ValuePickr Forum

Unichem laboratories ltd

UNICHEM LABORATORIES LTD

The company is an integrated pharmaceutical company with strong presence in the domestic formulations segment. The company has presence in cardiology, anti infectives, orthopaedics, neurology and is now entering dermatology segment.

The company is ramping up its presence in the US markets with more and more ANDA filings and gets approvals for the same.

Cmp 104, market cap 950 crores. Debt as on Sep 11 was around 47 crores.

Book Value around 75.

Promoter holding is 49.25% with no pledging.

RECENT DEVELOPMENTS

1. Unichem has undertaken commissioning of new facilities in Baddi and Sikkim.

2. Commissioning of its SEZ in MP.

3. Company is increasing its sales force to augment domestic sales. This has led to higher expense and hence reduction of margins in the short term. However in the longer term this move is likely to pay good dividends.

All the above measures are likely to have full impact on companyâs growth from fy 13 onwards.

4. Higher concentration on tier II brands as further growth from its top brand like ampoxin looks difficult.

5. Change in its domestic distribution network, replacing the distributor system with its own C&F agents in line with the practice followed by other peer pharma companies. This has led to destocking of inventory at the distributor level which has led to reduced sales and profit momentum in the short term. This pain is likely to get over post fy 12.

6. The company had taken over Niche Generics in UK and made it a fully owned subsidiary in dec 06. This acquisition however has not yet started contributing to the top line and is making loss at the net level. The management is focussing on making it profitable.

FINANCIALS

Paid up equity is 18 crores with 9 crores shares outstanding, face value of each share being Rs 2.

Company paid a dividend of Rs 4 in fy 11.

Last few years results

Year

07

08

09

10

11

H1fy12

Sales

557

588

660

690

766

387

OP

121

112

166

187

169

48

Int

2.4

2

1.93

1.8

2

NP

90

77

125

134

109

34

Half yearly eps for fy 12 (not annualised) is 3.85.

Last six quarter results

Qtr

Jun 10

Sep 10

Dec 10

Mar 11

Jun 11

Sep 11

sales

186

200

195

176

187

197

PBDT

50

51

40

26

28

33

NP

33

35

26

15

16

19

There has been steady improvement in the margins and sales figures since past 3 quarters and next few quarters need to be monitored.

INVESTMENT THEME

Investment in Unichem is based on investing in a near debt free company which is suffering a temporary glitch (in terms of reduced profitability) due to some initiatives taken by the management in order to ensure long term growth.

Promoter Dr Prakash Mody has been gradually increasing his stake through creeping acquisition from open markets.

Corporate office of the company is located on a land bank of 3.5 acres which alone could be valued at close to 500 crores. Though this offers valuation comfort, it should not be the reason for investment in the company.

The stock price has corrected from a high of 260 in dec 10 to the current price of 104 levels in line with declining performance.

If the steps initiated by the management to augment its domestic sales fructify , and expected ramp up from the US markets happens there could be significant upsides in the stock price from the current levels. And once the company gets its act together the stock price may go up inspite of markets going down or remaining at current levels. One needs to be patient in accumulating the stock at each fall. At cmp of around 104, I feel it offers good risk reward ratio for the patient investor.

TECHNICALS

At the recent low of around 102-103, the stock has lost exactly 61.8% from its all time high of 270 odd levels.

Unichem Looks like a low risk moderate return kind of investment bet in the current market conditions.

disc: accumulating at cmp and intend to add more on declines.

1 Like

Hi Hitesh,

Sales growth does not look great for the past few years.

How are the products of the company ? Since you are a doctor, you may have direct access to products of the company.

How do you compare it with another pick of yours Ajanta Pharma ? Ajanta Pharma has held up nicely during the recent crash. I also notice promoters of Ajanta have started buying from the market.

Lastly, Do you think Unichem Labs can be held for long term ? can it consistently increase its sales at 20% or so rate ?

regards,

Ananth

Products of unichem are quite good. The new medical reps seem to be working quite hard to promote their products atleast that is what I have observed in the derma division.

Unichem has been a consistent performer which commanded a PE multiple of close to 15 due to its debt free tag and high dividend payout and cash flows.

What has now happened is that the company, wanting to grow and at the same time wanting to increase/maintain profitability is taking steps actively to keep up the pace. In doing so they are suffering the teething problems any company normally faces during or immediately post expansion/restructuring. That to my mind is a point to get into these kind of companies when there is maximum pessimism and nobody wanting to buy it.

And according to what Lynch says in his turnaround picks one has to make sure that the company has the staying power (here it is stable balance sheet) till the turnaround is effected.

just for the record the promoter had bought heftily when the stock price was around 135-140. We are getting it cheaper than him. (It can still get cheaper though).

My calculations are that once fruits of expansions are there( post the initial problems visible since past three quarters and likely to continue max upto next 2 qtrs) which I expect to be fully reflected in fy 13 performance, the company will in the next couple of years attain peak performance shown in the past and that is net profit of around 135 crores. Applying a PE of 15 in a favorable market scenario, the market cap can go to something like 2000 crores. That becomes a 2 bagger from hereon. Thats the basic assumption in investing at cmp. Bcos they are ramping up production and ramping up sales force which is bound to give results.

Regarding your query about ajanta and comparision with it, I think ajanta became a winner due to change in its business profile where they reduced the tender based sales and focussed on retail sales from doctor’s prescription.

Size wise and product quality wise I will rate both the companies almost equally. Unichem has slight edge in its US product portfolio where Ajanta is just beginning to launch products in US regulated markets.

About ajanta promoters hiking their stake, its always good news when promoters hike stake when market price of stock is at its life time high.

What I fail to understand is why they have woken up after so much time.

I guess that reinforces the Lynch argument that amateur investors always have the edge in the markets.

Hitesh Sir,

I read Sushil Finance Report,

http://www.moneycontrol.com/news/recommendations/buy-unichem-labs;-targetrs-177-sushil-finance_608907.html

where it states 3 of Unichem subsidiaries are making losses. Loss making UK subsidiary,Niche Generics which was expected to turn around this year, might take one more year atleast it seems. Again there are Brazilian and US subsidiaries making losses. Already the domestic business is again a re-vamping story, where in the topline is also degrowing. Looks like before acquision of foreign subsidiaries Unichem was a wonderful, cash rich, dominant domestic bet. But now do you think the management has it in them to integrate overseas operations and turn around these companies in short periods ? Especially recession is looming large in Europe, slow growth in US, UK, Brazil having huge inflation problems. Looks like stock is very long term play. Would like your esteemed views. (P.S. Iam already invested here for div yield at 140 levels didn’t read the report earlier enough to stop and think !!)

Hi srinivasan,

I had a talk with some marketing people from the company and from what they mentioned the UK subsidiary turnaround is top priority for the management besides the restructuring of the Indian operations.

My expectation is that fy 13 should see the company back on track generating good cash as before.

The subsidiaries dont contribute a major chunk to the topline or the bottomline and hence if and when they start performing as per expectations it might add to the valuation of unichem.

Most of the negatives seem to be priced in at cmp.

Thanks a lot Dr sir. As you said subsidiaries contribution being negligible, I will also check what subsidiaries contribution to top & bottom line. This will help me average down the purchase at these lower levels.

Hi Hitech,

Another reason why the company’s performance suffered is that it did some inventory de-stocking in the recent quarters.

I am holding this stock from lower levels and expecting decent return over a 2-3 year period. Reasons - you have already stated pretty comprehensively.

Regards.

Rajat

rajat,

What u mention about inventory destocking is what i covered in point no 5 in recent developments in the original article. I think this pain is going to be over by end of fy 12 and fy 13 is what should be closely watched for significant improvement in operations on all front.

Here we have a good company passing through a bad patch and that’s the time to pick up the stock when most market participants with their myopic vision cant look 2-3 quarters beyond the current situation.

Risk reward here looks favorable especially since the company has a good clean balance sheet with low debt.

Hence as you mention if the holding period or investment view is over 2-3 years this one is sure to deliver good returns.

I have bought around 104-105 levels and kept some space to average down around 75-80 if it comes there.

Unichem in the last three trading sessions has given a very powerful breakout on the upside. It was locked in 20% upper circuit today for most of the afternoon at 134.75 and by close ended slightly lower at 130. Thats a 25-30% move for the week.

And when it is against a steep market fall for the week, it looks all the more impressive.

On the charts there is a very large bullish candlestick formation signalling change in trend. Now I think it becomes a very strong buy candidate on declines.

One of the thesis (again mentioned by Lynch in his book one up) put up in the write up about these kind of contra/turnaround bets moving up even when markets are going down seems to be proving correct.

Dec quarter results/management commentary should be interesting to watch.

Unichem after having moved to 160 from levels of 100 odd within 2 weeks is now correcting and currently around 115-116. It seems to be interesting on the charts at around cmp.

Since the run up and the subsequent correction was very sharp there is likely to be long consolidation phase before next move.

Unichem again seems to have resumed its uptrend. The stock has been put in 5% circuit filter.

1 Like

Unichem again seems to have resumed its uptrend. The stock has been put in 5% circuit filter.

A very interesting development seems to be taking place in Unichem labs.

According to details about EGM held in Nov 11, the company has decided to restrucure capital by cancelling shares allotted to group companies in lieu of amalgation. This will effectively reduce capital by around 31% and the company will be left with 6.2 crore shares of Rs 2 each outstanding against earlier around 9 crores shares.

Now the company has done total net profit of around 60 crores in 9M FY 11. Add another 20-25 crores for q4 fy 12 looking at the way things are progressing and it can easily do around 80-85 crores net profits for FY 12. On outstanding shares, post restructuring this amounts to EPS of around 13-14 and based on this the stock looks grossly undervalued. Over the years stock has traded at a PE of around 15 due to negligible debt and high dividend payout.

MY LOGIC

In the announcement the management has declared its intent to utilise a sum from the capital redemption reserve not exceeding around 5.65 crores. Total market cap of Unichem is around 1200 crores and since company is debt free, one can consider it as Enterprise value. With reduction in number of shares, EV comes down to around 800-850 crores which benefits the shareholders by around 350 crores at the expense of around 6 crores. (I have gone thru the details posted by the company on NSE regarding the EGM and this is my interpretation. If anybody can point out any flaws I would be obliged since I am not very comfortable deciphering this jargon put up in the announcement.)

Looks like a win win situation for the shareholders.

Hitesh Ji,

Unable to find the link in NSE website. If it was announced in Nov, isnt it implemented yet?

Thank You

Vinod

The announcement can be found at this link -http://www.moneycontrol.com/stocks/stock_market/corp_notices.php?autono=507011

Hitesh,

The decreased shares (and hence increased EPS) is not being reflected in the Dec quarter although the above resolution was passed in November itself. Read through the document but there was no identified/appointed/record date for this.

Any idea on that? If not, did you try to reach out to the company CS and find that out? If not, I can.

Very interesting theme (and idea) nevertheless. I think the CAs on valuepickr need to throw more light on reducing the number of shares and reducing the share redemption reserve effect on various stuff in the financial statements going forward.

Kiran

I called up the company CS regarding the disconnect between 9 cr shares and 6.2 cr shares and why it was not getting reflected in Dec 11 results (even though the shareholders approved it way back in Nov 2011)?

The simple answer was ‘The High Court has not approved it yet and we don’t know when the approval will come through. Only after the approval comes will we be able to get to the 6 cr share mark’. They also had no idea or guess of where the process is within the High Court or when the approval would come through.

Great catch Hitesh bhai though.

And oh yeah, those who are interested in the business as such, here are two very good reports on the company -

http://www.avendus.com/Upload/ResearchReports/ULAV140310.pdf

http://emkayglobal.com/downloads/researchreports/Unichem%20Laboratories%20Q3FY12%20Result%20Update.pdf

Here is a recent CENTRUM BROKING update.

Now according to this report (the only one which comes up about capital reduction) march 12 is supposed to be the quarter when the reduced capital might be reflected.

According to the CS info provided by kiran, this restructuring is going to happen sooner or later and therefore one has only to wait.

Regarding the amount to be spent from the capital redemption reserve, they categorically state that they will spend an amount not more than around 5.65 crores.

**Our View on Unichem Laboratories **

The stock of UNICHEM has crossed the Rs.150 levels twice, in the last three months. After touching a high of Rs.143 last month, the stock of Unichem has corrected to Rs.134 levels yesterday. The promoters of Unichem have also been continuously buying and increasing their stake from the open market.

Unichem is a mid-cap pharma stock with strong fundamentals and good quality management which we believe has the capability to turnaround profit growth in FY2013. Unichem has significant land banks in Mumbai and elsewhere. The corporate office is located on a land bank of 3.5 acres which is alone worth (over Rs.500 crore as per our own estimate) close to half of its enterprise value. Unichem recently went in for a capital restructuring, whereby, it reduced its paid up equity by 31% to Rs.12.4 crore. This will result in an EPS jump of 46%. For expected net profit of Rs.74 crore for FY2012E, the new EPS will stand at Rs. 11.90 (compared to Rs.8.20 earlier), adjusting for the capital restructuring.

Unichem has witnessed consistent growth in its topline, which has grown 3 times between FY2002 and FY2011 to Rs.817 crore. Its bottomline has also witnessed consistent growth, from Rs.30.5 crore to Rs.93 crore during FY2002-FY2011, except in a couple of years like FY2009 and FY2011. Unichem has never had significant debt on its books (Rs.50 crore on March 31, 2011). It has initiated expansion in capacities at various manufacturing locations which are expected to contribute to revenues from FY2013. We continue to recommend investors BUY this stock, which is trading at 8.4x its FY2013E EPS of Rs.15.90, with a medium to long term perspective.

Thank You Hitesh ji for this greatfind! How did you chance upon this?

Kiran’s input on just the high-court order pending gives lot of clarity and as you said it is just a matter of time.

Promoters buying from open market could also lead to the same conclusion - sudden jump in EPS and expected price rise.

This seems to be a safe short-medium term bet.

I am kind of in…:slight_smile:

Vinod