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Nicholas Piramal: Acquisition impact! - Views on News from Equitymaster

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Nicholas Piramal: Acquisition impact!

Jul 20, 2006

Performance summary
Nicholas Piramal has announced results for the first quarter ended June 2006. For the quarter, 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 (erstwhile Avecia). Operating margins have, however, contracted on the back of a rise in staff costs and R&D expenditure. All these factors put together, along with a rise in depreciation charges and reduction in other income, have resulted in the bottomline growing at a much slower pace than the topline.

Financial snapshot (Consolidated)
(Rs m) 1QFY06 1QFY07 Change
Net sales 3,983 5,226 31.2%
Expenditure 3,228 4,348 34.7%
Operating profit (EBDITA) 755 877 16.2%
EBDITA margin (%) 18.9% 16.8%  
Other income 18 0 -99.5%
Interest (net) 48 46 -5.6%
Depreciation 151 228 51.4%
Profit before tax 574 604 5.2%
Extraordinary item (5) -  
Tax 67 65 -2.9%
Minority interest 1 1 0.0%
Profit after tax/(loss) 502 539 7.3%
Net profit margin (%) 12.6% 10.3%  
No. of shares (m) 190.0 209.0  
Diluted earnings per share (Rs)*   8.1  
Price to earnings ratio (x)*   24.9  
(* 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% (FY06) 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 recently acquired the contract-manufacturing organisation (CMO), Avecia Pharmaceuticals, UK to establish a footprint in the global custom manufacturing space.

What has driven performance in 1QFY07?
International business drives topline: Topline clocked an impressive 31% YoY growth during the quarter, driven by superlative performance of its international business (up 213% YoY). The international business primarily includes revenues from NPIL Pharma (UK) Ltd (the erstwhile Avecia). Revenues from the international business now form 34% of the company’s sales.

As far as the domestic market is concerned, the formulations segment grew by 1% YoY during the quarter. The growth has been slow on account of the high base effect (1QFY06 saw a rise in sales due to re-stocking by retailers after the VAT impact in 4QFY05). If one were to exclude the impact of spillover sales, then the formulations business on a like-to-like basis has registered a 17% YoY growth. ‘Phensedyl’ sales have recovered after the controversy surrounding it in FY06. The company launched 8 new products during the quarter and the lifestyle portfolio constituted 34% of the domestic formulations business.

Margins under pressure: Operating margins contracted by 210 basis points during the quarter, largely due to the rise in staff costs and R&D expenditure. It must be noted that the staff costs for the quarter included salaries paid to Avecia’s personnel, accounting for the increase. Similarly, the R&D expenditure of Avecia was clubbed with that of Nicholas Piramal during the quarter leading to the rise in R&D expenditure.

Consolidated cost break-up
(% of sales) 1QFY06 1QFY07
Material cost 42.3% 35.3%
Staff cost 10.0% 15.3%
Other expenditure 25.4% 26.8%
R&D expenses 3.3% 5.8%

Bottomline picture: Bottomline during the quarter grew by 7% YoY and this growth was slower than that of the topline. This was due to the dip in operating margins, a significant rise in depreciation charges and a reduction in other income. The acquisition of Avecia led to Nicholas Piramal acquiring facilities in the UK and Canada and the rise in depreciation charges can be attributed to the impact of the same.

Quarterly trend
(%) 1QFY06 2QFY06 3QFY06 4QFY06 1QFY07
Net sales growth 8.8% -2.3% 8.9% 19.5% 31.2%
Operating profit margin 18.9% 17.6% 12.4% 13.2% 16.8%
Net profit growth 12.2% 0.9% -69.9% -26.5% 7.3%

What to expect?
At the current price of Rs 202, the stock is trading at a price to earnings multiple of 24.9 times its trailing twelve months earnings. Going forward, we believe that custom manufacturing will be the key growth driver for the company. While the Advanced Medical Optics (AMO) and the Allergan contracts have already started generating revenues, revenues from other 4 contracts will start filtering in from FY07 onwards. Besides contribution from Avecia, 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. We shall soon update our research report on the company.

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