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Nicholas Piramal: Formulating an India story! - Views on News from Equitymaster
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Nicholas Piramal: Formulating an India story!
Apr 25, 2006

Performance summary
Nicholas Piramal announced strong standalone and consolidated operating results for the fourth quarter and fiscal ended March 2006. For FY06, while consolidated topline has grown at a robust pace, the bottomline growth has been impacted due to the effect of an extraordinary income during FY05. Excluding this, consolidated net profits have actually grown by 53% YoY during the fiscal.

Financial snapshot (Standalone)
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net sales 2,275 3,362 47.8% 12,583 14,182 12.7%
Expenditure 2,514 2,854 13.5% 10,845 11,907 9.8%
Operating profit (EBDITA) (238) 508   1,738 2,275 30.9%
EBDITA margin (%) -10.5% 15.1%   13.8% 16.0%  
Other income 41 70 68.1% 178 312 75.4%
Interest (net) 69 24 -65.9% 175 135 -22.7%
Depreciation 135 152 12.6% 474 577 21.7%
Profit before tax (401) 402   1,267 1,875 48.0%
Extraordinary item 296 (25)   796 (33) -104.1%
Tax 21 1 -95.6% 367 139 -62.1%
Profit after tax/(loss) (125) 376   1,696 1,704 0.5%
Net profit margin (%) -5.5% 11.2%   13.5% 12.0%  
No. of shares (m) 190.0 209.0   190.0 209.0  
Diluted earnings per share (Rs)         8.1  
Price to earnings ratio (x)         29.8  

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 4.3% (FY05) 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.

Financial snapshot (Consolidated)
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net sales 2,464 4,254 72.7% 13,342 15,944 19.5%
Expenditure 2,652 3,889 46.6% 11,388 13,840 21.5%
Operating profit (EBDITA) (188) 366   1,954 2,105 7.7%
EBDITA margin (%) -7.6% 8.6%   14.6% 13.2%  
Other income 32 68 114.1% 75 273 266.0%
Interest (net) 76 43 -42.8% 192 173 -9.9%
Depreciation 148 214 45.0% 524 688 31.2%
Profit before tax (379) 177   1,312 1,517 15.6%
Extraordinary item 295 (26)   788 (97)  
Tax 49 (3)   457 210 -54.1%
Minority interest 1 2 66.7% 3 4 34.5%
Profit after tax/(loss) (134) 152   1,641 1,207 -26.5%
Net profit margin (%) -5.5% 3.6%   12.3% 7.6%  
No. of shares (m) 190.0 209.0   190.0 209.0  
Diluted earnings per share (Rs)         5.8  
Price to earnings ratio (x)         41.7  

What has driven performance in 4QFY06?
Formulating a domestic story: The consolidated topline growth for the fourth quarter has been much aided by NPIL’s domestic formulations business, which has recorded a 69% YoY growth. This business commands a significant share of the company’s business, which can be gauged from the fact that it formed around 57% of NPIL’s 4QFY06 standalone revenues (61% in 4QFY05). Investors should note that the company has also benefited on account of a low base, considering that sales in 4QFY05 were affected by de-stocking at the retailers’ level due to changes brought about by the introduction of Value Added Tax (VAT).

The quarter was also instrumental in helping the company log in 20% YoY growth for the fiscal considering that the operational integration of Avecia Pharmaceuticals was successfully completed during the quarter. The fourth quarter was also witness to a strong growth for NPIL’s leading brand ‘Phensedyl’, which was earlier faced with a controversy (in 2QFY06) when the Narcotics Bureau had classified the product as a narcotic.

Cost control lead margin expansion: Decline across cost heads has helped NPIL report an operating profit during 4QFY06 vis-à-vis an operating loss in 4QFY05. This has come about on the back of a fall in raw material costs (from 45% of 4QFY05 sales to 42% of 4QFY06 sales). Other expenditure also witnessed a considerable decline, thus contributing to margin expansion during the quarter. R&D expenses on a consolidated basis witnessed a rise after taking into account Avecia’s expenditure on R&D as well. Margins for the full year contracted by 140 basis points after factoring Avecia’s loss at the EBIDTA level.

Consolidated cost break-up
(% of sales) 4QFY05 4QFY06 FY05 FY06
Material cost 45.1% 41.5% 41.9% 42.3%
Staff cost 14.2% 14.9% 11.6% 12.1%
Other expenditure 42.7% 27.7% 28.1% 27.6%
R&D expenses 5.7% 7.3% 3.7% 4.9%

Extraordinary effect on bottomline: NPIL’s bottomline on a consolidated basis paints a grim picture if one were to consider the extraordinary income of 4QFY05. Readers should note that the extraordinary income in 4QFY05 was largely due to consideration received in return of certain marketing and distribution rights on snapping of ties with Roche Diagnostics. Excluding the impact of extraordinary items, NPIL’s 4QFY06 performance has been encouraging. For FY06, excluding the extraordinary items, the bottomline has grown by 53% YoY.

Quarterly trend
(%) 4QFY05* 1QFY06 2QFY06 3QFY06 4QFY06
Net sales growth -31.0% 8.8% -2.3% 8.9% 19.5%
Operating profit margin -9.2% 18.9% 17.6% 12.4% 13.2%
Net profit growth - 12.2% 0.9% -69.9% -26.5%
*Net loss in 4QFY05          

What to expect?
At the current price of Rs 241, the stock is trading at a price to earnings multiple of 20.1 times our estimated FY08 earnings. The board has recommended a dividend of Rs 3 per share (dividend yield of 1.2%). Also, in continuation with its inorganic growth strategy, the board has approved a fund raising scheme (not exceeding US$ 1.5 bn, in phases). Going forward, we believe that the contract manufacturing business will gain significant momentum. While the Advanced Medical Optics (AMO) contract has already started generating revenues, the revenues from other 4 contracts will start filtering in from FY07 onwards.

The acquisition of the European contract-manufacturing organisation (CMO), Avecia Pharmaceuticals, will further enable it to establish a footprint in the global CMO space. However, Avecia is currently a loss making company and is likely to breakeven by the end of FY07 and start contributing FY08 onwards. Therefore, while we are positive about the future growth prospects of the company, we believe that the current stock price more than adequately reflects this growth.

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