Unichem Laboratories Limited — Q3 FY17 earnings call

Call held 23 Jan 2017

Management summary

Unichem Labs reported strong financial results for Q3 FY17, driven primarily by robust growth in its international formulation business. Despite challenges from demonetization impacting domestic sales, the company maintained positive traction and is strategically expanding its Unienzyme brand into the OTC market. Management highlighted ongoing R&D investments and a healthy pipeline of ANDA filings, while acknowledging potential short-term disruptions from GST implementation and persistent US generics price erosion.

Highlights

  • Q3 FY17 Revenue stood at Rs. 360 Crores, marking a 16% year-on-year growth.

  • International formulation business grew by 31% to Rs. 123 Crores in Q3 FY17.

  • EBITDA for Q3 FY17 was Rs. 44.4 Crores, a 30% increase year-on-year.

  • Profit After Tax (PAT) for Q3 FY17 reached Rs. 26 Crores, up from Rs. 20 Crores last year.

  • EPS for Q3 FY17 was Rs. 2.87, compared to Rs. 2.27 in the prior year.

  • Nine-month (9M FY17) revenue was Rs. 1,070 Crores, a 15% growth over Rs. 931 Crores.

  • 9M FY17 EBITDA was Rs. 128 Crores, 15% higher than Rs. 111 Crores last year.

  • Domestic business grew 6% in Q3 FY17 to Rs. 203.64 Crores and 12% in 9M FY17 to Rs. 652 Crores.

  • Unienzyme OTC business showed a 12% growth in the first nine months.

Concerns

  • GST implementation ambiguity and transition impact

Key financials

2 periods

Q3 FY17

  • Revenue
    ₹360 Cr
    YoY +16%
  • EBITDA
    ₹44.4 Cr
    YoY +30%
  • PAT
    ₹26 Cr
    YoY +30%
  • EPS
    ₹2.87
    YoY +26.4%

9M FY17

  • Revenue
    ₹1,070 Cr
    YoY +15%
  • EBITDA
    ₹128 Cr
    YoY +15%
  • PAT
    ₹72 Cr
  • EPS
    ₹7.93

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

Share of Revenue (Q3 FY17)
₹326.64 Cr Total
  • Domestic Business ₹203.64 Cr 62.3%
  • International Formulations ₹123 Cr 37.7%

Guidance & targets

Product Pipeline

  • ANDA Filings Product Pipeline · next few years · Medium confidence one or two every quarter
    We have filed one ANDA and we are looking to file one or two every quarter for the next few years.

    — Rakesh Parikh

  • Domestic Product Launches Product Pipeline · every quarter · Medium confidence one or two product
    There are one or two product coming in every quarter.

    — B.S. Dhingra

  • US Product Launches (pending 7-8 products) Product Pipeline · next few quarters · Medium confidence about two or three
    May be about two or three can be launched in next few quarters.

    — Rakesh Parikh

  • US Pending Files Market Size (per product) Product Pipeline · High confidence USD 20 to 30 million
    At manufacturing level the market size is roughly around USD 20 to 30 million per product.

    — Rakesh Parikh

  • Rollout of New US Products Product Pipeline · next financial year or so · Low confidence —
    The filings of these will start happening from the next financial year or so.

    — Rakesh Parikh

Profitability

  • Tax Rate Profitability · for Unichem · High confidence 25% to 27%
    But on an average roughly the tax rate 21% of MAT and around 2% or 3% deferred tax, so ~25% to 27% should be the rate for Unichem.

    — Rakesh Parikh

  • EBITDA Margin Profitability · two to three years down the line · Medium confidence 12% to 15%

    From 11.5% today

    That is the only thing I was trying to get, say two to three years down the line we can move from 12% to 15%? Correct, this is what you are seeing.

    — Rakesh Parikh

Pricing

  • Price Increase (Losar) Pricing · every year · High confidence maximum 10%
    No, 10% that is the ceiling.

    — B.S. Dhingra

Revenue Mix

  • OTC Revenue Contribution Revenue Mix · medium to long term · Medium confidence 10% to 15%
    I am confident having 10% to 15% overall revenue ambition is not bad and I think it is very right targeting what you are setting for us...

    — B.S. Dhingra

Revenue Growth

  • Domestic Business Growth Revenue Growth · FY2018 · Medium confidence grow better than the market
    FY2018, I expect it to grow better than the market.

    — B.S. Dhingra

R&D Spend

  • R&D as % of Sales R&D Spend · this quarter · High confidence more than 4.5%
    Roughly it is likely more than 4.5% of our sales.

    — Rakesh Parikh

Risks & concerns

  • GST implementation ambiguity and transition impact

    high

    Uncertainty regarding GST rates (12-18%) and incentives could lead to inventory reduction and impact offtake, especially during the transition.

    Both acknowledged

  • Demonetization impact on domestic business

    medium

    The company lost approximately 7.5% of revenue in November and December due to demonetization, though January showed recovery.

    Management acknowledged

  • US generics price erosion

    medium

    Price erosion in the US business was in single digits, impacting value growth, but the company is focusing on volume and new product launches.

    Analyst acknowledged

  • Niche Generics litigation price related liability in European market

    medium

    A litigation involving a claim of approximately Euro 14 million for Niche Generics in the European market is ongoing with no movement or hearing.

    Both acknowledged

Areas of evasion (1)

  • Specific budget numbers for Unienzyme OTC venture

Q&A highlights

2 direct
Unienzyme OTC venture budget and future expenditure trajectory Partial
The first nine month expenditure was like more of testing expenditure, but if we want to scale the product to the next trajectory, we are relooking and reviewing our what kind of expenditure we need to do.

Reveals management's cautious approach to disclosing specific marketing budgets for a new strategic initiative, indicating a learning phase rather than a fixed budget.

Asked by Chirag Dagli

US business price erosion Direct
It was in single digit but we have to wait and watch to see how it pans out in the immediate future.

Confirms the impact of US generics pricing pressure, a key sector concern, on Unichem's international business, albeit in single digits.

Asked by Ashish Thavkar

Impact of GST on the industry and inventory management Direct
Uncertainty remains for example when you transfer something to CNF, you do not pay any tax when the goods are lying there except the excise, which has been paid as a part of manufacturing activity. Now tomorrow if you have to sell that in the GST regime straightaway 12-18% tax is applied. So obviously they will try to reduce the inventories which can reduce the offtake also.

Highlights a significant upcoming regulatory change (GST) and its potential short-term disruption to inventory and sales, a critical operational risk for the industry.

Asked by Chirag Dagli

3 min read 6 chapters

Detailed narrative

Q3 FY17 Financial Performance Highlights

Unichem Laboratories reported a strong Q3 FY17, with total revenue reaching Rs. 360 Crores, marking a 16% year-on-year growth from Rs. 309 Crores. This performance led to a 30% increase in EBITDA, which stood at Rs. 44.4 Crores against Rs. 34 Crores in the prior year. Profit After Tax (PAT) also rose to Rs. 26 Crores from Rs. 20 Crores, resulting in an EPS of Rs. 2.87 for the quarter. For the nine months ended December 31, 2016, total turnover was Rs. 1,070 Crores, a 15% growth, with EBITDA at Rs. 128 Crores, 15% higher than the previous year.

Domestic Business and Unienzyme OTC Strategy

The domestic business achieved Rs. 203.64 Crores in Q3 FY17, showing a 6% growth despite demonetization, and a 12% plus growth for the nine months, reaching Rs. 652 Crores. The company is strategically transitioning Unienzyme to the OTC market, which has already shown a 12% growth in the first nine months. Management is evaluating various cost-effective media strategies and plans to establish its own third-party field force post-December to engage retailers, aiming for 10% to 15% of overall revenue from OTC in the medium to long term.

International Formulations and US Generics Pipeline

The international formulation business was a key growth driver, achieving Rs. 123 Crores in Q3 FY17, a 31% increase from Rs. 93 Crores. For the nine months, this segment grew over 25% to Rs. 333 Crores. Unichem has 38 cumulative ANDA filings in the US, with 21 approvals, and 15 products have been launched. The company plans to file 'one or two' new ANDAs every quarter for the next few years and expects to launch 'about two or three' of the remaining approved products in the next few quarters, with each product having an estimated market size of USD 20 to 30 million at the manufacturing level.

Regulatory and Tax Environment Impact

Unichem acknowledged a 7.5% revenue loss in November and December due to demonetization, though January showed signs of recovery. The percentage of domestic revenues under price control has decreased to 12%-13%. For products like Losar, which are no longer under price control, the company can implement a maximum 10% price increase annually. Management expressed significant uncertainty regarding the upcoming GST implementation, particularly concerning its impact on incentives and the potential for industry-wide inventory reduction due to new tax structures.

R&D Investments and Capacity Expansion

R&D expenditure remains a substantial investment, roughly exceeding 4.5% of the company's sales, crucial for future revenue and regulatory compliance. The Goa facility has undergone capacity expansion, contributing to higher depreciation in Q2 and Q3, and is expected to reach its rated capacity soon. Manpower costs have increased due to strategic realignments in domestic divisions and augmentation of staff in international business capacities and R&D facilities. The company is working towards improving productivity to manage these rising costs.

Niche Generics Litigation and Future Margin Outlook

A litigation related to price liability in the European market concerning Niche Generics, involving a claim of approximately Euro 14 million, remains in status quo with no hearing movement. Despite this, Unichem aims to improve its EBITDA margin from the current 11.5% to a range of 12% to 15% over the next two to three years. This improvement is expected to be driven by enhanced productivity and operating leverage across its businesses. The company anticipates its domestic business to grow better than the overall market in FY2018.

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