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Piramal Healthcare: Led by the domestic business - Views on News from Equitymaster
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Piramal Healthcare: Led by the domestic business
Jul 22, 2009

Performance summary
  • Revenues grow by 16% YoY in 1QFY10 driven by the domestic branded formulations, pathlabs and global critical care businesses.
  • Operating margins reduce by 1.1% due to the increase in raw material costs and other expenditure (as percentage of sales).
  • While net profits register a growth of 25% YoY, the same is largely due to the extraordinary expenses and forex loss reported last quarter. Thus, excluding this impact, net profits decline by 15% YoY.


Financial snapshot (Consolidated)
(Rs m) 1QFY09 1QFY10 Change
Net sales 7,083 8,215 16.0%
Expenditure 5,657 6,658 17.7%
Operating profit (EBDITA) 1,426 1,557 9.2%
EBDITA margin (%) 20.1% 19.0%  
Other income 1 0  
Interest (net) 120 254 111.1%
Depreciation 270 385 42.8%
Profit before tax 1,037 919 -11.4%
Extraordinary item (41) -  
Forex loss/(gain) 231 (45)  
Tax 87 113 30.0%
Minority interest (2) (0)  
Profit after tax/(loss) 681 851 25.0%
Net profit margin (%) 9.6% 10.4%  
No. of shares (m) 209.0 209.0  
Diluted earnings per share (Rs)   15.9  
Price to earnings ratio (x)   20.4  

What has driven performance in 1QFY10?
  • Piramal Healthcare’s revenues grew by 16% YoY during 1QFY10 and were largely driven by its domestic branded formulations, pathlabs and global critical care businesses. The strong 26% YoY growth in branded formulations was aided by the respiratory, gastro-intestinal, anti-diabetic, dermatology and anti-infective therapy segments. 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 27% to sales during the quarter, while new product launches (in the past 2 years) accounted for 8.1% of 1QFY10 sales. Lifestyle products accounted for 34% of total sales. The company launched 9 new products during the quarter.

  • Revenues from the custom manufacturing business declined by 16% YoY during the quarter. Out of this, sales from custom manufacturing outside India fell by 23% YoY, which could be attributed to the inventory rationalization exercise undertaken by global pharma in wake of the global economic slowdown and the shutdown of the Huddersfield facility in the UK. Custom manufacturing revenues relating to contracts from Indian facilities also reported a muted growth of 2% YoY during the quarter. Having said that, the company expects the performance of this business to scale up in the latter half of the year as a result of which revenues for the full year from this business will be flat.

  • The pathlabs business grew by 19.7% YoY. While the growth last year was driven by acquisitions, the growth during 1QFY10 was fully organic as there were no acquisitions made during the quarter. 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 quarter largely due to the revenues from Minrad, which has now been fully integrated with the company.

    Segmental snapshot
    (Rs m) 1QFY09 1QFY10 Change
    Branded formulations 3,500 4,397 25.6%
    CMG 2,271 1,898 -16.4%
    Pathlabs 405 485 19.7%
    Global critical care 161 729 352.7%
    Others 746 707 -5.3%
    Total 7,083 8,215 16.0%

  • Operating margins fell by 1.1% during the quarter to 19% largely due to an increase in raw material costs and other expenditure (as percentage of sales). Raw material costs were higher on account of a two reasons. One is that Minrad’s costs are higher than the average raw material costs of Piramal. Second was the impact of rupee depreciation during this quarter as the company imports some of its raw materials. Other expenses were higher on account of increase in promotion expenses especially in the domestic business.

  • Piramal Healthcare’s bottomline registered a growth of 25% YoY during the quarter. However, the company had incurred extraordinary expenses in 1QFY09 which were not present this quarter. Futher, in 1QFY09 the company had reported a forex loss of Rs 231 m as against a gain of Rs 45 m this quarter. Thus, if you exclude the impact of both these items, net profits declined by 15% YoY due to an increase in interest costs and depreciation charges. Interest costs surged by 111% YoY due to additional loans taken to fund various acquisitions (the Cefi and Anafortan brands, Khandelwal Labs and Minrad).

What to expect?
At the current price of Rs 325, the stock is trading at a multiple of 9.5 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 with revenues from the Indian assets and Morpeth facility being the key growth drivers. While the current slowdown is impacting the company’s custom manufacturing business, the scenario is expected to improve going forward as the pressure on innovators to reduce costs increases. As far as the trend for the next three years is concerned, the company expects outsourcing to gain momentum which will bolster its custom manufacturing business. The company has closed down its manufacturing plant at Huddersfield, UK and while sales as a whole from the custom manufacturing business will be flat in FY10, margins will be enhanced by 6-8%.

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. 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. Overall, we maintain our positive view on the stock.

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