>UNICHEM LABS

Following a management meet with Unichem Labs, we believe that the worst is now past and expect a gradual recovery in its domestic formulations business. We upgrade the stock from a Sell to a Buy, with a revised price target of `168. We raise our net profit estimates for FY13
and FY14 by 2.4% and 8.5%, respectively, as revived domestic growth is likely to lead to a better EBITDA margin.


 Recovery in domestic formulations. Unichem’s domestic formulations business has declined in the last five quarters due to the high attrition in 4QFY11 and inventory rationalization measures. We believe that the impact of these is now past and growth is likely from 1QFY13. We expect 12% revenue CAGR in domestic formulations over FY12-14.


 Exports scaling up. Exports growth of 55% drove overall revenue growth in FY12. The high growth was led by commencement of a supply contract with an MNC from its Ghaziabad plant. We expect standalone exports to register 18% revenue CAGR over FY12-15 and expect 6%
CAGR in revenue from Niche Generics (the UK subsidiary).


 Raising estimates. We raise our revenue estimates for FY13 and FY14 by 2.9% and 3.3%, respectively, to factor in the anticipated recovery in domestic formulations and favourable currency movements. We also raise our FY13 and FY14 net profit estimates by 2.4% and 8.5%, respectively, led by the expected better margin in FY14 on account of the likely turnaround in Niche Generics. We also introduce FY15 estimates, with a net profit growth estimate of 17.3%.

 Valuation. Considering the revived growth outlook and reasonable valuations, we upgrade the stock from a Sell to a Buy, with a revised price target of `168 (`143 earlier). Risks: Currency fluctuations and regulatory hurdles.


To read report in detail: UNICHEM LABS


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