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Piramal Healthcare: Forex woes continue
Jan 23, 2009

Performance summary
  • Revenues grow by 15% YoY in 3QFY09 led by the domestic branded formulations and pathlabs businesses.
  • Operating margins expand substantially by 3.5% driven by considerable reduction in R&D and staff costs (as percentage of sales).
  • 3QFY09 net profits decline by 18% YoY hampered by forex losses (as against forex gains in 3QFY08). Excluding impact of the same during both the periods, the bottomline grows by 46% YoY.


Financial snapshot (Consolidated)
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 7,249 8,326 14.9% 20,893 24,302 16.3%
Expenditure 6,112 6,728 10.1% 17,668 19,452 10.1%
Operating profit (EBDITA) 1,137 1,598 40.5% 3,225 4,850 50.4%
EBDITA margin (%) 15.7% 19.2%   15.4% 20.0%  
Other income 40 0   60 2 -97.2%
Interest (net) 122 261 114.9% 344 552 60.4%
Depreciation 269 295 9.5% 781 853 9.1%
Profit before tax 787 1,042 32.4% 2,160 3,448 59.6%
Extraordinary item (56) -   (86) (136)  
Forex loss/(gain) (75) 352   (157) 990  
Tax 79 72 -9.0% 222 272 22.9%
Minority interest (1) 20   (1) 36  
Profit after tax/(loss) 728 599 -17.7% 2,010 2,014 0.2%
Net profit margin (%) 10.0% 7.2%   9.6% 8.3%  
No. of shares (m)       209.0 209.0  
Diluted earnings per share (Rs)         16.0  
Price to earnings ratio (x)         13.3  

What has driven performance in 3QFY09?
  • Piramal Healthcare’s revenues grew by 15% YoY during 3QFY09 and were driven by the branded domestic formulations and pathlabs businesses. The strong 22% YoY growth in branded formulations was aided by the respiratory, gastro-intestinal, cardiovascular and dermatology therapy segments. The top 10 brands of the company contributed around 25% to sales during 3QFY09, while new product launches (in the past 2 years) accounted for 5.9% of total sales in 3QFY09. Lifestyle products accounted for 29.5% of total sales. The company launched 3 new products during the quarter.

  • Revenues from the custom manufacturing business registered a tepid 4% YoY growth and were largely led by growth in its Indian assets. Custom manufacturing revenues relating to contracts from Indian facilities witnessed significant traction reporting an impressive 45% YoY growth during the quarter. Revenues from the custom manufacturing business outside India declined by 8% YoY largely due to the slowdown globally wherein innovator companies are placing lower orders to clean up the inventory at their end. The pathlabs business also clocked an impressive 35% YoY growth, which was due to a combination of organic as well as inorganic growth. Going forward, the company expects the growth from the pathlabs business to be largely acquisition driven.

    Segmental snapshot
    (Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
    Branded formulations 3,372 4,109 21.9% 9,822 12,100 23.2%
    CMG 2,471 2,561 3.6% 6,999 7,585 8.4%
    Pathlabs 315 425 35.1% 878 1,284 46.2%
    Others 1,091 1,230 12.7% 3,194 3,333 4.4%
    Total 7,249 8,326 14.9% 20,893 24,302 16.3%

  • Operating margins improved by a significant 3.5% during the quarter. This was led by a substantial reduction in R&D and staff costs (as percentage of sales). It must be noted that the company has demerged its NCE R&D business into a separate company, which resulted in the fall in R&D expenses and a consequent expansion in margins.

  • Piramal Healthcare’s bottomline declined by 18% YoY during the quarter on account of forex losses to the tune of Rs 352 m (gain of Rs 75 m in 3QFY08). If we exclude the impact of the same during both the periods, then the growth in the bottomline stood at 46% YoY, higher than the growth in operating profits. This is despite interest costs surging by 115% YoY during the quarter. At the end of December 2008, Piramal Healthcare’s debt equity ratio stood at 1, which it expects to come down to 0.7 by the end of the year.

What to expect?
At the current price of Rs 213, the stock is trading at a multiple of 6.6 times our estimated FY11 earnings. We believe that 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. As far as Avecia is concerned, the focus is on shifting a large part of the business to India. While the current slowdown is impacting the company’s custom manufacturing business, the scenario is expected to improve going forward as the pressure on innovators to reduce costs increases.

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. The company is also taking initiatives to boost growth in the domestic market by in-licensing new products and improving the productivity of its field force. Further, the company acquired the US based company Minrad last month to strengthen its Inhalation Anaesthetics (IA) business. Overall, we maintain our positive view on the stock.

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