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Nicholas Piramal: Margin upsides - Views on News from Equitymaster
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Nicholas Piramal: Margin upsides
Apr 24, 2008

Performance summary
  • Revenues grow by 16% YoY in FY08 led by both the branded formulations and custom manufacturing businesses.

  • Operating margins expand substantially by 3.4% driven by considerable reduction in R&D and other expenditure (as percentage of sales).

  • Net profits grow by 53% YoY aided by strong performance at the operating level and lower tax expenses. This is despite the 52% YoY rise in interest costs.

  • Board recommends a dividend of Rs 4.2 per share (dividend yield of 1.2%).

Financial snapshot (Consolidated)
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 6,452 7,679 19.0% 24,719 28,728 16.2%
Expenditure 5,603 5,643 0.7% 20,885 23,311 11.6%
Operating profit (EBDITA) 849 2,036 139.9% 3,835 5,418 41.3%
EBDITA margin (%) 13.2% 26.5%   15.5% 18.9%  
Other income - 0   4 61 1456.4%
Interest (net) 96 119 24.6% 305 463 51.8%
Depreciation 158 166 4.7% 818 947 15.8%
Profit before tax 595 1,751 194.4% 2,715 4,068 49.8%
Extraordinary item (12) (253)   (145) (339)  
Tax 34 155 358.3% 389 377 -3.2%
Minority interest - 15   1 14 1662.5%
Profit after tax/(loss) 550 1,328 141.7% 2,181 3,338 53.1%
Net profit margin (%) 8.5% 17.3%   8.8% 11.6%  
No. of shares (m)       209.0 209.0  
Diluted earnings per share (Rs)         16.0  
Price to earnings ratio (x)         20.7  

What has driven performance in FY08?
  • Nicholas Piramal’s revenues grew by 16% YoY during FY08 and was driven by both the domestic formulations and custom manufacturing businesses. The 10% YoY growth in branded formulations was aided by the anti-infectives, gastrointestinal, ophthalmology and OTC segments. Having said that, growth to a certain extent was impacted as sales of the company’s top product ‘Phensedyl’ declined in the first quarter due to the shortage of codeine. This was rectified in the subsequent three quarters of the year. The top 10 brands of the company contributed around 29% to sales during FY08, while new product launches (in the past 2 years) accounted for 4.4% of total sales in FY08. Lifestyle products accounted for 33% of total sales. The company launched 30 new products during the year.

  • Revenues from the custom manufacturing business registered a 19% YoY growth led by growth in Avecia, Morpeth and its Indian assets. Custom manufacturing revenues relating to contracts from Indian facilities witnessed significant traction and reported revenues of Rs 2.2 bn during the year (Rs 767 m in FY07). The company had started shipments of 5 new contracts during the year, which are large in size and hence the significant growth. The pathlabs business also clocked an impressive 72% YoY, which was due to a combination of organic as well as inorganic growth. During FY08, the company acquired the operations of 16 diagnostic laboratories across the country, which was instrumental in bolstering growth of the pathlabs business.

    Segmental snapshot
    (Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
    Branded formulations 2,624 3,092 17.8% 11,565 12,914 11.7%
    CMG 3,426 3,951 15.3% 11,275 13,411 18.9%
    Pathlabs 212 316 49.2% 695 1,194 71.8%
    Others 191 320 67.6% 1,185 1,211 2.2%
    Total 6,452 7,679 19.0% 24,719 28,729 16.2%

  • Operating margins improved by a significant 3.4% during the year. This was led by a substantial reduction in R&D and other expenditure (as percentage of sales). It must be noted that the company had demerged its NCE R&D business into a separate company in FY08, which resulted in the fall in R&D expenses and a consequent expansion in margins. If one excludes the R&D expenditure during both the years, then the improvement in operating margins stood at 1%. This was largely due to control over other expenditure and ramp up in the profitability of Morpeth.

  • Nicholas’ bottomline (up 53%) grew at a faster clip than the operating profits (up 41% YoY) owing to a fall in tax expenses, higher other income and strong performance at the operating level. Interest costs, however, rose by 52% YoY and was attributed to funding for investment in acquisitions (namely Avecia and Morpeth) and the hardening of interest rates.

What to expect?
At the current price of Rs 340, the stock is trading at a price to earnings multiple of 15.1 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. 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. 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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