Unichem Laboratories Limited — Q1 FY17 earnings call

Call held 25 Jul 2016

Management summary

Unichem Labs reported a solid Q1 FY17 with a 9.5% increase in total income from operations and 12% growth in its domestic formulations business. Despite a lower PAT due to higher deferred tax and a Rs. 7 Crores provision for its Brazilian subsidiary, management expressed confidence in future growth driven by new product launches, expanded capacities, and strategic initiatives like moving Unienzyme to the OTC market. The company also outlined significant capex plans for FY17-18, primarily for its Kolhapur API facility.

Highlights

  • Total income from operations grew by 9.5% to Rs. 342 Crores.

  • EBITDA stood at Rs. 44 Crores, with Net PAT at Rs. 25.8 Crores.

  • Domestic formulation business grew by 12% YoY to Rs. 221.54 Crores.

  • Domestic growth was split evenly with approximately 6% from volume and 6% from price.

  • Rs. 7 Crores was provided for diminution of the Brazilian subsidiary in Q1, with similar provisions expected for the next two quarters.

  • Two new ANDAs were filed in the quarter, bringing the total to 38 filings with 21 approvals.

  • The company plans to launch 2-3 new domestic products in Q2 FY17 and 4-6 more ANDAs this year.

  • Unienzyme, contributing Rs. 50 Crores internally, is transitioning to the OTC market with a TV commercial launch in August.

Key financials

  1. Total Income from Operations ₹342 Cr +9.5%YoY
  2. EBITDA ₹44 Cr
  3. Net PAT ₹25.8 Cr
  4. Domestic Formulations Revenue ₹221.54 Cr +12%YoY
  5. Domestic Volume Growth 6%
  6. Domestic Price Growth 5.9%
  7. CMO Contribution to Total Sales 9.5%
  8. Brazilian Subsidiary Provision ₹7 Cr
  9. FDC Sales ₹2 Cr
  10. Exports QoQ Decline ₹4.5 Cr -1.3%QoQ

What they filed

Q1 FY27: revenue up 20.1%, net profit up 510.0% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue507 533 587 527 579 +14%521 −2%575 −2%633 +20%
EBITDA55 86 84 22 66 +20%45 −48%48 −43%70 +218%
Net profit25 58 53 -10 -12 −148%264 +355%11 −79%41 +510%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Segment breakdown

  • Domestic Business
    3.6% NLEM Portfolio Growth4.6% Non-NLEM Portfolio Growth17% Growth Products Growth10% Pillar Brands Growth12.6% Non-NLEM (without FDCs) Growth

Guidance & targets

Revenue

  • Domestic Business Growth Revenue · Q2 FY17 · Medium confidence 100-300 basis points more than Q2 FY16 YoY
    In Q2 FY17 we may see around 100 to 300 basis points more than what we have seen in Q2 FY 16 in terms of growth of year-on-year basis.

    — B.S. Dhingra

  • Domestic Business Growth Revenue · Full Year FY17 · High confidence Robust double-digit growth
    I am sure that you will continue to see a robust double-digit growth for this financial year.

    — B.S. Dhingra

  • Export Growth Revenue · Full Year FY17 · High confidence Much better than last year
    Yes definitely, because with the addition of the expanded capacities available and also the approvals that we have got for the US, so obviously the exports growth will be much better than last year.

    — Monish Shah

  • US Business Revenue Revenue · Current Fiscal (FY17) · Medium confidence More than $40 million (less than $50 million)
    It will be little less than that but can be more than $40 million.

    — Monish Shah

  • US Business Growth Rate Revenue · Fiscal 2018 · High confidence 30% odd
    So you would be comfortable with a 30% odd kind of appropriate? Yes, absolutely.

    — Monish Shah

Capacity

  • Kolhapur Unit Commercialization Capacity · Q1 FY18 · High confidence First quarter of next year
    And for commercialization we are looking at some time in the first quarter of next year and not before that.

    — Monish Shah

  • Kolhapur Unit Capitalization Capacity · FY2018 · High confidence Next year
    Capitalisation will be in the next year, FY2018.

    — Rajaram Pai

Capex

  • Total Capex Capex · FY2017-2018 · High confidence Around 200 Crores
    Around 200 Crores is what we have earmarked and most of that will be towards the API facility in Kolhapur.

    — Monish Shah

Product Pipeline

  • ANDA Filings Product Pipeline · This year (FY17) · High confidence Another four to six products
    Already we have filed two ANDAs this quarter and based on the feedback from our R&D team, they are expecting to file another four to six products.

    — Monish Shah

Other

  • Brazilian Subsidiary Provision Other · Next two quarters (Q2, Q3 FY17) · High confidence 7 Crores each
    In the three quarter you will see 7 Crores each.

    — Rajaram Pai

Risks & concerns

  • AWACS Data Discrepancy

    medium

    External market data (AWACS) is not reflecting the company's internal growth numbers, which could lead to investor skepticism or misinterpretation of performance.

    Management acknowledged

  • Brazilian Subsidiary Underperformance

    medium

    The company continues to make provisions for diminution of its Brazilian subsidiary (Rs. 7 Crores per quarter for the first three quarters of FY17), indicating ongoing challenges in that market.

    Management acknowledged

  • Niche Generics & Third-Party API Sales Impact

    medium

    Niche Generics faced pricing pressure in Europe and supply constraints, with preference given to the US market for higher realization, causing third-party API sales to take a backseat.

    Management acknowledged

  • US Business Growth Reliance on New Approvals

    medium

    Future US business growth beyond FY17 is heavily dependent on new product approvals, as mature products face significant competition.

    Management acknowledged

  • FDC Ban Impact

    low

    The FDC ban led to a 34% degrowth in fixed dose combinations over last year, and the company has stopped production, holding existing stock while awaiting a court order.

    Management acknowledged

Areas of evasion (2)

  • Specific names of upcoming US products
  • Consolidated profit figures

Q&A highlights

2 direct
Employee Benefit Cost Increase Direct
The cost impact is because the bonus act did not come in the first quarter numbers of last year. Second cost factor is because of hiring done at various plants. So the cost is not because of domestic manpower increase

Clarifies that the increase in employee benefit cost is due to one-time accounting for the bonus act and hiring at plants, rather than an increase in domestic field force, which was previously undergoing rationalization.

Asked by Sudarshan P

Brazilian Subsidiary Provision Partial
Monish Shah: So this year what we are saying is that Rs. 7 Crores will be provided for the first three quarters based on the conservative accounting policy... Yes, absolutely. It is reflected in the other expense segment. Rajaram Pai: In the three quarter you will see 7 Crores each.

Initial ambiguity from Monish Shah about whether the entire Rs. 7 Crores was a Q1 hit or spread over quarters was clarified by Rajaram Pai, indicating a recurring provision for the first three quarters of FY17.

Asked by Sudarshan P

AWACS Data Discrepancy and Domestic Growth Direct
Actually in our case there was some disruption the AWACS reflection is not right for us as of now, and we are trying to rectify that. We are showing that growth trajectory across verticals is showing good growth based on internal number and why the same is not getting reflecting in AWACS? We are confident that our volume and value growth will continue to be robust.

Addresses a potential red flag from external market data (AWACS/AIOCD) showing lower growth than reported, with management asserting the robustness of their internal numbers and committing to investigate the discrepancy.

Asked by Prakash Agarwal

3 min read 6 chapters

Detailed narrative

Q1 FY17 Financial Performance and Domestic Growth Drivers

Unichem Labs reported a total income from operations of Rs. 342 Crores for Q1 FY17, marking a 9.5% year-on-year growth. EBITDA stood at Rs. 44 Crores, with Net PAT at Rs. 25.8 Crores, impacted by higher deferred tax and a Rs. 7 Crores provision for the Brazilian subsidiary. The domestic formulations business was a key driver, growing by 12% YoY to Rs. 221.54 Crores. This growth was equally contributed by volume and price increases, both around 6%. The NLEM portfolio grew by 3.6%, while the non-NLEM portfolio saw 4.6% growth, with specific 'growth products' expanding by approximately 17%.

International Business and US Market Strategy

The company filed two new ANDAs in Q1 FY17, bringing its total filings to 38, with 21 approvals. Management expects to file another four to six ANDAs this fiscal year. For FY17, US business revenue is projected to be between $40 million and $50 million, with a comfortable 30% odd growth rate targeted for FY18, contingent on new approvals. Exports experienced a sequential decline of Rs. 4-4.5 Crores in Q1, attributed to higher contractual sales in the previous quarter, but are expected to perform 'much better' for the full year due to expanded capacities and US approvals.

Strategic Shift: Unienzyme to OTC Market

Unichem is strategically transitioning its Unienzyme brand, which currently contributes around Rs. 50 Crores internally, to the Over-The-Counter (OTC) market. The company has partnered with a multinational firm for marketing expertise, with the first TV commercial scheduled for August. This move aims to tap into the indigestion market directly, where management believes there is a vacuum for a product like Unienzyme, differentiating it from existing Ayurvedic remedies.

Capex and Manufacturing Expansion

The company is aggressively pursuing its capex program, having spent over Rs. 50 Crores in Q1 FY17, primarily on the Kolhapur unit. This new facility is slated for commercialization in Q1 FY18 and will initially cater to ROW and domestic markets, with future plans for US FDA/UK MHRA approvals. Unichem has earmarked approximately Rs. 200 Crores for capex in FY2017-2018, mainly directed towards the API facility in Kolhapur, alongside maintenance capex and R&D/Biosimilars related costs.

Brazilian Subsidiary Performance and Provisions

The Brazilian subsidiary continues to face challenges, leading to a provision of Rs. 7 Crores for diminution in Q1 FY17. Management clarified that similar Rs. 7 Crores provisions are expected for the next two quarters, totaling Rs. 21 Crores for the first three quarters of FY17. This conservative accounting policy is reversible if the subsidiary's sales and profitability improve. The total investment in the Brazilian subsidiary is around Rs. 57 Crores, with prior provisions of Rs. 22.5 Crores and Rs. 4.5 Crores.

Cost Structure and Employee Benefits

Employee benefit costs increased in Q1 FY17, which management attributed to the bonus act not being included in Q1 numbers of the previous year and recent hiring at various plants. They clarified that this increase was not due to an expansion of the domestic field force, which had undergone rationalization. The Q4 FY16 employee benefit cost, plus certain add-ons, should be considered the steady run rate going forward.

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