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Nicholas Piramal: International benefits!
Jan 19, 2007

Performance summary
Nicholas Piramal has announced robust results for the third quarter and nine months ended December 2006. For the quarter, the impressive growth in topline, on a consolidated basis, has been driven by the company’s international business, which includes revenues of NPIL Pharma (UK) Ltd (Avecia and Pfizer’s Morpeth facility). Lower raw material costs and other expenditure (as percentage of sales) have largely contributed to the improvement in operating margins. All these factors put together have led the bottomline to grow at a much faster pace than the topline.

Financial snapshot (Consolidated)
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Net sales 4,056 6,495 60.1% 11,690 18,267 56.3%
Expenditure 3,716 5,525 48.7% 9,951 15,281 53.6%
Operating profit (EBDITA) 340 970 185.3% 1,739 2,986 71.7%
EBDITA margin (%) 8.4% 14.9%   14.9% 16.3%  
Other income 4 2 -46.2% 205 4 -98.1%
Interest (net) 23 88 277.2% 130 209 61.4%
Depreciation 170 222 31.0% 474 694 46.3%
Profit before tax 151 663 338.1% 1,340 2,087 55.7%
Extraordinary item (1) (32)   (7) (32)  
Tax 53 110 107.8% 240 355 47.9%
Minority interest 0 -   2 1 -66.7%
Prior period items - 34   (36) (68) 92.4%
Profit after tax/(loss) 97 555 473.7% 1,055 1,631 54.6%
Net profit margin (%) 2.4% 8.5%   9.0% 8.9%  
No. of shares (m) 190.0 209.0   190.0 209.0  
Diluted earnings per share (Rs)*         10.1  
Price to earnings ratio (x)*         26.8  
(* on a trailing 12-months basis)            

What is the company’s business?
Nicholas Piramal India Ltd. (NPIL) is one of the leading Indian pharma companies with strong focus on the domestic market. It is the fourth largest company in the domestic market with a share of 4.6% (FY06) and a large sales force covering 10 therapeutic segments. The company has gradually improved its product portfolio by increasing the share of lifestyle drugs and has also focused on R&D of late. The biggest contributors to company’s revenues are the respiratory and cardiovascular segments. The other major therapeutic segments in which the company operates are anti-infectives, nutritional, and gastro intestinal. Nicholas Piramal has also identified custom manufacturing as its area of growth going forward. With this aim in mind, the company has signed five contracts to date and also recently acquired the contract-manufacturing organisation (CMO), Avecia Pharmaceuticals, UK to establish a footprint in the global custom manufacturing space.

What has driven performance in 3QFY07?
Acquisitions drive growth: Nicholas Piramal’s revenues grew by an impressive 60% YoY during the quarter, largely driven by revenue contribution from its international businesses, namely Avecia and Morpeth (3QFY06 does not include Avecia and Morpeth and therefore to that extent the numbers are not comparable). Both these put together contributed 32% to total revenues in 3QFY07. While exports during the quarter constituted 46% of 3QFY07 sales, for the nine-month period, they contributed 41% to total revenues.

Revenues from the domestic branded formulations business grew by 12.6% YoY during the quarter, largely driven by its respiratory (up 13% YoY), cardiovascular (up 22% YoY) and nutritionals (up 14% YoY) segments, which are amongst the top five contributors to the company’s domestic sales. The top 10 brands of the company contributed around 30% to sales during the quarter, while new product launches (in the past 2 years) accounted for 4% of 3QFY07 sales. Also, revenues from the India contract manufacturing operations contributed around 3% to total sales during both 3QFY07 and 9mFY07.

Segmental snapshot
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
India sales            
Branded formulations 2,620 2,950 12.6% 8,162 9,095 11.4%
CMO 183 194 6.0% 591 586 -0.8%
Pathlabs 109 167 53.1% 324 484 49.4%
Others 168 170 1.0% 539 691 28.3%
Total 3,080 3,480 13.0% 9,616 10,857 12.9%
Export sales 976 3,015 208.9% 2,074 7,411 257.3%
Total sales 4,056 6,495 60.1% 11,690 18,267 56.3%

Margin improvement visible: Operating margins expanded by 650 basis points, which was largely due to a substantial fall in raw material costs and other expenditure (as percentage of sales). However, R&D expenditure has witnessed a rise after the integration of Avecia with Nicholas Piramal. As far as NPIL Pharma (UK) is concerned, the operations are expected to break even by the end of FY07.

Consolidated cost break-up
(% of sales) 3QFY06 3QFY07 9mFY06 9mFY07
Material cost 46.1% 36.7% 42.5% 36.2%
Staff cost 11.5% 17.2% 11.1% 16.8%
Other expenditure 29.6% 26.3% 27.6% 25.7%
R&D expenses 4.3% 4.8% 4.0% 5.0%

Bottomline picture: Bottomline (up 474% YoY) during the quarter grew at a much faster clip than the topline, which is attributed to strong performances both at the topline and the operating level. This growth has come about despite the surge in interest costs during the quarter.

Quarterly trend
(%) 2QFY06 3QFY06 4QFY06 1QFY07 2QFY07 3QFY07
Net sales growth -2.3% 8.9% 19.5% 31.2% 74.4% 60.1%
Operating profit margin 17.6% 12.4% 13.2% 16.8% 15.1% 14.9%
Net profit growth 0.9% -69.9% -26.5% 7.3% 30.1% 30.1%

What to expect?
At the current price of Rs 271, the stock is trading at a price to earnings multiple of 20.7 times our estimated FY09 earnings. Going forward, we believe that custom manufacturing will be the key growth driver for the company. While the Advanced Medical Optics (AMO) and the Allergan contracts have already started generating revenues, revenues from other 4 contracts will start filtering in from FY07 onwards. Besides contribution from Avecia, the company acquired Pfizer’s Morpeth facility in the UK, which will also provide a considerable fillip to the custom manufacturing business in the future. Considering all these factors, while we remain positive on the company’s long-term growth prospects, investors need to be cautious with respect to valuations.

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