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.