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Nicholas: Still Attractive?

Apr 30, 2002

Nicholas Piramal has ended FY02 with a strong financial performance. The figures for FY02 are on a consolidated basis with Rhone Poulenc Rorer (RPR) and hence not exactly comparable. On a merged basis, while sales have recorded a 70% jump, net profit dipped 27% on the back of write off of a one time expenditure of Rs 442 m.

(Rs m)FY01FY02Change
Sales 5,064 8,662 71.0%
Other Income 124 374 200.7%
Expenditure 4,216 7,378 75.0%
Operating Profit (EBDIT) 848 1,284 51.5%
Operating Profit Margin (%)16.7%14.8%
Interest 96 320 233.5%
Depreciation 139 169 21.5%
Profit before Tax 737 1,170 58.6%
Other Adjustments 3 442
Tax 70 245 249.1%
Profit after Tax/(Loss) 665 482 -27.4%
Net profit margin (%)13.1%5.6%
No. of Shares (eoy) (m) 34.9 38.0
Diluted Earnings per share 19.1 12.7
P/E (at current price) 22.8

The restructuring cost is mainly on account of acquisition of Rhone Poulenc India. This includes a payment for VRS and stock write offs. NPIL sold off the erstwhile Rhone Paithan manufacturing facility to contract manufacturer Encore Pharma for Rs 85 m. During the year, Nicholas also acquired the pharmaceutical division of ICI Ltd as a going concern for a total consideration of Rs 700 m. The acquisition was completed on March 26, 2002 after which date all transactions of the said division has been incorporated in the books of accounts of the Company.

The Company has changed the accounting policy on treatment of expenditure incurred on VRS. The company used to fully write off the VRS expense in the year of expenditure. The same would now be amortised over a period of 60 months. The profits would had been lower by another Rs 167 m had the company maintained its accounting policy on writing off the entire VRS expense.

Going forward Nicholas intends to focus primarily on the domestic market. The company is still open to further growth through the in-organic route, strategic alliances and tie-ups. The company believes that the pharma industry would throw exciting acquisitions opportunities as it consolidates in the run up to 2005. Nicholas is investing aggressively in creating a strong marketing infrastructure to prepare itself for in-licensing opportunities from MNC pharma's. Though the company is looking for tie-ups with generic players abroad for manufacturing arrangements, it doesn't intend to aggressively eye the export generic market, quite unlike other domestic pharma majors. The therapeutic areas, which Nicholas caters to, are well diversified. It has launched several new products in last six months in the cardiovascular, anti-diabetic, anti-arthritic and anti-infective segments.

Read our last report - Are valuations attractive?

We expect that acquisition synergies would start percolating into financial numbers from the current year. Robust growth numbers (on account of merger without a major strain on balance sheet), a faster payback period, and a broad product basket are expected to make FY03 numbers of the company attractive. We would soon revise our net profit estimates of the company inline with change in accounting policy. However, excluding one time / extra-ordinary expenses, the stock trades at 10x our expected earnings for FY03.

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