Buy Unichem Laboratories Ltd - Motilal Oswal

To gain from strong demand growth: The Indian pharmaceuticals industry is likely to grow at 12-15% compounded average growth rate (CAGR) over FY10-FY12E after having grown by 14% CAGR over the last 15 years. Unichem's domestic business, which contributed 81.5% to revenues in FY10, had a market share of 1.5% and is currently ranked 25th. The company plans to add 700 medical representatives over FY10-FY12E to grow in line with industry growth rates.

Strong brands power domestic growth: Ampoxin (Rs 83 cr, Rank 30th, Anti-infective), and cardiovascular drugs Losar-H (Rs 60 cr, Rank 61st) and Losar (Rs 56 cr, Rank 73rd) were among the top 100 Indian pharmaceutical brands during MAT March, 2010. Unichem has a presence in only 25% of therapeutic segments in the Indian market and is working on expanding its therapeutic coverage. This planned coverage expansion and strong presence in the fast growing Cardiovascular, Diabetes and Neurology segments is estimated to grow the domestic formulations business by 13.5% CAGR over FY10-FY12.

US to constitute 4% of FY12E revenues: Unichem entered the US market in FY10 with 4 products. Current approvals by USFDA stand at 9, with 6 more awaiting approvals and 1-2 filings per quarter likely in FY11 and FY12. US revenue is estimated at $4-5 million in FY11E and $8-9 million in FY12E. As a result of higher gross margins in this geography, overall raw material cost is likely to decline by 2-3% of sales p.a. over FY10-FY12 from 34% of sales in FY10.

Turnaround likely in wholly-owned UK-based subsidiary: Niche Generics sources and sells formulations in UK. In FY10, Niche's losses reduced to £0.19 million from £1.3 million in FY09 despite flat sales at £1million aided by increase in sourcing from India at 20% of revenues. The management expects a turnaround in FY11 due to improved product mix, cost rationalization and increased sourcing from India.

Valuations & View: Revenue growth of 10% CAGR over FY10-FY12E and margin expansion is estimated to lead to 18%+ CAGR in earnings over FY10-FY12. We expect EBITDA margins to expand due to increased sourcing from India by US and UK subsidiaries. The company pays out one third of its earnings as dividend. Unichem has announced a split of its share from Rs 5 face value to Rs 2 face value. With an ROE of 23% and greater than Rs 60 per share in cash and cash equivalent at FY12E end, the stock is extremely attractive at less than 10xFY12E and more than 3% FY12E dividend yield. We recommend a BUY with a target price of Rs 560 - 12xFY12E earnings.

Source : Equity Bulls

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