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Nicholas Piramal: A review

Jul 17, 2003

Nicholas Piramal India Ltd (NPIL) is one of the leading domestic pharma companies with strong focus on the domestic market. The company has over the years adopted the inorganic growth strategy. In line with this, it has recently acquired the pharmaceutical business of ICI India and Global Bulk Drugs and Fine Chemical. The company has also gradually improved its product portfolio by increasing the share of lifestyle drugs. Moreover, NPIL has also started focusing on R&D. However, will all these initiatives culminate into a better future for the company? Let’s find out!

Business mix
  FY02 FY03
Formulations 78% 80%
Vitamins & fine chemicals 7% 7%
Diagnostic & patient care 7% 6%
Generics 8% 5%
others 1% 2%

Let us first understand the NPIL’s business structure. NPIL has a different business model as compared to its domestic peers. While most of the domestic pharma companies have adopted the strategy of exploiting the generic market in the US and derive a major portion of the revenues from the US market, in case of NPIL, exports contribute only 3.5% of the total revenues. Moreover, generics itself forms only 0.3% of total revenues. Formulations and bulk drugs contribute a major portion of the exports. Going forward, the acquisition of Global Bulk Drugs and Fine Chemical could help the company in recording an increase in exports.

On the domestic front, the formulations segment saw an increase in contribution to the revenues. This was primarily on account of the acquisition of the pharmaceutical division of ICI India. Let us now briefly evaluate the company’s domestic formulation business.

Domestic formulations break-up
Therapeutic
segment
% of domestic
formulations
Growth over
FY02
Market growth
rate
Respiratory 22.4% 11.1% 5.6%
CVS 10.4% 45.9% 12.4%
Anti-infectives 10.2% 0.6% -0.2%
CNS 9.4% 16.8% 13.4%
Biotek 8.0% 27.0% NA
Nutritional 7.7% 3.6% 4.4%
Gastro-intestinal 4.8% 5.2% 7.5%
Anti-diabetic 3.9% 27.8% 20.3%
Others 23.2% NA NA
(Source: Company annual report)

Commoditisation of the anti-infectives market has affected the NPIL’s growth rate in this segment. However, recognizing this, the company started increasing its focus on high-value lifestyle segments like CVS, CNS and anti-diabetics segment. Consequently, the contribution of these segments taken together has increased to almost 23% of revenues. Moreover, new product launches have further helped the company in improving its market share. NPIL has made 35 new product launches in the past two years. Resultantly, NPIL has been able to record higher growth rates in most of the segments as compared to the average industry growth rate.

In the vitamins and fine chemicals division, although NPIL has managed to record a strong growth on the back of cost reduction initiatives and launch of value added products, dumping of low-cost imports and drop in the demand from the user industry is a cause of concern for the company going forward. To counter this drop in demand, this division has entered into new business areas like perfumery and speciality chemicals. The success of these new business initiatives remains to be seen.

In the diagnostic and patient care division, NPIL registered strong volumes growth. However, price reduction has resulted in the company recording a marginal growth in value terms. Among the major products in this segment, meter sales grew 38% in FY03, with the company introducing new range of products in this segment. The contribution of generics to NPIL‘s total revenues has seen a gradual decline primarily on account of negative growth recorded by the company in the domestic generics market.

NPIL’s R&D initiative is at a very nascent stage. The company is concentrating on developing NCEs in the diabetes, oncology and infectives segments. NPIL is currently focusing on obtaining critical mass in areas like pharmacokinetics and early metabolism studies which are crucial for predicting the success of NCEs in clinical development. Moreover, NPIL has recently filed a US patent application for its oncology molecules. However, development of NCE being a high-risk initiative, the performance of the company could be severely affected by its failure.

Financial overview
  FY01 FY02 FY03
Revenues (Rs m) 5,064 8,662 9,642
Growth in revenues - 71.1% 11.3%
PAT (Rs m) 665 482 1,181
Growth in PAT - -27.5% 145.0%
OPM (%) 16.7 14.8 18.5
NPM (%) 13.1 5.6 12.2

On the financial front, on account of NPIL’s inorganic growth strategy, the financials of the company are not comparable. Focus on lifestyle segments has helped the company to record higher than industry growth rates in the top line. NPIL has taken steps to bring down the interest costs like restructuring of high-cost loans with low cost ones, and this is reflected in the performance of the company in the form of an improvement in the net margins of the company.

Comparative Valuation
  Nicholas Piramal Cipla Wockhardt Sun Pharma
Current Price (Rs) 329 827 375 363.7
EPS (Rs) 31.1 41.3 28.7 24.7
P/E (x) 10.6 20.0 13.1 14.7
OPM (%) 18.5 20.1 18.3 30.0
M Cap/Sales (x) 1.3 3.2 1.8 3.9
*All valuations pertain latest declared annual results

NPIL is currently trading at a P/E of 11x its FY03 earnings. The company has seen strong growth in revenues in recent times. However, a major portion of this growth has come from the acquisition route. The new business segments in which the company is entering, nascent stage of R&D initiatives and the risk involved therein seem to be the prime reasons for the company’s stock receiving a lower valuation as compared to its peers. This coupled with the lack of management direction and introduction of product patent post 2005 could affect the performance of the company going forward.

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