Unichem Laboratories Ltd Upgraded to Sell on Improved Valuation Despite Financial Challenges

Quality Assessment: Persistent Operational and Profitability Concerns

Unichem Laboratories continues to face challenges in its financial quality parameters. The company reported a sharp decline in profitability in the third quarter of fiscal year 2025-26, with Profit Before Tax excluding other income (PBT less OI) falling by 77.2% to ₹6.11 crores compared to the previous four-quarter average. Net profit after tax (PAT) also dropped by 56.0% to ₹16.13 crores in the same period. These results highlight ongoing pressure on earnings quality and operational efficiency.

Moreover, the company’s ability to service debt remains weak, with a high Debt to EBITDA ratio of 4.87 times, signalling elevated leverage risk. The average Return on Equity (ROE) stands at a modest 1.44%, indicating limited profitability generated per unit of shareholder funds. Return on Capital Employed (ROCE) is also low at 4.90%, underscoring subdued capital efficiency. These factors collectively maintain a cautious stance on the company’s quality grade despite the rating upgrade.

Valuation Upgrade: From Attractive to Very Attractive

The primary catalyst for the rating upgrade is the marked improvement in valuation metrics. Unichem Laboratories’ valuation grade has been upgraded from “Attractive” to “Very Attractive,” reflecting its current market price discount relative to intrinsic and peer valuations. The stock trades at a price-to-earnings (PE) ratio of 24.64, which is significantly lower than many of its pharmaceutical peers such as Ajanta Pharma (PE 36.05) and Gland Pharma (PE 34.38).

Other valuation multiples reinforce this positive view: the Enterprise Value to EBITDA (EV/EBITDA) ratio stands at 13.34, and the PEG ratio is a low 0.83, suggesting the stock is undervalued relative to its earnings growth potential. Price to Book Value is near parity at 1.06, and Enterprise Value to Capital Employed is also modest at 1.06. These metrics indicate that investors are currently paying a bargain price for Unichem’s assets and earnings, justifying the upgrade in valuation grade.

Financial Trend: Mixed Signals with Weak Profitability but Strong Operating Growth

Financial trends for Unichem Laboratories present a complex picture. While the company’s net sales have grown at a moderate compound annual growth rate (CAGR) of 11.95% over the past five years, profitability has been under pressure. The latest quarterly results reveal a significant contraction in profits, with PAT down 56.0% year-on-year.

However, there is a silver lining in the operating profit growth, which has surged at an impressive annual rate of 148.09%. This suggests that the core business operations are expanding robustly, but the benefits are being offset by higher interest costs and other expenses. Interest expenses have risen by 30.5% over the last six months, reflecting the company’s elevated debt burden.

Long-term returns have also been disappointing. The stock has delivered a negative return of 45.44% over the past year, substantially underperforming the Sensex, which gained 9.66% over the same period. Over three and five years, Unichem’s returns of 12.45% and 22.05% respectively lag behind the Sensex’s 35.81% and 59.83% gains, highlighting persistent underperformance relative to the broader market.

Technicals: Price Pressure Amidst Volatility

From a technical perspective, Unichem Laboratories’ stock price has been under pressure recently. The share closed at ₹367.50 on 17 Feb 2026, down 2.42% from the previous close of ₹376.60. The stock’s 52-week high was ₹727.95, while the 52-week low is ₹362.10, indicating a wide trading range and significant volatility.

Short-term price momentum remains weak, with the stock declining 8.04% over the past week and 8.75% over the last month, both underperforming the Sensex’s modest gains in the same periods. The downward trend is consistent with the company’s recent earnings disappointments and elevated debt concerns, which have weighed on investor sentiment.

Peer Comparison and Market Positioning

When compared with its pharmaceutical peers, Unichem Laboratories stands out for its relatively attractive valuation but lags behind in profitability and growth metrics. For instance, Ajanta Pharma and Gland Pharma trade at significantly higher PE ratios of 36.05 and 34.38 respectively, reflecting stronger earnings growth expectations. However, Unichem’s PEG ratio of 0.83 is substantially lower than peers such as Ajanta Pharma (2.78) and J B Chemicals (2.98), indicating undervaluation relative to growth.

The company’s market capitalisation grade remains low at 3, reflecting its small-cap status and limited liquidity compared to larger pharmaceutical firms. Promoters continue to hold a majority stake, which provides some stability but also concentrates ownership risk.

Outlook and Investment Implications

Unichem Laboratories’ recent upgrade from Strong Sell to Sell reflects a nuanced view of the company’s prospects. While financial performance and leverage concerns persist, the stock’s very attractive valuation offers a potential entry point for value-oriented investors willing to tolerate near-term volatility. The company’s strong operating profit growth and low PEG ratio suggest that earnings recovery could support a re-rating if debt levels are managed prudently.

Investors should weigh the risks of continued earnings pressure and high interest costs against the opportunity presented by the stock’s discounted valuation. Monitoring upcoming quarterly results and debt reduction progress will be critical to reassessing the company’s investment case.

Summary of Key Metrics

• Current Price: ₹367.50 (17 Feb 2026)
• PE Ratio: 24.64
• EV/EBITDA: 13.34
• PEG Ratio: 0.83
• ROCE: 4.90%
• ROE (Average): 1.44%
• Debt to EBITDA: 4.87 times
• 1-Year Stock Return: -45.44% vs Sensex +9.66%
• Market Cap Grade: 3
• Mojo Score: 31.0 (Sell, upgraded from Strong Sell)

In conclusion, Unichem Laboratories Ltd’s investment rating upgrade is a reflection of improved valuation attractiveness amid ongoing financial and operational challenges. The company’s discounted multiples relative to peers and growth prospects provide a cautious but more favourable outlook for investors seeking value in the Pharmaceuticals & Biotechnology sector.

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