UNICHEM

LABORATORIES LIMITED
AN ANALYSIS

Rama Krishna Vadlamudi vrk_100@yahoo.co.in

MUMBAI
October 2nd, 2009

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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.

Rama Krishna Vadlamudi, MUMBAI. vrk_100@yahoo.co.in. Oct. 2nd, 2009 Page 1 of 8

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. (Data source: Company)
(API-Active Pharmaceutical Ingredients) (Also see graphics below)

The company’s subsidiaries are located abroad: South Africa, England, the US and Brazil. Niche
Generics Limited (UK) is company’s UK-based subsidiary. The formulations facilities are at
Ghaziabad, Baddi (HP) and Goa. The API facilities are located in Roha (Maharashtra) and
Pithampur (Madhya Pradesh).

Rama Krishna Vadlamudi, MUMBAI. vrk_100@yahoo.co.in. Oct. 2nd, 2009 Page 2 of 8

FORMULATIONS:

Unichem’s formulations are spread across various therapeutic classes as depicted below:

Therapeutic Segments %

Nutritional Others
7% 1%
Psychiatry
12%
Cardiology &
Diabetology
42%

Anti-infectives
21%

Gastrointestinal Anti-allergy Musculoskeletal

8% 3% 6%

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’s pharmaceutical industry is poised for a growth of 12-
13 per cent this year. India is emerging as a competitive outsourcing hub and is playing a major
role in the global pharmaceutical industry in manufacturing APIs and intermediates for drug
makers. Generic drugs produced in India are increasingly being accepted worldwide. The
company in 2008-09 has spent Rs 30 crore on Research and Development, representing 4.56
per cent of its turnover. The figures for the previous year are Rs 33 crore (5.51 per cent).

Rama Krishna Vadlamudi, MUMBAI. vrk_100@yahoo.co.in. Oct. 2nd, 2009 Page 3 of 8

According to the company’s CMD, the company is following a three-pronged approach to
increase its business:

Domestic formulation penetration

Contract research and manufacturing services (CRAMS)

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:

The company is launching new products which may provide higher revenues

The company started Unikare, a new marketing division, to take care of marketing
skincare products. The dermatology in India is estimated at around Rs 1,500 crore

It is concentrating more on contract research and manufacturing segment for better profit
margins

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. The API business is
also facing stress on account of the slowdown in the 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.

Rama Krishna Vadlamudi, MUMBAI. vrk_100@yahoo.co.in. Oct. 2nd, 2009 Page 4 of 8

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

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:

The company is almost a zero-debt company with debt-equity ratio at 0.05 (2008-09)

Being a zero-debt company practically, its interest cover ratio is more than 75

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)

It has never incurred loss in the last ten years

It has always shown positive cash flows from operating activities in the last ten years

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

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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)

The return on capital employed (ROCE) has been more than 25 per cent in the past ten
years except in two years

The return of net worth (RONW) has also been more than 25 per cent in the past ten years
except in two years

The company is known for its conservatism and steady growth with strong fundamentals

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.

Rama Krishna Vadlamudi, MUMBAI. vrk_100@yahoo.co.in. Oct. 2nd, 2009 Page 6 of 8

 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

Rama Krishna Vadlamudi, MUMBAI. vrk_100@yahoo.co.in. Oct. 2nd, 2009 Page 7 of 8

  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

 There is no point in making equity investments and be satisfied with small profits and get
some sort of ‘ego’ satisfaction

 One needs to have a portfolio approach and build a portfolio over a period of several
years with strong built-in risk management techniques

 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)

 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

 As such, it is better to see things from a MACRO angle, rather than picking up one stock
here and selling another stock there

 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.

 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!).

 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
HAPPY INVESTING ALL OF YOU!

Rama Krishna Vadlamudi, MUMBAI. vrk_100@yahoo.co.in. Oct. 2nd, 2009 Page 8 of 8