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Nicholas Piramal: Its domestic this time - Views on News from Equitymaster
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Nicholas Piramal: Its domestic this time
Jan 21, 2008

Performance summary
  • Revenues grow by 13% YoY largely on the back of a 16% YoY growth in domestic branded formulations.

  • The contract manufacturing business posts a relatively staid 7% YoY growth in revenues and is impacted by the appreciation of the Canadian dollar against the US dollar.

  • Operating margins expand by 1.6% driven by considerable reduction in other expenditure and staff costs (as percentage of sales).

  • Net profits grow by 31% YoY aided by strong performance at the operating level, higher other income and lower tax expenses. This is despite interest costs being higher by 39% YoY.

Financial snapshot (Consolidated)
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 6,495 7,323 12.8% 18,267 21,050 15.2%
Expenditure 5,525 6,112 10.6% 15,281 17,668 15.6%
Operating profit (EBDITA) 970 1,212 24.9% 2,986 3,381 13.2%
EBDITA margin (%) 14.9% 16.5%   16.3% 16.1%  
Other income 2 40 1814.3% 4 60 1448.7%
Interest (net) 88 122 38.9% 209 344 64.2%
Depreciation 188 269 42.9% 660 781 18.4%
Profit before tax 697 861 23.6% 2,121 2,317 9.2%
Extraordinary item (32) (56)   (134) (86)  
Tax 110 79 -27.9% 355 222 -37.6%
Profit after tax/(loss) 556 726 30.8% 1,632 2,009 23.1%
Net profit margin (%) 8.6% 9.9%   8.9% 9.5%  
No. of shares (m) 209.0 209.0   209.0 209.0  
Diluted earnings per share (Rs)*         12.2  
Price to earnings ratio (x)*         27.1  
(* on a trailing 12-months basis)

What has driven performance in 3QFY08?
  • Nicholas Piramalís revenues grew by 13% YoY during 3QFY08, largely driven by the 16% YoY growth in the domestic branded formulations. Growth was driven by the dermatology, ophthalmology and OTC segments of the market. The top 10 brands of the company contributed around 27% to sales during 9mFY08, while new product launches (in the past 2 years) accounted for 5% of total sales in 9mFY08. Lifestyle products accounted for 32% of total sales. The company launched 24 new products during the nine-month period.

  • Revenues from the contract manufacturing business, however, slowed down considerably during the quarter (up by 7% YoY) and were impacted by the appreciation of the Canadian dollar against the US dollar (Nicholas Piramal has a presence in Canada through Torcan, which is a subsidiary of Avecia). However, contract manufacturing revenues relating to contracts from Indian facilities witnessed significant traction and reported revenues of Rs 554 m (up 208% YoY).

    Segmental snapshot
    (Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
    Branded formulations 2,918 3,372 15.6% 8,941 9,822 9.8%
    CMG 3,181 3,410 7.2% 7,849 9,459 20.5%
    Pathlabs 167 315 88.6% 484 878 81.7%
    Others 230 227 -1.0% 994 891 -10.4%
    Total 6,495 7,323 12.8% 18,267 21,050 15.2%

  • Operating margins improved by 1.6% during the quarter. While raw material costs (as percentage of sales) increased, the company was able to significantly reduce its staff and other expenditure. As far as R&D is concerned, the company is hiving off the NCE R&D into a separate listed company. The de-merger will be effective from April 01, 2007 and lead to an improvement in operating margins going forward.

  • Nicholasí bottomline (up 31%) grew at a much faster clip than the operating profits (up 25% YoY) owing to a sizeable fall in tax expenses, higher other income and strong performance at the operating level. Nicholas had entered into a JV with the Japanese company ARKRAY Inc., to market diagnostic products, mainly self-monitoring blood glucose system in the Indian market. Under the agreement, Nicholas transferred all its existing blood glucose monitoring business into the JV for a consideration of Rs 40 m leading to the higher other income. Interest costs, however, rose by 45% YoY and could be attributed to the fact that the entire Morpeth and Avecia acquisition was funded through debt and hence, the higher costs towards servicing the same.

What to expect?
At the current price of Rs 330, the stock is trading at a multiple of 12.8 times our estimated FY10 earnings. We believe that the global custom manufacturing business will bolster the performance of the company going forward with the Avecia acquisition, operations from the Indian assets and Morpeth facility being the key growth drivers. As mentioned earlier, the de-merger of the R&D business will lead to an improvement in operating margins going forward. Despite the positives, we believe that the risk-reward ratio is largely skewed towards the former and hence we advise investors to exercise caution while investing in the stock.

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