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Anand Ram

UNICHEM Laboratories is a mid-sized pharmaceutical company and has attracted much market interest in the last few days. The company's share price has been on a successive uptrend since the first week of this month. The reason behind this rally is not clear at the moment, though definitely not driven by fundamental developments. Since this appreciation has surpassed fundamental expectations, it may be prudent to book profits at this level and re-enter the counter when valuations are lower.

Business: The company has built up a primary presence in formulations with minor interests in bulk drugs. The company's dominant strengths lie in pain management, anti-infective and gastrointestinal segments. It has now moved into the more lucrative high margin therapeutic areas like cardiology, psychiatry and anti-diabetes. It has derived around 42 per cent growth from the launch of about five new products in the last six months and has co-marketing arrangements for two more new antibiotics with Glenmark Pharmaceuticals. The company has cemented R & D initiatives with planned allocations of up to 6 per cent of its turnover in the future.

Financials: The company has ended the last three quarters with good numbers. Net sales have increased at an average rate of a little over 16 per cent in the last three years. Total income has grown at an average annual rate of about 17 per cent from 1999 while operating profits have shown an average increase of 18 per cent over the last three years. Post tax profits have risen more than 40 per cent during this period. Overall the numbers augur well for the future profitability of the company. At a EPS of Rs 38.36 (annualised) and quoting at a current price of Rs 265 (as on 12 April 2002), the price/earnings differential has increased by 1.7 from the beginning of this month.

Market trends: Shares of Unichem Laboratories were quoting at Rs 199 on April 1. At this level, the counter was attractive enough to consider buying into for returns on its long-term fundamentals. However, the price action witnessed in the last two weeks gives rise to the belief that company fundamentals have not been the only factor that led to the counter's appreciation. If investors did buy into the shares on April 1, the holding period returns work out to 33 per cent. This should satisfy any investor's need for long-term returns. Further, from this level for the stock to deliver returns commensurate with its risk profile, it has to meet optimistic growth rate projections. As a strategy, investors therefore could liquidate their positions at this level and seek to re-enter at lower prices.

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