UNICHEM LABORATORIES LIMITED
--AN ANALYSIS
Rama Krishna Vadlamudi
MUMBAI
October 2nd, 2009
Unichem
Laboratories Limited is a small-cap company with a market cap of Rs 950 crore.
It is well-known for its steady growth providing value to its shareholders.
The article analyses the company from
an individual investor’s
point of view. The company promoted by Dr PA Mody has been
on BSE’s listed shares since 1962 without interruption. It has got a robust
balance sheet with strong cash flows from operating activities, negligible
debt, good dividend track record, and
in the process
adding value to investors
in the last 10 years.
PROMOTER SHAREHOLDING:
The total promoter shareholding in Unichem
Laboratories Limited is 48.42 per cent as at the end of June 30th,
2009. Indian promoters, led by Dr Prakash Amrut Mody’s family, hold the entire
promoter stake through several individuals and trusts. Significantly, the
promoters’ stake has gone up gradually from 45.69 per cent in 2001 to the
present 48.42 per cent.
BOARD OF DIRECTORS:
The Board consists of seven directors. Dr PA Mody
and Supriya Mody are from the promoters’ side. Supriya Mody is daughter of Dr
PA Mody, the company’s Chairman and Managing Director. She has been inducted on
the board a few months back. The other five are Independent Directors, which
include Ramdas Gandhi, Anand Mahajan and Nasser Munjee. The latter was a former
Managing Director and CEO of IDFC Limited and is also on the board of HDFC
Limited. The board looks professional.
PLDEGE OF EQUITY SHARES BY
PROMOTERS:
The promoters have not pledged any of their
equity shares as on June 30, 2009. There is no previous record of the company
or its promoters having pledged their shares. After the fiasco of the erstwhile
Satyam Computers’ promoters, pledging of shares by promoters has been
increasingly tracked by all investors since January 2009, when the Satyam’s
fiasco first broke out.
FII & MUTUAL FUND
HOLDING:
Mutual funds and insurance companies hold 17.56
per cent stake in the company as on 30.6.09. Out of this domestic institutional
holding, Reliance Mutual Fund holds 17.56 per cent stake and LIC of India holds
5.27 per cent. One good thing here is that FII holding is only 1.22 per cent
which is a boon to the so-called small investors in the sense that the stock
price is not vulnerable to wild moves caused by the impossible-to-predict
swinging moods of FIIs in the Indian stock market. (As all of you are aware,
their unpredictable mood changes have caused lot of heartburn to several investors
in 2008 though FIIs are a force to reckon with in India as they also played a
major role in the development of capital markets in India which has to be
accepted by us grudgingly though some sceptics argue that FII-money is not
desirable for Indian markets)
EQUITY SHARES:
The total outstanding shares are at 3.61 crore,
with paid-up equity being Rs 18.03 crore (face value – Rs 5 per share). The company issued bonus shares in recent
years in March 2004, May 2000 and August 1994. The company has been listed on
Bombay Stock Exchange since 1962.
BUSINESS MODEL:
The company gets its business from two segments,
viz, Formulations-India and API-India. The sales mix consists of 86 per cent
from the former and 14 per cent from the latter. The company gets around 22 per
cent of its sales revenue from sales outside India
The company’s subsidiaries are located abroad: South Africa , England ,
the US and Brazil UK Ghaziabad , Baddi (HP) and Goa .
The API facilities are located in Roha (Maharashtra )
and Pithampur (Madhya Pradesh).
 |
 |
||||||||
FORMULATIONS:
Unichem’s formulations are spread across various
therapeutic classes as depicted below:
The company has launched 27 new products in
various therapeutic segments and plans to focus more on high margin products
& lifestyle drugs. The company has presence in over 20 countries. The
company has 422 valid product registrations as on March 31, 2009. Its top brands
include Losar (Losartan) & Ampoxin (Ampicillin&Cloxacillin). Other
brands are Loram, Telsar and TG-tor.
ACTIVE PHARAMCEUTICAL INGREDIENTS (API):
Unichem’s APIs and Intermediaries are marketed
both in the domestic as well as international regulated markets. The company is
pursuing strategic alliance with research-based companies abroad for
in-licensing patented new drugs. It has launched new division focusing on
nephrology-cardiology segment. It has received certificate of quality from
European Directorate for its plant at Roha, Maharashtra .
It has also received US Food and Drug Administration’s (USFDA) approval for its
Formulations plant Ghaziabad India India India
According to the company’s CMD, the company is
following a three-pronged approach to increase its business:
ü
Domestic formulation penetration
ü
Contract research and manufacturing services (CRAMS)
ü
Developing global markets with speciality APIs and integrated
formulations
CASH FLOW:
Net cash flow of the company is good, with Rs 124
crore (previous year Rs 89 crore) of net cash flow from operating activities
during 2008-09.
TOTAL CASH
HOLDING: Cash & cash equivalents,
as on March 31, 2009, are at Rs. 30 crore.
GROWTH DRIVERS:
ü The company is launching
new products which may provide higher revenues
ü The company started
Unikare, a new marketing division, to take care of marketing skincare products.
The dermatology in India
ü It is concentrating more
on contract research and manufacturing segment for better profit margins
ü The company expects to
generate better business from its foreign subsidiaries. The company’s
UK-subsidiary Niche Generics is expected to breakeven in the current year
RISKS ASSOCIATED WITH THE
COMPANY:
Slowdown in
business: Formulations business is
under pressure in India US and Europe .
This may have some adverse impact on company’s business. However, the company
has already received approval for five ANDAs (Abbreviated New Drug
Applications) and the latest being Bisoprolol which is a USD-50 million product
in the US
Cost of
litigation: Increasing international presence indicates that the company is
likely to face litigations from drug regulators abroad, particularly in the US
and Europe, where companies, like, Ranbaxy, Dr Reddy’s Labs and Sun Pharma have
faced rough weather from USFDA in the past and will continue to face the
regulators’ increasing scrutiny in future also.
Forex
losses on account of net forex inflows: The company is vulnerable to losses on account
of adverse currency positions as a result of volatility in Rupee’s exchange
rate against foreign currencies. The company incurred a foreign exchange loss
of Rs 80 lakh during June 2009 quarter. During 2008-09, it posted a foreign
exchange gain of Rs 541 lakh versus a foreign exchange loss of Rs 257 lakh in
2007-08. The outstanding under External Commercial Borrowings (ECBs) has come
to ‘nil’ at the end of 2008-09. To that extent, the company’s vulnerability to
movements of Rupee against foreign currencies has lessened.
Contingent
Liabilities: Contingent liabilities in the balance sheet have gone up by 500
per cent during the year 2008-09 compared to previous year. They have gone up
from Rs 4.32 crore in 2007-08 to 2008-09 on account of guarantees to a Bank on
behalf of its foreign subsidiaries.
THREE-MONTH STOCK RETURN:
In the last three months, the company’s stock has
given a return of around 25 per cent. Now, it’s near its 52-week high. Its
52-week high was Rs 280 on 30.09.09 and low was Rs 132 on 27.10.08, which means
the stock has given a return of 100 per cent since its 52-week low.
QUARTERLY RESULTS:
The company made a net profit of Rs 32 crore
during June 2009 (Rs 35 crore in June 2008 quarter) quarter, against a total
income of Rs 170 crore (Rs 179 crore in June 2008 quarter). The June 2009
quarter results are a little subdued due to sluggish growth impacted by the
global financial crisis that has engulfed the world’s markets in the last two
years.
ICRA rating for the
company’s bank facilities:
Facility : For short-term debt
(including commercial paper)
- Prior Rating : A1+ (Highest rating)
- Revised Rating : A1+ (Highest rating)
- Rating Action : Reaffirmed
- Prior Rating : A1+ (Highest rating)
- Revised Rating : A1+ (Highest rating)
- Rating Action : Reaffirmed
WHY YOU SHOULD NOT INVEST IN
ITS EQUITY:
Before we delve deeper into the reasons for
investment in the company’s equity, let us see why we should not invest in this
company:
× The
company’s market capitalization is less than Rs 1,000 crore. Being a small-cap
company, its susceptibility to price
erosion may be higher compared to other large-cap
phama companies in times of a severe downturn
in broader markets
× The
pharmaceutical companies are facing increasing competition in a globalised
environment and being a small company, it
may not have the wherewithal to face the
onslaught of Multi-National Companies
× Being
a small-cap company, the stock’s volumes are very low on the stock exchanges
where it is listed and investors may face
liquidity risk due to its low volumes
SOME
POSITIVES OF THE COMPANY:
ü
The company is almost a zero-debt company with debt-equity ratio at
0.05 (2008-09)
ü
Being a zero-debt company practically, its interest cover ratio is
more than 75
ü
The company has shown consistent progress in its sales and
profitability for the past ten years or so (it’s always better to see a
company’s progress over a period of ten years because we have to see how the
company has performed during different cycles – peak and trough – of the
economy)
ü
It has never incurred loss in the last ten years
ü
It has always shown positive cash flows from operating activities
in the last ten years
ü
The dividend payout has always been more than 20 per cent in the
last ten years – it being 24 per cent during the latest 2008-09
ü
For the past four financial years, the company has been paying a
dividend of more than 100 per cent on its face value, that is, Rs 5 per share
(It paid a dividend of Rs 8 per share, in fact, in 2008-09)
ü
The return on capital employed (ROCE) has been more than 25 per
cent in the past ten years except in two years
ü
The return of net worth (RONW) has also been more than 25 per cent in
the past ten years except in two years
ü
The company is known for its conservatism and steady growth with
strong fundamentals
ü
Due to its low volumes of stock trading, the company has never been
on the radar of FIIs, which is a blessing in disguise for small individual
investors (the higher the participation of FIIs, the greater the volatility and
chances of loss by small investors)
LITMUS TEST FOR
MANAGEMENT QUALITY
|
The management has got good reputation – one can observe
that from the representation of Independent Directors on the Board of
Directors and ‘nil’ pledging of equity shares by promoters (described as
above); consistency in paying taxes, generating reasonable growth in sales
and profits over the past ten years; its dividend paying record over several
years; maintaining a very low debt-equity ratio for the past ten years (in
fact, the debt-equity ratio has never crossed 1.0 in the past ten years);
consistency in promoters’ stake at above 45% since 2001; and strong
fundamentals reflecting in the various
ratios, especially, ROCE & RONW
|
VALUATION
and PROSPECTS:
Market capitalization of Unichem Laboratories
Limited is Rs 952 crore as on October 1st,
2009. The price-earning ratio is 7.70 based on an EPS of Rs 34.30 (TTM-trailing
twelve months). The price-book value works out to 1.83. The valuation matrix is
given below.
If we look at the historical valuations, the
current market price of Rs 264 (close price on 1st of October, 2009)
seems to be less than fair valuation. If the broader market goes up further
from the present Sensex level of 17,135 (September 17, 2009); the stock too may
give further upside depending on the performance of the small-cap companies. It
has got the potential to become a mid-cap company. But, investors need to have
a time horizon of at least three years and patience.
Overall, the balance sheet of the company appears
to be strong and the company has got a sound business model which will keep the
company in good stead going forward. As mentioned above, the company has got
good growth drivers going forward; even though the net sales have been somewhat
sluggish in the last three to four quarters. The company seems to have managed
the business environment during the tough times of last year quite well.
Further prospects will largely hinge on future volume growth. Overall, it is a
company to watch and may be considered for investment; subject to being fully
aware of the risk factors mentioned above.
MATRIX OF IMPORTANT VALUATION PARAMETRES
(Rs crore)
2008-09
|
2007-08
|
2006-07
|
2005-06
|
2004-05
|
|
Equity Paid Up
|
18.03
|
18.02
|
18.02
|
18
|
17.06
|
Networth
|
519.96
|
428.02
|
371.33
|
300.61
|
182.62
|
Net Sales
|
651.19
|
575.73
|
539.97
|
453.15
|
390.79
|
Other Income
|
17.46
|
12.61
|
17.96
|
20.5
|
15.91
|
Net Profit
|
124.75
|
77.71
|
90.08
|
83.43
|
44.73
|
Revenue earnings in forex
|
140.17
|
116.27
|
123.9
|
94.73
|
68.9
|
Revenue expenses in forex
|
29.00
|
27.1
|
30.28
|
16.3
|
19.14
|
EPS (annualised) Rs
|
33.24
|
20.71
|
24.29
|
22.48
|
12.62
|
Book Value Rs
|
144.19
|
118.76
|
103.03
|
83.5
|
53.52
|
Dividend (annualised%)
|
160.00
|
100
|
100
|
100
|
70
|
Dividend Payout (%)
|
23.00
|
24.14
|
20.58
|
22.25
|
27.73
|
Cash
Flow From Operating Activities
|
123.72
|
89.31
|
89.69
|
47.39
|
56.31
|
Debt-Equity Ratio %
|
0.05
|
0.06
|
0.08
|
0.15
|
0.28
|
Interest Cover Ratio %
|
75.66
|
46.63
|
45.37
|
32.52
|
18.75
|
Operating Profit Margin (%)
|
25.21
|
19.01
|
21.79
|
20.07
|
17.9
|
Return on capital employed %
|
29.30
|
22.77
|
30.14
|
30.16
|
31.05
|
Return on net worth (%)
|
26.32
|
19.44
|
26.81
|
29.47
|
26.81
|
Data Source:
www.capitalmarket.com
Sources:
NSE, BSE, company’s annual report, CapitalMarket, etc.
PictureCourtesy:
UnichemIndia.com
Design and
Concept: Rama Krishna Vadlamudi
Ø Keep in mind the macro
picture of the economy, interest rate movements, overall liquidity position,
mood swings of large investors, shenanigans of traders, currency movements, etc,
before you indulge in dabbling of stocks on your own without any professional
help
Ø There is no point in
making equity investments and be satisfied with small profits and get some sort
of ‘ego’ satisfaction
Ø One needs to have a
portfolio approach and build a portfolio over a period of several years with
strong built-in risk management techniques
Ø If we don’t get the MACRO
PICTURE right, as small investors we are likely to lose heavily as happened in
2008 and several times previously also (Internet bubble & Harshad Mehta
Scam being good, sorry bad examples)
Ø All of us have seen how
people have lost their shirts (in several cases, more than 90 per cent of their
stock market wealth) last year in the wake of the global financial crisis
Ø As such, it is better to
see things from a MACRO angle, rather than picking up one stock here and selling
another stock there
Ø
DO THE MATH CORRECTLY: Get
your calculations right. Make a statement of all the monies you invested in
equities and check up whether you’re making any profits. Mind you, calculate
your profits/losses after deducting all your expenses – brokerage, capital
gains taxes, STT, telephone expenses, demat charges, internet charges, cost of
magazines, periodicals, etc – finally, calculate the opportunity cost you have
lost. Opportunity cost is: had you invested
the same amount of time and energy on other things – like your passion or job/core
business or some other activities – which may have given you more satisfaction
in terms of being a better human being or generating consistent wealth.
Ø If you’re not making
returns better than bank deposits or small savings instruments or losing money
in fact, then you get out of investing yourself in the market. Give your money
to equity mutual funds, which have got professional management, good research
methodology, global experience, etc; that way, you’ll be better off generating
higher returns without getting excited every day seeing the stock market
gyrations (which are much superior to the pelvic dances that are frequently choreographed
by Farah Khan in Bollywood movies!).
Ø The so-called typical
Indian small investor indulges in a lot of stock churning making brokers richer
every day (the author too is no exception, though in a small way, to this type
of strange behaviour)
FINALLY, HAPPY
INVESTING ALL OF YOU!
|
No comments:
Post a Comment