|Type of Report||First Recommendation|
|Report Date||May 24, 2017|
|Price on Report Date||Rs. 249|
|Current Market Cap||Rs. 2263 crores|
|Indicative Target Price*||Rs. 380|
Introduction: Unichem Laboratories is a 20 years old pharmaceutical company with more than half of its revenues coming from the domestic formulation markets. Unichem is ranked 29th in terms of formulation sales in India. It has a very high market share in certain therapeutic areas / categories like Cardiology where it sells formulation under the umbrella of LOSAR brands. Apart from catering to the domestic market, Unichem also has presence in the developed markets of US and Europe.
1. Domestic Formulation Business to Grow Adequately: Unichem has a strong domestic product portfolio with nearly 60% of its total revenues coming from India. Unichem is well present in acute as well as chronic segments and specialises in therapeutic areas like gastroenterology, cardiology, diabetology, psychiatry, neurology, anti-bacterial, and anti-infective and pain management. In the last two years, Unichem added 5 new marketing divisions over its existing 7 marketing divisions and re-arranged the entire field force of 2600 employees. The new structure has 12 divisions out of which 6 divisions are focussing on acute portfolio having 40% of its field force. The other 6 divisions has 60% of field force and focusses on chronic portfolio.
2. OTC Business Foray carries a strong upside option: In April 2017, the company launched a wellness division to tap opportunities in the OTC market. As a start, the company has started positioning its lead prescription based gastroentrology product named Unienzyme as an OTC product. Under the prescription sales, Unienzyme has a revenues of ~Rs. 60 crores. The company is betting on it being a first company to entire into a gastro market dominated by Ayurvedic brands with moderate competition. As a part of marketing strategy, it also got tied-up with an MNC having expertise in the OTC market who helped them launch a Unienzyme TV commercial with a tagline Freedom from Indigestion. Due to this, the company saw large advertising and promotion cost of around Rs. 20 crores being spent in FY17 for OTC product. However, the rewards for the same should be seen only over the next few 1-2 year. Based on the success and learnings of the maiden OTC product, the company has plans to introduce a couple of more OTC products in gastroenterology and skin care segments. Depending upon its success, the OTC foray can provide a significant option value for the company.
Since April2017, after nearly three and a half years, most products under the LOSAR brands are coming out of NLEM and are eligible for certain price hikes every year. Having a very high market share in the segment where LOSAR operates, Unichem will be able to take benefit of maximum hike and should directly increase gross margins for the company. With LOSAR group of products coming out of absolute price control, the company would now just have 12-15% of its sales under NLEM.
- FY17 saw a marketing costs of Rs. 19 crores for Unienzyme entry as an OTC product. This should not be more than Rs 10 crores from FY18.
- FY17 also saw total write-off related to Brazil worth Rs. 21 crores. This will not be repeated in FY18.
- Ongoing change of distribution model towards C&F model have nearly come to conclusion. It is expected that it will lead some efficiency gains over next 4-8 quarters.
- The export consignments to US and many others areas will now be sent via shipments instead of air transport. This too is expected to bring in additional efficiencies.
- With sales growth expected to be double digit, there could be some operating efficiencies mainly coming from other expenses.
2. Inability to maintain more than 10% domestic segment growth.
3. Domestic regulatory changes affecting the pricing for the company.
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