Unichem Laboratories Limited — Q2 FY17 earnings call

Call held 24 Oct 2016

Management summary

Unichem Labs reported a strong Q2 FY17, with total income from operations growing 19% YoY to Rs. 368 Crores, driven by robust performance in International and Domestic Formulations. The US subsidiary continued its strong growth trajectory, and the UK subsidiary returned to profitability. The company is investing significantly in capacity expansion and R&D, with a capex of Rs. 150 Crores planned for FY17, and aims for a 150-200 BPS improvement in consolidated EBITDA margins.

Highlights

  • Total income from operations for Q2 FY17 was Rs. 368 Crores, marking a 19% YoY growth.

  • EBITDA for Q2 FY17 stood at Rs. 39.6 Crores, a 15% YoY growth.

  • H1 FY17 topline reached Rs. 710 Crores, growing 14%, with EBITDA at Rs. 83.8 Crores.

  • International Formulations grew 26% in Q2 FY17 and 21% in H1 FY17.

  • Domestic Formulations grew 18% in Q2 FY17 and 15% in H1 FY17.

  • US Subsidiary clocked a turnover of $19.3 million for H1 FY17, showing a 27% growth.

  • Capex guidance for FY2017 is around Rs. 150 Crores, part of a Rs. 250-300 Crores plan over 2-3 years.

  • Management targets a 150-200 BPS increase in consolidated EBITDA margins on a 12-month basis.

Key financials

2 periods

Q2 FY17

  • Total Income from Operations
    ₹368 Cr
    YoY +19%
  • EBITDA
    ₹39.6 Cr
    YoY +15%
  • Standalone Revenue
    ₹227 Cr
    YoY +18%

H1 FY17

  • Topline
    ₹710 Cr
    YoY +14%
  • EBITDA
    ₹83.8 Cr
  • Standalone Revenue
    ₹448.49 Cr
    YoY +15%

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

  • International Formulations
    26% Growth (Q2 FY17)21% Growth (H1 FY17)
  • Domestic Formulations
    18% Growth (Q2 FY17)15% Growth (H1 FY17)
  • US Subsidiary
    $19.3 Mn Turnover (H1 FY17)27% Growth (H1 FY17)
  • Niche Generics (UK Subsidiary)
    5.5 million gbp Sales (H1 FY17)4.1 million gbp Sales (H1 FY16)0.18 million gbp Net Profit (H1 FY17)

Guidance & targets

Capex

  • Overall Capex Capex · next 2-3 years · High confidence Rs. 250-300 Crores
    Overall our capex we are talking of something like Rs.250 to Rs. 300 Crores over a span of two to three years.

    — Rakesh Parikh

  • FY2017 Capex Capex · FY2017 · High confidence around Rs. 150 Crores
    In current year practically it is around Rs. 150 Crores and the balance will get spilled over to the next year.

    — Rakesh Parikh

  • FY2018/FY2019 Capex Capex · FY2018 and FY2019 · Medium confidence around Rs. 80-100 Crores (may be slightly higher)
    So in FY2018 and FY2019 it will decline, it will come back to say around 80 to 100 Crores kind of? ... In 2018 it may be slightly higher depending on what spillover happens and how we want to do because one of the major things in future now is our new API facility at Kolhapur which we are doing in phases.

    — Rakesh Parikh

ANDA Filings

  • ANDA Filings Rate ANDA Filings · ongoing · Medium confidence 1-2 ANDAs per quarter
    We are looking at maybe one or two ANDAs per quarter.

    — Rakesh Parikh

  • ANDA Filings (Next Year) ANDA Filings · next year or so · Medium confidence 6-8 ANDAs
    There may be some bunching up, it may not be exactly for quarter, so you can say something like 6 to 8 over the next year or so is what we are looking at.

    — Rakesh Parikh

US Product Launches

  • US Product Launches (FY17) US Product Launches · before end of current financial year · Medium confidence around two more products
    We are contemplating to launch around two more products before the end of current financial year.

    — Rakesh Parikh

  • Approved but not launched US products US Product Launches · ongoing · High confidence about six products
    It is about six products or so.

    — Rakesh Parikh

US Market Size

  • Addressable Market Size (Filed/Approved Molecules) US Market Size · ongoing · High confidence $15-20 million
    Now as regards to the addressable size for the molecules which we have already filed would be roughly about 15 to 20 million at the manufactures end that is net of all rebates, discounts, charge backs, though in IMS could be many times more.

    — Rakesh Parikh

US Market Share

  • Market Share for New US Launches US Market Share · ongoing · Medium confidence 5-25%
    It can be anywhere between 5% and 25% or so.

    — Rakesh Parikh

Profitability

  • Consolidated EBITDA Margin Improvement Profitability · 12-month basis · Medium confidence 150-200 BPS
    150 to 200 BPS on consolidated basis is what we have been trying at and now that India Formulation is more or less in line and we hope that in the second half we may not see the kind of dip which we have been historically seeing in H2 and if the US traction continues with Niche Generics also then there is still a chance. We mentioned earlier, we do not look at one quarter to another quarter, but overall the intention and the effort is all towards seeing that we come on any 12 month basis that we increase by about 150 basis points or so.

    — Rakesh Parikh

R&D Spend

  • R&D Expenditure as % of Standalone Turnover R&D Spend · ongoing · High confidence 4-5%
    Total earlier we have been guiding it is roughly between 4% and 5% of our total turnover and it has remained in spite of this R&D expenditure increasing on a sequential or a Y-o-Y basis it still remains within the 5% band of the company's standalone turnover.

    — Rakesh Parikh

Domestic Growth

  • Chronic Portfolio Growth Domestic Growth · ongoing · High confidence double-digits
    Chronic is showing positive movement based on our strategic initiatives so I think that getting a current growth will not be difficult. It will be in double-digits.

    — B.S. Dhingra

  • US Business Growth Rate Domestic Growth · next few quarters · High confidence 20-30%
    US we have shown growth varying if you take on all the various past quarters anywhere between 20% and 30% and we are reasonably confident and we would like that rate to continue for the next few quarter or so.

    — B.S. Dhingra

Risks & concerns

  • Brazilian Subsidiary Performance

    medium

    A provision of Rs. 7 Crores was made for the Brazilian subsidiary in Q2 FY17, though management expects this to be the last year for such provisions and sees some improvement with a soft launch.

    Analyst acknowledged

  • US Generics Pricing Pressure

    medium

    Management stated they would only launch products if they make it profitable, implying awareness of competitive and pricing pressures in the US market.

    Management acknowledged

  • FDC (Fixed Dose Combination) Ban Impact

    low

    The ban of around Rs. 4 Crores of FDCs impacted volumes, which would have otherwise shown higher growth.

    Management acknowledged

  • Acute Business Seasonality

    low

    H2 is generally a weaker half for acute business, and the industry is not expected to be as buoyant as H1, which benefited from epidemics.

    Management acknowledged

Areas of evasion (2)

  • Specific names of US ANDA products to be launched
  • Detailed budget for OTC marketing

Q&A highlights

2 direct
Outlook for Niche Generics (UK Subsidiary) Direct
What you have said is right, the first half has shown a good growth and predominantly it has been driven by the opportunities, which were available in the UK market. As you are aware Niche Generics has their own plant in Ireland and they service the UK market as well as the European market and about more than 1/3rd of their products are sourced from Unichem. Because of our priority to US market the supply to Niche Generics was lower. The tender market which has become very prevalent in the European countries especially the Western European ones also had an impact on it. This base effect which the company faced also enabled them to show a robust growth; however, we are reasonably confident that the current level of business should continue and in terms of the future growth is concerned with our expanded capacity in place, along with US we are seeing whether we can also launch some new products in the European market.

Analyst questioned the sustainability of Niche Generics' strong H1 growth, and management clarified drivers and future strategy including new product launches and capacity.

Asked by Rashmi Sancheti

Uptick in Other Expenses and its Recurring Nature Direct
Now one of the major reasons is we had a significant expansion at our Goa plant, as well as our Pithampur API plant. As a result of which the manufacturing related expenses are now being written-off for the entire quarter this year because it was at the end of first quarter where the capitalization happened. The increase also is contributed by various manufacturing expenses and it is seen in the topline and the growth in the output which has come. The other reason is there is an increase in R&D expenditure because of certain projects, which were taken up during the second quarter. Also if you see one of our major growth drivers has been the US business and the selling and distribution in terms of freight for that business is much higher than the company average. Another major reason is in the India business where we have been talking about going to the over the counter route for Unienzyme and we had a commencement of advertisement and marketing..

Analyst sought clarity on the significant increase in other expenses, and management provided a detailed breakdown of the contributing factors, including one-time capitalization and ongoing R&D/marketing investments.

Asked by Amey Chalke

Impact of Supreme Court backing NPPA on drug price fixing Partial
In our case, Unichem has per se not gone against NPPA nor we have any other major issues if you see the list of the companies, you are referring to the last week's judgment, isn't it? ... Yes. So we are not part of it and we do not expect any impact arising out of this.

Analyst raised a critical industry-wide regulatory concern, and management clarified that Unichem was not directly involved in the specific judgment and does not anticipate an immediate impact, though acknowledging the broader industry trend.

Asked by Ranvir Singh

3 min read 7 chapters

Detailed narrative

Robust Q2 FY17 Performance Driven by Key Segments

Unichem Laboratories reported a strong Q2 FY17 with total income from operations reaching Rs. 368 Crores, representing a 19% year-on-year growth. This performance was primarily fueled by a 26% growth in International Formulations and an 18% growth in Domestic Formulations. The company's EBITDA for the quarter stood at Rs. 39.6 Crores, reflecting a 15% YoY increase, indicating healthy operational performance.

H1 FY17 Overview and Margin Improvement Targets

For the first half of FY17, Unichem achieved a topline of Rs. 710 Crores, a 14% growth over the previous year. H1 EBITDA was Rs. 83.8 Crores. Management expressed confidence in improving consolidated EBITDA margins by 150-200 basis points on a 12-month basis, driven by sustained growth in India Formulations and continued traction in US and Niche Generics businesses.

Strong Growth in US and UK Subsidiaries

The US subsidiary demonstrated robust performance, clocking a turnover of $19.3 million for H1 FY17, a significant 27% growth. Niche Generics, the UK subsidiary, also showed a turnaround, recording sales of GBP 5.5 million in H1 FY17 (up from GBP 4.1 million last year) and achieving a net profit of GBP 0.18 million, compared to a loss in the prior year. This growth was attributed to opportunities in the UK market and expanded capacity.

Domestic Market Strategic Realignment Yields Results

In the domestic market, Unichem's represented market grew by 16.2% (YTD AWACS data), outperforming the Indian Pharmaceutical Market (IPM) growth of 9.8%. The chronic portfolio showed a strong 21.5% growth as per AWACS, significantly higher than the market's 10%. The strategic decision to move the Unienzyme brand to the OTC route and restructure acute/chronic businesses has started paying dividends, with volume growth of 8.5-9% despite a Rs. 4 Crores impact from FDC bans.

Significant Capex and R&D Investments Underway

Unichem plans an overall capex of Rs. 250-300 Crores over the next two to three years, with approximately Rs. 150 Crores allocated for FY2017. About Rs. 75 Crores of this was already spent in H1 FY17. The investments are primarily for the expansion of the Goa and Pithampur API plants, and a new API facility in Kolhapur is also in phases. R&D expenditure is maintained at 4-5% of standalone turnover, supporting a robust product pipeline.

Product Pipeline and US Launch Strategy

The company aims for 1-2 ANDA filings per quarter, targeting 6-8 filings over the next year. For the US market, Unichem expects to launch about two more products before the end of the current financial year, with six products already approved but not yet launched. The addressable market size for filed/approved molecules is estimated at $15-20 million at the manufacturer's level, with a target market share of 5-25% for new launches.

Other Expenses and Brazilian Subsidiary Update

An uptick in other expenses was noted, attributed to the capitalization of expanded Goa and Pithampur plants, increased R&D expenditure, and higher selling and distribution costs for the growing US business. A provision of Rs. 7 Crores was made for the Brazilian subsidiary in Q2, which management expects to be the last such provision, with a soft launch initiated for one product.

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