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Nicholas Piramal: Going global! - Views on News from Equitymaster

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Nicholas Piramal: Going global!
Apr 26, 2007

Performance summary
Nicholas Piramal has announced robust results for the fourth quarter and full year ended March 2007. For both the periods under review, the impressive growth in topline, on a consolidated basis, has been driven by the company’s international business, which includes revenues of NPIL Pharma (UK) Ltd (Avecia and Pfizer’s Morpeth facility). Lower raw material costs and other expenditure (as percentage of sales) have largely contributed to the improvement in operating margins for the full year. All these factors put together have led the bottomline to grow at a faster pace than the topline despite the reduction in other income and increase in interest and tax expenses.

Financial snapshot (Consolidated)
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Net sales 4,254 6,452 51.7% 15,944 24,719 55.0%
Expenditure 3,898 5,603 43.8% 13,849 20,885 50.8%
Operating profit (EBDITA) 357 849 137.9% 2,096 3,835 83.0%
EBDITA margin (%) 8.4% 13.2%   13.1% 15.5%  
Other income 77 -   282 4 -98.6%
Interest (net) 43 96 121.0% 173 305 76.4%
Depreciation 214 158 -26.1% 688 818 18.9%
Profit before tax 177 595 236.8% 1,517 2,715 79.0%
Extraordinary item (26) (12)   (33) (43) 31.8%
Tax (2) 34   238 389 63.3%
Minority interest 2 -   4 1 -79.5%
Prior period items 0 -   (36) (102) 186.5%
Profit after tax/(loss) 152 550 262.2% 1,206 2,181 80.8%
Net profit margin (%) 3.6% 8.5%   7.6% 8.8%  
No. of shares (m) 209.0 209.0   209.0 209.0  
Diluted earnings per share (Rs)*         10.4  
Price to earnings ratio (x)*         24.0  
(* on a trailing 12-months basis)            

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 4.6% 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 acquired the contract-manufacturing organisation (CMO), Avecia Pharmaceuticals, UK (in November 2005) to establish a footprint in the global custom manufacturing space.

What has driven performance in FY07?
Acquisitions drive growth: Nicholas Piramal’s revenues grew by an impressive 55% YoY during FY07, largely driven by the consolidation of businesses acquired, namely Avecia and Morpeth (both in the UK). This led to global sales registering an impressive 214% YoY growth. Contract manufacturing revenues relating to contracts from Indian facilities reported revenues of Rs 767 m (around 3% of total sales).

Revenues from the domestic branded formulations business grew by 12% YoY during the year, largely driven by its respiratory (up 18% YoY), cardiovascular (up 15% YoY) and nutritionals (up 14% YoY) segments, which are amongst the top five contributors to the company’s domestic sales. The top 10 brands of the company contributed around 30% to sales during the year, while new product launches (in the past 2 years) accounted for 6% of total sales.

Segmental snapshot
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
India sales            
Branded formulations 2,335 2,646 13.3% 10,497 11,742 11.9%
CMO 354 240 -32.2% 945 826 -12.6%
Pathlabs 126 212 67.9% 450 695 54.5%
Others 125 119 -4.7% 664 810 22.0%
Total 2,939 3,216 9.4% 12,555 14,073 12.1%
Export sales 1,315 3,236 146.1% 3,389 10,647 214.1%
Total sales 4,254 6,452 51.7% 15,944 24,719 55.0%

Margin improvement visible: Operating margins expanded by 240 basis points during the year, which was largely due to a substantial fall in raw material costs and other expenditure (as percentage of sales). However, R&D expenditure has witnessed a rise after the integration of Avecia with Nicholas Piramal. During the year, Nicholas managed to turn around the operations of Avecia. It must be noted that at the time of its acquisition, Avecia had operating losses of 12.8% owing to lower revenues and high cost structure at its UK operations. During FY07, Nicholas has managed to grow Avecia’s revenues and reduce its material costs and fixed expenses.

Consolidated cost break-up
(% of sales) 4QFY06 4QFY07 FY06 FY07
Material cost 41.4% 33.8% 41.8% 35.6%
Staff cost 14.9% 17.5% 12.1% 17.0%
Other expenditure 27.9% 30.1% 28.1% 26.8%
R&D expenses 7.3% 5.6% 4.9% 5.1%

Bottomline picture: Bottomline (up 81% YoY) during FY07 grew at a much faster clip than the topline, which is attributed to strong performances both at the topline and the operating level. This growth has come about despite the surge in interest costs during the quarter. Given the fact that the entire Morpeth and Avecia acquisition was funded through debt and the rising interest rates, the interest costs for the year were higher. Due to its stronger operating performance, Avecia was able to contribute positively to Nicholas’ consolidated bottomline.

Quarterly trend
(%) 3QFY06 4QFY06 1QFY07 2QFY07 3QFY07 4QFY07
Net sales growth 8.9% 19.5% 31.2% 74.4% 60.1% 51.7%
Operating profit margin 12.4% 13.2% 16.8% 15.1% 14.9% 13.2%
Net profit growth -69.9% -26.5% 7.3% 30.1% 30.1% 262.2%

What to expect?
At the current price of Rs 250, the stock is trading at a multiple of 19.1 times our estimated FY09 earnings. We believe that the global custom manufacturing business will drive the performance of the company going forward. While the Avecia acquisition will be the critical growth driver, the company acquired Pfizer’s Morpeth facility in the UK, which will also provide a considerable fillip to the custom manufacturing business in the future. The performance of the company for the full year has been better than our expectations and to that extent we will have to upgrade our numbers for FY07. We shall soon update our research report on the company.

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