UNICHEM LTD

INITIATING COVERAGE

OUTLOOK FOR THE COMPANY Unichem Ltd (UL) currently trades well below its fair value when compared to its growth prospects. UL generates 75% of its revenues from Domestic operations. India is expected to become the 10th largest Pharma market in value terms as per IMS data. The company has all the facilities in place to capture this growth and it expects to grow higher than the industry growth. The Operating margins are expected to improve going forward with various initiatives taken by the Company and with its subsidiaries turning profitable. We Recommend Investors to ACCUMULATE the stock on levels close to Rs.400 for initial Price target of Rs.561

PHARMA
March 30 , 2010

ACCUMULATE
CMP Target Rs.440 Rs.561

SHARE HOLDING (%)

Promoters 48.42 1.45 14.01 32.82 3.30

INVESTMENT RATIONALE Unichem Ltd expects to achieve 14.0% and 16.0% y-o-y growth in Sales in FY 2011 and FY 2012 respectively which would be higher than expected Industry growth rate. Unichem Ltd expects its consolidated Operating margins to improve from current 20.0% to 24.0% in FY 2012 with its operational subsidiaries expected to be profitable in FY 2012. Companys shift from Push Strategy to Pull strategy is expected to lead to higher growth as witnessed in Q3 FY 2010. Companys top 7 brands and top 25 brands contribute 50% and 70% of Domestic Revenues respectively. It plans to de-risk itself by introducing and promoting newer brands and thereby diversifying the contribution from each brand. UL presence in only 20% of the sub-segments of the Indian Pharma market gives it significant scope to expand within Domestic untapped segments. UL is a Debt free company. It currently trades at extremely cheap valuation with P/E of 7.8 on FY 2012E EPS and P/Sales of 1.6 on FY 2012E Sales.

FII / NRI FI / MF / CBs Non Promoter Public & Others

STOCK DATA
ReutersCode BloombergCode
BSE Code NSE Symbol Market Capitalization 52 Weeks (H/L) UNLB.BO UL.IN 506690 UNICHEMLAB
RS.15,871.4mn US$ 353.3mn

RS.452.80/156.00

Equity Analyst Alok Deora alok.deora@sushilfinance.com

Please refer to important disclosures at the end of the report Sushil Sushil Finance ConsultantsPrivate Limited INB010982338. Financial Services Ltd, SEBI Reg. No. For private Circulation Only.

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UNICHEM LTD

Y/E March. FY09 FY10E FY11E FY12E

Revenue (Rsmn) 7,352.3 7,500.0 8,550.0 9,918.0

KEYFINANCIALS(CONSOLIDATED)
APAT (Rsmn) 1,081.6 1,401.4 1,633.1 2,024.1 AEPS (Rs) 30.0 38.9 45.3 56.1 AEPS (%Ch.) 92.3 29.6 16.5 23.9 P/E (x) 14.7 11.3 9.7 7.8 ROCE (%) 27.1 28.6 27.9 28.5 ROE (%) 22.3 23.8 22.9 23.4 P/BV P/Sales (x) (x) 1.6 1.3 1.1 0.9 2.2 2.1 1.9 1.6

COMPANY OVERVIEW Unichem ltd is one of the leading integrated Pharmaceutical Companies in India. It has a strong presence in Domestic markets with Revenue contribution of 75%. According to IMS, Unichem ranks 25th in the Domestic Formulations Market. It is a Debt free company which is a significant positive taking into consideration the current Economic environment. It has presence in USA and Europe through its wholly owned subsidiaries. These are expected to break even in FY 2011 after which Unichem Ltd would be able to penetrate further into global markets. The Company has a diversified portfolio of brands with 3 brands featuring in the top 100 brands as per IMS data. It has managed to grow at CAGR of 13% during last 5 years. Most of Unichems manufacturing facilities are FDA approved. For its Active Pharmaceutical Ingredients (API) business it has facilities at Roha in Maharashtra and Pithampur in MP and both are USFDA approved. For its Formulations Business it has facilities at Baddi and Ghaziabad in UP, Goa, Sikkim and a packaging facility in Ireland. Facility at Goa is utilized particularly for export orders.

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UNICHEM LTD

TOP BRAND GROUPS No 1 2 3 4 5 6 7 8 9 10 Brands Losar Group Ampoxin Group Trika Group Unienzyme Group TG-TOR Group Telsar Group Vizylac Group Metride Group Cardival Group Clodrel Group Value (Rs Cr) 126 84 33 23 23 22 15 14 11 11

Source: Company INDUSTRY OVERVIEW Unichem ltd mainly caters to Indian market with Revenue contribution of 75%. The current estimated size on the Indian Pharmaceutical market is close to Rs. 40,000 cr. India currently stands at 13th position in the World in terms of Value. By 2015, India is expected to reach at number 10th position. It has grown at a robust growth rate of CAGR 13% during the last 4 years. ORG-IMS expects it to grow between 10-12% in FY 2010 and 13-14% in the next few years. Emerging economies are expected to be the next driver of growth going forward with advanced economies slowing down. Indian economy with strong GDP growth and large number of population now covered under health care coverage would prove to be significant driver for companies like Unichem ltd.

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UNICHEM LTD

INVESTMENT THESIS
Top-Line Growth to be higher than Industry Growth

Unichem ltd is expected to grow at faster pace than the expected Industry growth rate of 11%.It derives 75% of its total Revenues from the Domestic sector. India is poised to become the 10th largest Pharmaceutical market from the current 13th position in value terms (Source: IMS Knowledge) by 2015.Unichem Ltd being a dominant player in India is likely to benefit significantly from this growth. Unichems operational subsidiaries are expected to break-even in FY 2011 and turn profitable in FY 2012 thus supporting bottom-line growth.
Operating Margins to improve with Subsidiaries expected to Breakeven

Unichem ltd operates in Europe through its 100% subsidiary Niche Generics. It identifies products for development and once Unichem develops the product it sells the supply agreements to third parties. It is exploring opportunities in Australia, Canada and South Africa. The Company expects Niche Generics to report net profit during Q4, FY 2010. We expect Niche Generics to contribute to top-line and add to margins by FY 2012. Unichem ltd has presence in USA through its wholly owned subsidiary Unichem Pharmaceuticals (USA) Inc. It had filed 15 Abbreviated New Drug Applications (ANDA) in 2009 out of which 8 have been approved and 4 have been launched. Unichem limited is investing in Research and Development for this subsidiary. With these investments, we expect USA Inc to file more ANDAs in FY 2011. Unichem ltd expects this subsidiary to break even in FY 2011 and be profitable in FY 2012. Unichem has subsidiaries in Brazil and South Africa which are not fully operational currently. With Europe and USA subsidiary turning profitable by FY 2012 we expect Operating margins to significantly improve from current 20.0% to 24.0% by FY 2012.
Shift from Push to Pull Strategy to boost Growth going forward

Unichem ltd applied a Push strategy till 2009 where it incentivized primary and secondary sales by targeting distributors who delivered to the stockist who then delivered to the end user. In FY 2010, the Company reviewed its strategy and incentivized the field post for secondary sales. This led to de-growth in Revenues during 1H, FY 2010. However it paid off during Q3, FY 2010 as Unichem witnessed growth in revenues. The Company would focus more on Pull strategy than Push which is expected to boost growth going forward.
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UNICHEM LTD

De-risking strategy going forward to provide stability

Unichem ltds derives 75% of its revenues from Domestic Operations. Out of this, 50% is contributed by top 7 Brands and 70% is contributed by top 25 brands. Unichem ltd is reviewing its strategy to avoid higher revenue contribution from few brands. To implement this, Unichem is now following a De-risk strategy where it would be concentrating on newer brands and develop them. This would give entry to newer brands in the product mix and shift the contribution between the existing and newer brands. Going forward it expects its top 25 brands to contribute not above 50% of total revenues. This would de-risk the company in times of Economic slowdown and competitive pressure.

Wide scope to expand in the Domestic untapped market

Unichem ltd currently covers just 20% of the total Pharma sub-segments in India. It is just present in 262 of the 1,340 identified sub-segments in India. This gives it significant opportunity to tap the non-represented segments within India. It is exploring opportunities in Biologics but is currently at very niche stage of development process. It is also reviewing and exploring opportunities into Hospital products which could prove to be a significant driver for growth in coming years.
Increasing Cash Flows provides opportunity for Acquisitions

Unichem ltd is a Debt Free Company. With various initiatives taken by the company, it expects to achieve negative working capital in near term which would lead to higher cash generation. The Company is on look out for acquisition where it can increase in presence in terms of geography and brands.

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OUTLOOK&VALUATION

UnichemLimitedisinvolvedinAPIandFormulationbusiness with presence in anti allergics,antiinfectives,digestivesandnutritionals.Itsmajorrevenuecontributor is from Domestic sector which is expected to grow significantly going forward. WithlargenumberofsubsegmentsnotyettappedbyUnichem,itleavesahuge opportunity for Unichem to expand its operations. It caters to International markets through its wholly owned subsidiaries. Majority of its subsidiaries are expected to turn profitable by FY 2012. At the current market price of Rs.440, Unichem Ltd is available at very attractive valuation of 7.8x its FY12E EPS of Rs 56.1 and 0.9x of its FY12E Book Value. It is currently trading at 1.6x its FY12E Sales. We recommend investors to ACCUMULATE the stock at levels close to Rs.400withinitialtargetpriceofRs561.

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UNICHEM LTD

PROFIT&LOSSSTATEMENT (Rs.mn)
Y/EMarch NetSales RawmaterialCost ManufacturingExp. OtherDirectCosts AdministrativeExp. PBIDT InterestCost Depreciation OtherIncome ExtraordinaryExp. PBT Tax RPAT FY09 7,352.3 1,710.5 1,178.1 2,008.8 1,033.1 1,421.9 19.0 224.1 94.8 0.0 1,273.6 192.0 1,081.6 FY10E 7,500.0 1,725.0 975.0 1,950.0 1,050.0 1,800.0 23.8 225.0 97.5 0.0 1,648.7 247.3 1,401.4 FY11E 8,550.0 1,966.5 1,111.5 2,180.3 1,197.0 2,094.8 23.8 256.5 106.9 0.0 1,921.3 288.2 1,633.1 FY12E 9,918.0 2,281.1 1,289.3 2,479.5 1,289.3 2,578.7 23.8 297.5 124.0 0.0 2,381.3 357.2 2,024.1

BALANCESHEETSTATEMENT(Rs.mn)
Ason31stMarch. ShareCapital Reserves&Surplus NetWorth SecuredLoans UnsecuredLoans TotalLoanfunds Deferredtaxliabilities CapitalEmployed NetBlock Cap.WIP Investments SundryDebtors Cash&BankBal Loans&Advances Inventories CurrLiab&Prov NetCurrentAssets TotalAssets FY09 180.3 4,664.2 4,844.5 209.5 187.8 397.3 323.6 5,241.8 3,008.1 759.3 10.2 1,515.9 343.6 357.3 1,033.9 1,463.0 1,787.8 5,241.8 FY10E 180.3 5,715.2 5,895.5 209.5 187.8 397.3 323.6 6,292.8 3,283.1 759.3 10.2 1,625.0 978.0 357.3 1,041.7 1,438.2 2,563.8 6,292.8 FY11E 180.3 6,940.1 7,120.3 209.5 187.8 397.3 323.6 7,517.7 3,526.6 759.3 10.2 1,828.8 1,770.2 357.3 1,163.8 1,574.8 3,545.2 7,517.7 FY12E 180.3 8,458.2 8,638.4 209.5 187.8 397.3 323.6 9,035.7 3,729.1 759.3 10.2 2,093.8 2,839.8 357.3 1,322.4 1,752.5 1,752.5 9,035.7

FINANCIALRATIOSTATEMENT
Y/EMarch GrowthRatios(%) NetSales EBITDA APAT Profitability(%) EBITDAMargin(%) NetProfitMargin(%) ROCE(%) ROE(%) PerShareData(Rs.) EPS CEPS BVPS ValuationRatios(x) PER PEG P/BVPS EV/EBITDA P/NetSales TurnoverDays DebtorsDays CreditorsDays FY09 9.5 64.7 92.3 19.3 14.7 27.1 22.3 30.0 72.4 268.7 14.7 0.2 1.6 11.4 2.2 75.3 54.9 FY10E 2.0 26.6 29.6 24.0 18.7 28.6 23.8 38.9 90.2 327.0 11.3 0.4 1.3 9.0 2.1 78.0 55.0

FY11E 14.0 16.4 16.5 24.5 19.1 27.9 22.9 45.3 104.8 395.0 9.7 0.6 1.1 7.8 1.9 77.0 54.0 FY12E 16.0 23.1 23.9 26.0 20.4 28.5 23.4 56.1 128.8 479.2 7.8 0.3 0.9 6.3 1.6 76.0 53.0

CASHFLOWSTATEMENT(Rs.mn)
Y/EMarch PAT Depreciation Chg.inWC CashFlowfrom Operations Chg.InFixedAssets Chg.InInvestment CashFlowfrom Investing ChgInDebt ChgInShareCapital Dividend CashFlowfrom Financing Cash&Cash Equivalent FY09 1,274.1 224.1 (295.7) 1,027.7 FY10E 1,401.1 225.0 (141.7) 1,484.6 (582.6) 3.2 (579.4) 39.8 90.1 (335.1) (205.2) 343.6 (500.0) 0.0 (500.0) 0.0 0.0 (350.3) (350.3) 978.0 1,770.2 0.0 0.0 (408.3) (408.3) 2,839.8 (500.0) 0.0 (500.0) (500.0) 0.0 (500.0) 0.0 0.0 (506.0) (506) FY11E 1,633.1 256.5 (189.2) 1,700.5 FY12E 2,024.1 297.5 (246.1) 2,075.6

Source:Company,SushilFinanceResearchEstimates

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UNICHEM LTD

Please Note that our technical calls are totally independent of our fundamental calls. Additional information with respect to any securities referred to herein will be available upon request.
Sushil Financial Services Private Limited and its connected companies, and their respective directors, Officers and employees (to be collectively known as SFSPL), may, from time to time, have a long or short position in the securities mentioned and may sell or buy such securities. SFSPL may act upon or make use of information contained herein prior to the publication thereof. This sheet is for private circulation only and the said document does not constitute an offer to buy or sell any securities mentioned herein. While utmost care has been taken in preparing the above, We claim no responsibility for its accuracy. We shall not be liable for any direct or indirect losses arising from the use thereof and the investors are requested to use the information contained herein at their own risk.

22nd October 2007