Unichem laboratories ltd

Abhishek/Others,

Has anyone studied the subsidiaries in any detail?

For Unichem to play its growth story, the subsidiary status/plans will be key.

Those who have studied this/want to let me know your views.

-Donald

Regarding the margins , one of the reason the margins are trending down is due to increasing contributions of exports and to some extent API business to revenue over past two years . Margins are highest in domestic formulations followed by exports and API . Management has guided for 200-300 bps improvement in blended margins over next couple of years . Margin highs of 25%+ will probably not be captured soon if the present revenue mix continues .

btw Donald , there was a brief surge in unichem intraday yesterday by over 5% . was that you taking your “initial position”? :smiley:

donald,

About time that you started looking at Unichem.

Coming to market perception of Unichem, I think it is looked at sceptically bcos of a poor string of quarterly results.

The dictum – Turnarounds never turn around --often makes market participants fearful after few poor quarters.

For me, Unichem is a sleeping giant. – It has all the attributes of making it big –

1). presence in vital therapeutic segments and sub segments — this needs to be utilised as a platform to launch a really big attempt to make it big

2). Good manufacturing facilities which have finished expansions or are near finished.

3). Clean balance sheet.

4). On face of it management seems to be good. Till now havent heard anything negative about them. Dr Prakash Mody himself is a qualified guy and knows about the pharma industry. In recent development, to augment domestic sales they have got in Mr Dhingra about whom the MRs speak very highly – apparently he is well respected among the medical rep fraternity.

About the negatives

1). There seems to be a lack of thrust to achieve faster growth which companies like sun, lupin, torrent, etc and ajanta among smaller companies have shown. Question arises whether they have missed the bus?

2). The pharma policy overhang remains. - How much it affects the company remains to be seen. Management talks about improvement in margins to the extent of 2% next year but in view of the pharma policy being implemented how it affects margins is a thing to be seen. Overall I think taking weighted average of the various top brands and then determining prices seems to be a better idea rather than govt itself determining prices.

3). How the company milks the expanded capacities needs to be seen. For fy 13 sales growth has been quite impressive.

With in depth digging maybe we can get a better idea about prospects of the company. And with the kind of digging donald does, not much will be left uncovered post management meet.

A look at how the subsidiaries have performed over last 8 years


Unichem Subsidiaries

Niche Generics, UK

Unichem Pharma USA

Unichem Farma, Brasil

Unichem SA

Unichem Lab, Ireland

product development, dossier filing and
manufacturing formulations for European markets

business development, filing of own ANDAâs and exploring opportunities for marketing alliances in North American markets

own product registrations, launch generic and branded generics products in Brazil

Business Development, own Product Registrations, No direct marketing

Incorporated FY12. business development and to own product registrations

Sales

Profit/Loss

Sales

Profit/Loss

Sales

Profit/Loss

Sales

Profit/Loss

Sales

Profit/Loss

Mn GBP

Mn GBP

Mn US $

Mn US $

Mn Real $

Mn Real $

SA Rand

SA Rand

Euro

Euro

FY06

12.3

0.1

-0.4

-1.3

-96,648

FY07

11.1

-1.8

-0.6

-1.3

1960

FY08

11.6

-2.2

-0.8

-0.93

-2229

FY09

11.5

-1.3

-1.17

-0.93

-28

FY10

10.4

-0.19

0.75

-1.24

-1.26

197

FY11

10.04

-0.79

2.77

-0.92

-1.44

58

FY12

10.32

-0.19

5.43

-0.75

0.009

-2.48

-6113

8512

FY13

10.77

0.1

8.45

-0.62

1.54

-2.97

0.22

-0.29


Needs to be seen in the context of Investments made in the Subsidiaries/Capital Allocated.
Views Invited

The following table indicates the total Cap emp as % of total assets and net profits. Starting 2006, the Capital employed in the business fell sharply from avg 87-88% to 74% (started going in to subsidiaries). Profit growth fell sharply as well. But there was a sudden jump from 2008-2009(??). IN attempt to get in to new markets, it seems, mgmt lost focus on domestic business itself, which it seems continues.

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

Total Capital / Assets

72.06%

74.70%

69.71%

74.93%

67.88%

74.27%

88.58%

82.47%

89.19%

90.11%

np

82.46

108.71

133.63

124.89

77.23

90.19

83.43

44.73

43.86

27.03

@Shadab - Thanks. Changing product mix may be one of the reasons. Did you correlate the mix changing for the better/worse in specific years when OPM shot up and declined esp 2009 and 10 vs 2011 & 12 and even 2007 & 8.

Unichem -Standalone 31/03/2012 31/03/2011 31/03/2010 31/03/2009 31/03/2008 31/03/2007
EBITDA Margin 17.03% 21.83% 27.30% 24.50% 19.01% 21.12%
Raw Materials/Sales 37.75% 37.28% 33.97% 39.98% 42.85% 44.23%
Employee cost/Sales 13.06% 12.11% 10.98% 11.12% 10.65% 10.17%
Selling and Admin/Sales 4.72% 23.57% 20.65% 20.76% 21.95% 19.97%
Power and Fuel/Sales 3.17% 2.85% 2.26% 2.19% 2.44% 2.30%

You might see interesting correlations with RM over the last 4 years too. This is base don quick data from MC. If interested check actual data figures from ARs of respective years.

@Atul -You may like to exploreperhaps -the Altman Z Score. Apart from giving you a quick-n-dirty RISK insight on financial management by the company, I like that it also gives us a nice Assets picture - what are the assets tied in. though this is not complete...like Assets tied up in Gross block picture will additionally help form a picture in your mind.

Unichem - Consolidated 31/03/2012 31/03/2011 31/03/2010 31/03/2009 31/03/2008 Z-Weights
Working Capital/Total Assets 26.62% 28.45% 23.80% 27.93% 21.65% 1.2
Retained Profits/Total Assets 6.05% 8.85% 14.49% 15.13% 7.54% 1.4
EBIT/Total Assets 13.44% 18.73% 26.08% 23.66% 17.21% 3.3
Market Cap/Total Liabilities 173.95% 262.03% 159.09% 107.92% 172.85% 0.6
Sales/Total Assets 119.93% 123.41% 124.84% 140.26% 154.04% 1
Altman Z-Score 3.09 3.89 3.55 3.38 3.51
Z > 2.99 -âSafeâ Zones
1.81 < Z < 2.99 -âGreyâ Zones
Z < 1.81 -âDistressâ Zones













Incidentally I use the Score - mostly for the reverse picture. Companies that stand out have an excellent Altman Z Score;)

Re: Subsidiaries Capital Allocation

If interested, please add-up investments made by parent for each subsidiary over the years, as well as transactions between the parent company and the subsidiaries...that may lead us to more qualified look?

Thanks Donald, nice analysis.

Incase the Z-score was new to other members (like me), here is a link

http://en.wikipedia.org/wiki/Altman_Z-score

Thanks

Supratik

Thanks for pointing to Z-score Donald. Are you hinting that decreasing z-score is indication of capital allocation getting worseâ?

Regarding capital allocated in subsidiaries

March-12

March-11

March-10

March-09

March-08

March-07

March-06

Total capital emp

560.95

529.20

441.69

408.75

306.38

294.53

291.35

net profit

82.46

108.71

133.63

124.89

77.23

90.19

83.43

total investment in subsidiaries

91.60

78.85

69.13

59.81

41.00

36.00

8.00

Niche Generics Ltd (UK)

25.56

25.56

25.56

25.56

25.50

25.50

2.60

Preference redeemable shares for niche

11.64

11.64

Unichem SA Pty Ltd

0.12

0.12

0.12

0.12

0.12

0.12

0.07

Unichem Farmaceutica Do Brasil Ltda

26.65

19.63

13.24

9.63

7.50

5.40

2.50

Unichem Pharmaceuticals USA Inc.

29.51

25.86

21.16

14.75

8.40

5.40

2.60

Ireland

3.40

0.00

0.00

0.00

provision

5.30

3.90

2.65

1.93

What I can make out is that capital going in brasil is going down the drain. US seem to be turning around though. And no incremental cap for UK and SA.

And related party transactions..

Related Party transactions

March-12

March-11

March-10

March-09

March-08

March-07

March-06

Sales of goods

30.60

23.58

20.00

12.86

9.70

8.20

7.90

Investment made during year

14.19

10.97

10.00

20.00

5.20

28.00

4.80

total

44.79

34.55

30.00

32.86

14.90

36.20

12.70

The numbers above donât seem too significant in light of total sales. More insights in to this data invited.

Unichem fy 13 AR is now available on company website.

Some salient features:

**financial **

book value 90, net debt is nil (if u consider cash in hand and current investments against total debt), outstanding shares around 9 crores.

related to business:

The domestic business seems to be getting on track after the rejig and likely to bear fruits in future.

Chronic therapy segments account for two thirds business, rest by acute therapy. (for those uninitiated, chronic therapy segment is usually lifestyle diseases like diabetes, hypertension, and other chronic therapy segments like neurology, psychiatry etc, while acute therapy mainly includes antibiotics to treat infections, antiinflammatory drugs for pain fever etc and so on.)

The new pricing policy I think should not be viewed as an absolute negative. the drug price is capped at average of all the drug prices of companies having more than 1% market share. – If i charge a premium for my products e.g azithral for alembic which costs rs 95 for a strip of 3 tablets, the cost gets down to Rs 59 and below bcos the average of all brands commanding market share of more than 1% comes to 59. So azithral will have to be priced somewhere below 59 instead of the 95 it commanded. (earlier the DPCO mandated a cost plus basis for fixing the prices whereas according to new policy the pricing is the average of all brands commanding more than 1% market share) ----This seems to be a better method of fixing caps on prices.

SALES )-- Domestic sales grew from 561 crores in fy 12 (605 crores in fy 11) to 665 crores.

Exports in fy 11 was 166 cr, in fy 12 was 246 cr and in fy 13 was 347 crores. — This is a trend which seems very very encouraging.

Revenue from US markets grew by 71% y-on-y.

SALE OF THE FACILITY TO MYLAN – ITS TALKED OF ALMOST AS A DONE DEAL AND SHOULD MATERIALISE IN NEXT FEW MONTHS.

SUBSIDIARIES )-- performance

Niche generics turned profitable in fy 13. sales was 88 cr and net profit was 81 lacs.

Brazilian subsidiary did turnover of 4.2 cr and did net profit of 8 cr. … (looks like teething problems)

US subsidiary sales was 43 cr and net loss at 3.26 cr.

Ireland subsidiary (set up last year) sales at 1.5 cr and loss of 2 cr.

Management needs to focus on these subsidiaries and make them profitable. When we question the management this should form an important part-- we should understand how management sees the potential from these subsidiaries — what kind of growth and profitability do we expect – and how early can be see them stop bleeding.

Another query we can put up is what are unichem guys doing that is wrong as compared to companies like ajanta which are growing at a scorching rate in exports and generating equivalent profits.

The quality of AR (soft copy) is impressive and information is provided in a very lucid and understandable manner.

Any news on Unichem today? It fell hard. I couldn’t find anything on web.

Just thought I add a couple of points I heard from the management at a conference: )- UK business benefited from a temporary shortage in a product they supply which helped them break even; while management was not sure this would repeat, it seems that the business will be profitable at PAT level in Q1 )- Brazil: company is waiting for approvals for their drugs; difficult regulatory regime; waiting for 1-2 drugs in the next year or so; 1 full year of operation with 2-3 drug portfolio should enable break even )- US business is small but likely to grow strongly (think they mentioned 25-30%+, but its a small base) without addition of new products )- Some of their exports is contract manufacturing in nature where growth was a little more uncertain (no new deals signed)

India infoline report

Unichem Laboratories: Attractive valuation with a strong Balance Sheet â BUY
CMP Rs166, Target Rs210, Upside 26.5%

Unichem laboratory (ULL), an integrated pharmaceutical company has a strong footprint in domestic formulation market. Domestic operations contribute around 75% to total revenues. In the recent past, the company failed to keep pace with the competitors in the domestic market but now, after the completion of restructuring activity and improving operating parameters, the company is all set to post improvement in the margins and return ratio. We believe the rough phase for ULL is set to be over soon; the turnaround of overseas operations along with ramp up in domestic business and cost pressure rationalizing with incremental revenue will help ULL post robust growth.

Unichemâs four brands feature among the Top 300 Indian pharmaceutical brands and out of which two brands are in the Top 100 (Losar H- Rs790mn- 90th Rank and Losar- Rs680mn -100th Rank). Top 10 Brands contribute nearly 50% of the companyâs domestic revenues. Domestic business will drive long term growth on leveraging on brands. Additionally, Company is also gradually entering developed markets to leverage upon its R&D and manufacturing capabilities. Unichem has presence in Europe through its 100% subsidiary Niche Generics having 33 products in the portfolio. It has direct sales operation in UK and Ireland and is exploring other territories like Australia, SA and Canada. We expect this venture to add meaningful contribution to EPS by FY14. In the US, the company has filed 29 ANDAs till date and has 15 approvals of which 9 have been launched. We expect 2-3 filings every quarter. CRAMs business would also prove to be an interesting opportunity for ULL.

We expect revenues to register 15% CAGR over FY13-15 and margins to expand to 15%. The company is a** zero-debt company** with a cumulative positive cash flow. The company is looking for acquisitions in therapy area to fill the gap in product offerings. We believe ULLâs valuation is attractive at 8.7x FY15E EPS. . We estimate the fair value of Unichem at Rs 210 and recommend BUY.

Detailed-http://content.indiainfoline.com/wc/research/researchreports/Unichem_030713.pdf

this report proves how much they dont know about the company. they have already achived margins of 18.5 in fy13 and the management has told in last con call they will improve it further this year and may even achieve their peak 25% in 4-5 years.

domestic bizness to grow at 15%, exports to grow around 25%, so overall growth will be around 20% if not more.

** Unichem _ â BUY
CMP _** 26.5%

** strong Domestic the parameters, ** ** We soon; **

Unichemâs ** companyâs domestic revenues. Domestic brands. ** gradually entering developed markets **

We 15%. ** azero-debt company ULLâs

Unichem up nearly 10% with significant increase in volumes. Was the above mentioned report trigger for this?

Domestic revenues should be 60% and exports revenue should be around 40% in FY14 as opposed to 75%/25% as per this report . So currency appreciation could also provide additional kicker to margins and bottom line

India infoline report

Unichem Laboratories: Attractive valuation with a strong Balance Sheet â BUY
CMP Rs166, Target Rs210, Upside 26.5%

Unichem laboratory (ULL), an integrated pharmaceutical company has a strong footprint in domestic formulation market. Domestic operations contribute around 75% to total revenues. In the recent past, the company failed to keep pace with the competitors in the domestic market but now, after thecompletion of restructuring activity and improving operating parameters, the company is all set to post improvement in the margins and return ratio. We believe the rough phase for ULL is set to be over soon; the turnaround of overseas operations along with ramp up in domestic business and cost pressure rationalizing with incremental revenue will help ULL post robust growth.

Unichemâs four brands feature among the Top 300 Indian pharmaceutical brands and out of which two brands are in the Top 100 (Losar H- Rs790mn- 90th Rank and Losar- Rs680mn -100th Rank). Top 10 Brands contribute nearly 50% of the companyâs business will drive long term growth on leveraging on brands.Additionally, Company is also gradually entering developed markets to leverage upon its R&D and manufacturing capabilities. Unichem has presence in Europe through its 100% subsidiary Niche Generics having 33 products in the portfolio. It has direct sales operation in UK and Ireland and is exploring other territories like Australia, SA and Canada. We expect this venture to add meaningful contribution to EPS by FY14. In the US, the company has filed 29 ANDAs till date and has 15 approvals of which 9 have been launched. We expect 2-3 filings every quarter. CRAMs business would also prove to be an interesting opportunity for ULL.

We expect revenues to register 15% CAGR over FY13-15 and margins to expand to 15%. The company is azero-debt company with a cumulative positive cash flow. The company is looking for acquisitions in therapy area to fill the gap in product offerings. We believe ULLâs valuation is attractive at 8.7x FY15E EPS. . We estimate the fair value of Unichem at Rs 210 and recommend BUY.

Hi Abhinav,

Good to see you participating! This is very useful information towards future visibility.

It did look like that the only subsidiary that may start producing something significant anytime soon is the US one since Sales had been growing at a fast clip ($2.77 Mn to 5.43 Mn to 8.45 Mn in last 3 years). At ~50 Cr Sales contribution in FY13, this is at 5% contribution levels. So will take a couple of years before representing something significant. Good to know this will be maintaining the fast clip.

The only other subsidiary worth considering is Niche Generics UK with a Sales contribution of GBP 10.77 Mn or about ~98 Cr in FY13. This is a good at almost 10% contribution today but has been falling each year as Sales have been stagnant around that 10 Mn figure for last 8 years. So I had little hopes of this doing anything significant. But if it attains profitability at PAT level consistently that is a plus.

You might have heard more? Could you share any insights on any operational aspects of these 2? product development, dossier filing or manufacturing scale ups, etc. UK Subsidiary is for manufacturing and supplying to European customers of Unichem Labs? It doesn’t do any marketing/business development of its own? If so, why not shift manufacturing to low-cost base? Anything that you may have heard is useful:)

-Donald

)- - - -

Problem with the recent rallies in Unichem is that they tend to be sharp and have no follow up buying… There is a sharp spike for one or two days followed by gradual erosion for next many trading sessions which usually wipe off the entire gains.

Once the above cycle breaks, one can expect a significant rally. till then its wait and watch.

Hitesh,

Unichem has a resistance now at 190. After nearly 2 months the stock has moved to X column. Hope it crosses this level. Then the next stop is at 210-15. After this we can expect a new high. If the markets are strong, these levels will be achievable. Those who invested at higher levels will exit and then the stock will be in strong hands. Until then we will have these hiccups.