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Piramal Healthcare: India drives growth

Jul 24, 2008

Performance summary
  • Revenues grow by 17% YoY in 1QFY09 led by the domestic branded formulations and pathlabs businesses.

  • Operating margins expand substantially by 3.1% driven by considerable reduction in R&D and staff costs (as percentage of sales).

  • Net profits grow by 57% YoY aided by strong performance at the operating level and lower interest costs and depreciation charges.

  • The Government gives Piramal Healthcare the license to manufacture codeine, an important raw material required for the latter’s leading cough syrup ‘Phensedyl’.

Financial snapshot (Consolidated)
(Rs m) 1QFY08 1QFY09 Change
Net sales 6,081 7,083 16.5%
Expenditure 5,240 5,888 12.4%
Operating profit (EBDITA) 840 1,195 42.2%
EBDITA margin (%) 13.8% 16.9%  
Other income 20 1 -94.6%
Interest (net) 111 120 8.0%
Depreciation 249 270 8.3%
Profit before tax 500 807 61.2%
Extraordinary item (3) (41)  
Tax 63 87 37.2%
Minority interest (0) (2)  
Profit after tax/(loss) 434 681 56.9%
Net profit margin (%) 7.1% 9.6%  
No. of shares (m) 209.0 209.0  
Diluted earnings per share (Rs)   17.1  
Price to earnings ratio (x)   17.3  

What has driven performance in 1QFY09?
  • Piramal Healthcare’s revenues grew by 17% YoY during 1QFY09 and was driven by the branded domestic formulations and pathlabs businesses. The strong 20% YoY growth in branded formulations was aided by the anti-infectives, respiratory, cardiology and dermatology segments. Growth was also on a lower base as sales of the company’s key product ‘Phensedyl’ were impacted in 1QFY08 due to codeine shortage. The top 10 brands of the company contributed around 23% to sales during 1QFY09, while new product launches (in the past 2 years) accounted for 7.4% of total sales in 1QFY09. Lifestyle products accounted for 37% of total sales. The company launched 16 new products during the quarter. Piramal had also made some brand acquisitions during the quarter, which accounted for around Rs 50 m of the total sales.

  • The government giving Piramal Healthcare the license to manufacture codeine was an important development for the company during the quarter. Piramal’s top product in the domestic market ‘Phensedyl’ requires codeine and the sales of this product were adversely impacted last year due to a shortage of the raw material. At present, the company is still procuring codeine from the government, which in turn imports the same and the setting up of a manufacturing facility to make codeine is still in the planning stage. Having said, the management has cited that they see visibility in terms of procuring codeine for the next six months atleast.

  • Revenues from the custom manufacturing business registered a 14% YoY growth and were largely led by growth in its Indian assets. Custom manufacturing revenues relating to contracts from Indian facilities witnessed significant traction reporting a superlative 115% YoY growth during the quarter. The custom manufacturing business outside India witnessed a decline of 2% YoY. The pathlabs business also clocked an impressive 61% YoY growth, which was due to a combination of organic as well as inorganic growth. Going forward, the company expects the growth from the pathlabs business to be largely acquisition driven.

    Segmental snapshot

    (Rs m) 1QFY08 1QFY09 Change
    Branded formulations 2,624 3,092 17.8%
    CMG 3,426 3,951 15.3%
    Pathlabs 212 316 49.2%
    Others 191 320 67.6%
    Total 6,452 7,679 19.0%

  • Operating margins improved by a significant 3.1% during the quarter. This was led by a substantial reduction in R&D and staff costs (as percentage of sales). It must be noted that the company has demerged its NCE R&D business into a separate company, which resulted in the fall in R&D expenses and a consequent expansion in margins.

  • Piramal Healthcare’s bottomline (up 57%) grew at a faster clip than the operating profits (up 42% YoY) owing to lower interest costs and depreciation charges. Having said that, while the company’s debt to equity ratio rose to 0.9 during the quarter, the same is expected to fall to 0.75 by the end of this fiscal.

What to expect?
At the current price of Rs 295, the stock is trading at a price to earnings multiple of 9.2 times our estimated FY11 earnings. We believe that the global 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. The company is also taking initiatives to boost growth in the domestic market by in-licensing new products and improving the productivity of its field force. After factoring in the FY11 numbers, we maintain our positive view on the stock.

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