Key highlights of the result

- Domestic formulations steal the show in Q1FY13: Unichem reported 41% YoY growth (above Reliance Securities' estimates) led by export formulations (albeit on a low base, up 162.5% YoY) aided by rupee depreciation. Strong pick-up in domestic formulations (up 21% YoY) surprised positively post a struggle for last 5 quarters due to the ongoing shift in its distribution channel.

- Operating margin shows gradual improvement: Unichem recorded 430bp YoY increase in the operating margins at 17.6% (vis-à-vis Reliance Securities estimate of 17%) marking gradual improvement in the business over the past 5 quarters. Despite higher tax rates, Unichem reported a remarkable growth in its business performance, thereby, clinching 82.7% YoY growth to Rs27.5cr on an adjusted basis (against their estimate of Rs21cr). Including the forex gain of Rs5.6cr, the RPAT grew by 112.2% YoY to Rs33.1cr.

- Other Highlights: (1) Reliance Securities expected domestic formulations to resume normalcy in the far end of FY13E, thus a strong Q1FY13 is a positive surprise (2) Order commencement from Ghaziabad facility in November, 2011 continues to boost CRAMS growth; the facility contributes ~30% of the exports business (3) The management expects its Indore facility to commence operations in FY13E, thereby adding boost to its exports revenue (4) Niche Generics reported sales worth GBP2.3mn and net loss of GBP0.05mn during the quarter. However, the break-even is still some time away.

Outlook and Valuation

Unichem’s Q1FY13 results reflected gradual improvement in exports business and a swift turnaround in the domestic business. The strong growth in CRAMS on the export formulations front added cheer to the results. Better traction in the domestic formulations, increasing productivity gains and pay off from the investments done so far resulted in gradual improvement in the EBITDA margin.

The domestic business is the most profitable business of Unichem’s revenue pie. A positive trend in revenue growth, coupled with an operating leverage, thus is likely to have an accentuated impact on profitability. The full impact of CRAMS would also be visible from next year once the manufacturing facilities start operations at the optimal level.

Reliance Securities factors in the strong growth and revise their EPS for FY13E to Rs11.9 (v/s. Rs10.5 earlier) and for FY2014E to Rs14.2 (v/s. Rs12.4 earlier). Given the limited upside, Reliance Securities recommends Neutral on the stock with a fair value of Rs170.