LONG TERM BUY - UNICHEM LAB

Unichem Laboratories

BSE: 506690    NSE: UNICHEMLAB  CMP : 151.00Unichem Laboratories promoted by Dr.Prakash Mody is a domestic centric,
vertically integrated branded prescription led pharmaceutical company known
for its ability to build large successful brands by retaining prescribers and
generating new prescriptions at family physician level.
Investment Argument
Nurturing a second tier of power brands
The company is leveraging the brand equity of its flagship brand to nurture a
second tier of power brands in a conscious move aimed at reducing dependence
on Cardiac Care, which accounts for over 40% of domestic revenues.
High operating efficiency with debt free balance sheet
As top seven brands contribute 50% of the revenues, dominance in the domestic
market ensures a shorter working capital cycle of about 2.5 months compared to
the industry average of 4 months, Robust free cash generation and debt free
status (cash per share of ` 25) offers healthy ROCE and operational stability with
reserves more than 35 times its share capital.
Restructuring initiatives to provide thrust to the business
Unichem embarked on a series of restricting initiatives, which include focusing
on increasing the penetration of its existing portfolio by successfully retaining
prescribers at consultant level and generating new prescriptions at family
physician level. Additionally, it is strengthening its second tier power brands by
leveraging the brand equity of its flagship brands and increasing its sales force
to extend its reach to new markets.
Considerable spare capacities opens up new opportunities
Unichem in our view has considerable spare capacities in place and we believe
contract manufacturing agreements with MNC’s from its facilities in Ghaziabad,
Sikkim and Baddi could provide upside triggers to our target price.
Valuation
We expect Unichem’s revenues to grow at a CAGR of 14.8% to `11.3bn over
FY’10-13, which although less than the market growth rate of 17% witnessed in
CY’10, an expected 20% earnings growth over FY’11-13 with metrics superior to
some of its peers make us optimistic on the stock. We recommend a BUY on the
stock trading at 10.8xFY’13 and P/BV of 2x with a price target of `240.