Nicholas Piramal is one of the leading domestic pharma companies with strong focus on the domestic market. The company has shown a consistent growth performance in the last few years despite the slowdown in the domestic pharma industry. One thing that makes this growth commendable is that unlike other domestic pharma companies, Nicholas Piramal has huge exposure to the extent of 90% of the company's net sales, in the domestic pharma industry.
Looking at the historical performance, the company has been involved in several leveraged buyouts. FY02 and FY03 were significant years in terms of topline growth, when the company acquired the likes of Rhone-Poulenc India, Boots –Piramal and Allergan India. The company has over the years adopted an inorganic growth strategy. To put things in perspective, at a time, it has as many as 13 subsidiaries. But it has taken a cue from this and has hived -off most of its unrelated businesses (only two subsidiaries now). The company has managed to maintain growth in last two years despite the slowdown in the domestic pharma industry.
Looking at its operations in the domestic markets, the company has a strong presence in the cardiovascular and respiratory segments (30% of revenues). It must be noted that cardiovascular segment has been the fastest growing in the domestic pharma market (16.9% in 2003). The company's high exposure towards the life style segment makes it an attractive growth story. Also, it has a very low DPCO coverage (12% of total revenues) which gives it the pricing power.
At the same time, Nicholas Piramal, with a debt to equity ratio of 1:1, is highly leveraged on a relative basis. This strategy can do wonders in good times, but can be disastrous in bad times. But we expect the leverage to decline in the future. The management has also given indication of concentrated inorganic growth strategy in the future.
The company is also been into R&D activity and has acquired R&D facilities of Hoechst Marrion Roussel Ltd's research center two years back. This facility gives Nicholas an exposure to the established facilities in the new drug research program. It is in the process of establishing a new R&D facility, which will start operations in FY05. The main focus of the company will be in the field of cardiovascular, diabetology, oncology and anti-infective segment.
On the export front, the company has adopted a slightly different business model wherein it is likely to focus on contract manufacturing and contract research. It has established a new facility for contract manufacturing and the first shipment is expected in the later half of FY05 to AMO Corporation, US.
At Rs 780, the stock is trading at a P/E of 15x FY05E earnings. Considering its strong presence in the domestic markets, growth prospects look promising. But on the flip side, the high leverage and the lack of focus on the business in past years increases the risk profile of the stock significantly.
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