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Piramal Health: Custom manufacturing still ails
Jan 21, 2010

Performance summary
  • Revenues grow by 9% YoY in 3QFY10 largely driven by the domestic branded formulations and global critical care businesses.
  • Revenues from the custom manufacturing business fall by 18% YoY during the quarter.
  • Operating margins improve marginally by 0.3% due to a fall in raw material costs and R&D expenditure (as percentage of sales).
  • While net profits register a growth of 128% YoY, the same is largely due to forex losses reported in 3QFY09. Thus, excluding this impact, net profits grow by 40% YoY duly helped by lower tax expenses.


Financial snapshot (Consolidated)
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 8,326 9,077 9.0% 24,302 27,292 12.3%
Expenditure 6,728 7,303 8.5% 19,452 22,187 14.1%
Operating profit (EBDITA) 1,598 1,774 11.0% 4,850 5,105 5.3%
EBDITA margin (%) 19.2% 19.5%   20.0% 18.7%  
Other income 0 -   2 0  
Interest (net) 261 217 -17.1% 552 724 31.3%
Depreciation 295 434 47.1% 853 1,194 40.0%
Profit before tax 1,042 1,124 7.8% 3,448 3,187 -7.6%
Extraordinary item - -   (136) (4)  
Forex loss/(gain) 352 (33)   990 (93)  
Tax 72 (204) -384.5% 272 2 -99.2%
Minority interest 20 (1)   36 (2)  
Profit after tax/(loss) 599 1,362 127.5% 2,013 3,276 62.7%
Net profit margin (%) 7.2% 15.0%   8.3% 12.0%  
No. of shares (m)       209.0 209.0  
Diluted earnings per share (Rs)         21.2  
Price to earnings ratio (x)         16.9  

What has driven performance in 3QFY10?
  • Piramal Healthcare’s revenues grew by 9% YoY during 3QFY10 and were largely driven by its domestic branded formulations, pathlabs and global critical care businesses. The strong 22% YoY growth in branded formulations was aided by the anti-infective, respiratory, cardiovascular and CNS segments. Besides promoting brands heavily, the company also strengthened its presence in the tier 2 cities thereby contributing to the growth across therapeutic areas. The top 10 brands of the company contributed around 27% to sales during 9mFY10, while new product launches (in the past 2 years) accounted for 8.3% of 9mFY10 sales. Lifestyle products accounted for 30% of 9mFY10 sales. The company launched 26 new products during the nine month period.

  • Revenues from the custom manufacturing business declined by 18% YoY during the quarter. Out of this, sales from custom manufacturing outside India fell by 46% YoY, which was largely due to the weakness in the global markets in wake of the economic slowdown and the shutdown of the Huddersfield facility in the UK. While the performance of the business this year is expected to remain subdued, the company expects revenues to pick up next year onwards. Custom manufacturing revenues relating to contracts from Indian facilities reported a robust growth of 42% YoY during the quarter.

  • The pathlabs business grew by 18% YoY, which was largely organic growth as there were no acquisitions made during the quarter. After the acquisition of Minrad in the Inhalation Anaesthetics (IA) segment, Piramal Healthcare formed a new division called 'Global Critical Care'. This business witnessed a stupendous growth during the quarter largely due to the revenues from Minrad, which has now been fully integrated with the company.

    Segmental snapshot
    (Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
    Branded formulations 4,109 4,994 21.5% 12,100 14,609 20.7%
    CMG 2,561 2,091 -18.4% 7,585 6,690 -11.8%
    Pathlabs 425 503 18.2% 1,284 1,535 19.6%
    Global critical care 296 779 163.4% 753 2,393 218.0%
    Others 935 712 -23.9% 2,581 2,066 -19.9%
    Total 8,326 9,077 9.0% 24,302 27,292 12.3%

  • Operating margins improved marginally by 0.3% during the quarter to 19.5% largely due to a fall in raw material costs and R&D expenditure (as percentage of sales). However, staff costs were higher due to the inclusion of Minrad. While Piramal Healthcare’s bottomline grew by 128% YoY during the quarter, the same was largely due to forex income of Rs 33 m this quarter as against a loss of Rs 352 m in 3QFY09. Thus, if you exclude the impact of both these items, net profits grew by 40% YoY. This growth was still much higher than the growth in operating profits due to lower interest costs and a tax refund this quarter.

What to expect?
At the current price of Rs 358, the stock is trading at a price to earnings multiple of 10.4 times our estimated FY12 earnings. We believe that both the domestic formulations and the custom manufacturing business will bolster the performance of the company going forward with revenues from the Indian assets and Morpeth facility being the key growth drivers. While the current slowdown is impacting the company’s custom manufacturing business, the scenario is expected to improve next year onwards by which time the inventory rationalization exercise undertaken by global pharma should come to an end. As far as the trend for the next three years is concerned, the company expects outsourcing to gain momentum led by the pressure on global pharma to cut down costs.

As regards Morpeth, the company is aiming to get more business besides the one from Pfizer and has successfully negotiated for the renewal of contracts. Minrad is also expected to bolster the overall performance of Piramal as the former’s margins and sales ramp up. The company is also taking initiatives to boost growth in the domestic market by in-licensing new products, promoting existing products and improving the productivity of its field force. Overall, we maintain our positive view on the stock.

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