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Piramal Health: Hurt by custom manufacturing - Views on News from Equitymaster

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Piramal Health: Hurt by custom manufacturing
May 11, 2010

Piramal Healthcare has announced its FY10 results. The company has reported 12% YoY and 52% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow by 12% YoY in FY10 largely driven by the domestic branded formulations and global critical care businesses.
  • Revenues from the custom manufacturing business fall by 17% YoY during the year.
  • Operating margins fall marginally by 0.4% due to a rise in raw material and staff costs (as percentage of sales).
  • While net profits register a growth of 52% YoY, the same is largely due to forex losses reported in FY09 as against gains in FY10. Thus, excluding this and extraordinary expenses, net profits grow by 7% YoY.
  • Board recommends a dividend of Rs 5.4 per equity share (dividend yield of 1%).


Financial snapshot (Consolidated)
(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Net sales 8,509 9,418 10.7% 32,811 36,711 11.9%
Expenditure 6,725 7,255 7.9% 26,176 29,443 12.5%
Operating profit (EBDITA) 1,784 2,163 21.2% 6,635 7,268 9.5%
EBDITA margin (%) 21.0% 23.0%   20.2% 19.8%  
Other income 72 -     74 0  
Interest (net) 286 192 -32.9% 838 916 9.4%
Depreciation 343 233 -32.2% 1,196 1,427 19.3%
Profit before tax 1,227 1,738 41.7% 4,675 4,926 5.4%
Extraordinary item (310) (66)   (446) (69)  
Forex loss/(gain) (169) (49)   821 (141)  
Tax (53) 178   219 180 -17.8%
Minority interest (10) 0   26 (2)  
Profit after tax/(loss) 1,149 1,543 34.3% 3,163 4,819 52.4%
Net profit margin (%) 13.5% 16.4%   9.6% 13.1%  
No. of shares (m)       209.0 209.0  
Diluted earnings per share (Rs)         23.1  
Price to earnings ratio (x)         23.9  

What has driven performance in FY10?
  • Piramal Healthcare’s revenues grew by 12% YoY during FY10 and were largely driven by its domestic branded formulations, pathlabs and global critical care businesses. The strong 25% YoY growth in branded formulations was aided by the anti-infective, dermatology, nutritionals and OTC segments. Sales of the latter especially crossed Rs 1 bn during the year. Besides promoting brands heavily, the company also strengthened its presence in the tier 2 cities thereby contributing to the growth across therapeutic areas. The top 10 brands of the company contributed around 26% to sales during FY10, while new product launches (in the past 2 years) accounted for 7.6% of FY10 sales. Lifestyle products accounted for 29.5% of FY10 sales. The company launched 32 new products during the full year.

  • Revenues from the custom manufacturing business declined by 17% YoY during the year. Out of this, sales from custom manufacturing outside India fell by 24% YoY, which was largely due to the weakness in the global markets in wake of the economic slowdown and the shutdown of the Huddersfield facility in the UK. While the performance of the business this year was subdued, the company expects revenues to pick up next year onwards. Custom manufacturing revenues relating to contracts from Indian facilities also declined by 4% YoY during the year.

  • The pathlabs business grew by 22% YoY, which was largely organic growth as there were no acquisitions made during the year. After the acquisition of Minrad in the Inhalation Anaesthetics (IA) segment, Piramal Healthcare formed a new division called ‘Global Critical Care’. This business witnessed a stupendous growth during the year largely due to the revenues from Minrad, which has now been fully integrated with the company. In April 2010, the company acquired the Bharat Serum & Vaccines’ Anesthetic product business which is expected to further bolster the Global Critical Care business going forward.

    Segmental snapshot
    (Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
    Branded formulations 3,949 5,394 36.6% 16,049 20,002 24.6%
    CMG 3,021 2,160 -28.5% 10,607 8,850 -16.6%
    Pathlabs (Diagnostics) 406 529 30.4% 1,690 2,064 22.2%
    Global critical care 563 884 56.9% 1,316 3,277 149.0%
    Others 569 451 -20.7% 3,150 2,517 -20.1%
    Total 8,509 9,418 10.7% 32,811 36,711 11.9%

  • Operating margins fell marginally by 0.4% during the year to 19.8% largely due to a rise in raw material and staff costs (as percentage of sales). Staff costs were higher due to the inclusion of Minrad. While Piramal Healthcare’s bottomline grew by 52% YoY during the year, the same was largely due to forex income of Rs 141 m this year as against a loss of Rs 821 m in FY09. Thus, if you exclude the impact of both these items and the extraordinary expenses during both the periods, net profits grew by 7% YoY.

What to expect?
At the current price of Rs 550, the stock is trading at a price to earnings multiple of 16.8 times our estimated FY12 earnings. We believe that both the domestic formulations and the custom manufacturing business will bolster the performance of the company going forward. While the slowdown impacted the company’s custom manufacturing business in FY10, the scenario is expected to improve FY11 onwards by which time the inventory rationalization exercise undertaken by global pharma should come to an end. As far as the trend for the next three years is concerned, the company expects outsourcing to gain momentum led by the pressure on global pharma to cut down costs.

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. Minrad is also expected to bolster the overall performance of Piramal as the former’s margins and sales ramp up. The company is also taking initiatives to boost growth in the domestic market by in-licensing new products, promoting existing products and improving the productivity of its field force. The company has slightly underperformed our estimates and we shall have to downgrade our numbers accordingly. We shall soon update our research report on the company.

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