus

Beating the strong negative flow of the preceding six quarters, UL reported a 21% growth in the domestic formulations business during the Jun12 quarter. This, coupled with currency and volume-led growth in the export segment, propelled a 33% y-o-y revenue rise. While recovery in the domestic business was expected to set in during FY13f, our assumption was a largely back-ended performance; thus, delivery in the Jun12 quarter is a positive surprise. UL's valuation, we maintain, is likely to be driven by its delivery in the Indian pie; the Jun12 quarter has probably set the ball rolling. However, sustaining the impetus is crucial. As India contributes to growth, the impact on earnings may be more pronounced. We raise our target multiple on the domestic piece without changing our revenue forecasts much. Rollover TP to Jun13 and raise it to INR183; maintain Buy.

Positive territory after a long wait

After six straight quarters of a y-o-y fall in the domestic formulations segment, the Jun12 quarter was a reveler. With a 21% growth, the segment marked a recovery. This, coupled with currency and volume-led growth in the export segment (formulation exports up c160% y-o-y), propelled sales up at INR2.6bn, a 33% y-o-y growth. While we projected a recovery in the domestic business to set in during FY13f, our assumption was a largely back-ended performance.

Favorable impact on margins, but could have been better

The domestic business is the most profitable business of UL's revenue pie. A positive trend in revenue growth, coupled with an operating leverage, thus is likely to have an accentuated impact on profitability. While the EBITDA margin at 18% marks a 380-bp/90-bp recovery y-o-y/q-o-q, given the positive swing in the revenue mix, the improvement is marginally subdued.

Mild rise in forecasts, but buoyancy in the P/E

We largely maintain our revenue estimates for FY13f-FY15f, and so also our PAT estimates for FY14f-FY15f. UL's valuation, we maintain, is likely to be driven by its delivery in the domestic formulations pie; the Jun12 quarter has probably set the ball rolling. However, sustaining the momentum is crucial. Also, lifting margins up from their trough of FY12 would be a near-term delivery. We raise our target multiple on the domestic piece to 12.0x. We rollover our TP to Jun13 and raise it to INR183; maintain Buy. At our TP, UL trades at 11.2x Jun14 EPS of INR15.5. Slower-than-estimated growth in the domestic portfolio is a key risk.

Source : Equity Bulls

Keywords