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Nicholas Piramal: Other income blues - Views on News from Equitymaster
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  • Jul 25, 2003

    Nicholas Piramal: Other income blues

    Domestic pharma major Nicholas Piramal (NPIL) has announced its 1QFY04 results. While the company has registered a respectable 19% growth in the topline, it has suffered a 19% drop in the bottomline. However, the performance for the current quarter cannot be compared with that of the corresponding previous quarter as the 1QFY04 results include the revenues generated from the erstwhile Global Bulk Drugs and Fine Chemicals Pvt. Ltd, which was merged with the company w.e.f. 1st January 03. If the same is excluded, then topline growth will drop to 11%.

    (Rs m) 1QFY03 1QFY04 Change
    Net Sales 2,262 2,691 19.0%
    Other Income 116 8 -93.1%
    Expenditure 1,814 2,162 19.2%
    Operating Profit (EBDIT) 448 529 18.1%
    Operating Profit Margin (%) 19.8% 19.7%
    Interest 73 23 -69.0%
    Depreciation 65 70 8.3%
    Profit before Tax 426 445 4.3%
    Extraordinary items (25) (82)
    Tax 90 111 22.9%
    Profit after Tax/(Loss) 312 252 -19.1%
    Net profit margin (%) 13.8% 9.4%
    No. of Shares 38.0 38.0
    Diluted Earnings per share* 32.8 26.5
    P/E Ratio 12.2
    (* annualised)

    Let us briefly understand the performance of the company on the basis of the different business segments in which it operates.

    Sales break-up
    (Rs m) 1QFY03 1QFY04 Change 1QFY04 as %
    of Total
    Formulations 1,752 1,905 8.7% 72.2%
    Generics 121 122 1.5% 4.6%
    API - 52 - 2.0%
    Vitamins & Fine Chemicals 116 165 42.8% 6.3%
    Diagnostics & Patient Care 179 174 -2.8% 6.6%
    Total (A) 2,168 2,418 11.6% 91.7%
    Formulations 33 55 66.8% 2.1%
    Generics 10 8 -14.6% 0.3%
    API - 131 - 5.0%
    Vitamins & Fine Chemicals 22 25 15.7% 0.9%
    Total (B) 64 219 240.7% 8.3%
    Grand Total ((A)+(B)) 2,232 2,638 18.2% 100.0%

    As can be seen from the above table, while the domestic business grew by 12%, it was the sharp growth in exports that helped NPIL record an 18% rise in revenues. This was primarily on account of Rs 131 m revenue contribution from the bulk drugs business acquired from Global Bulk Drugs and Fine Chemicals Pvt. Ltd. In the current quarter, NPIL has made one DMF (Drug Master File) and is in the process of filing a second one. On the domestic front, while there was stagnancy in the generics and diagnostics division, the company recorded healthy growth in formulations and vitamins and fine chemicals divisions.

    Domestic formulations break-up
    (Rs m) 1QFY03 1QFY04 Change
    Respiratory 399 323 -19.0%
    Anti-infectives 175 205 16.7%
    CNS 143 186 29.8%
    Nutritional 153 176 15.1%
    CVS 196 174 -10.9%
    Biotek 164 163 -0.9%
    NSAIDS 101 125 24.3%
    Others 421 552 31.2%
    Total 1752 1905 8.7%

    In the domestic formulations division, NPIL has outperformed the industry with a 9% growth against an industry average of 4%. In all, NPIL launched 5 new products in 1QFY04 contributing revenues of Rs 15 m. The products launched in the past two years contributed Rs 203 m to the revenues. The growth was fuelled by strong performance recorded in lifestyle segments like CNS, anti-diabetics and also in the anti-infectives segment. However, negative growth in the respiratory and CVS segment subdued the overall growth rate in the domestic formulations segment. In the domestic diagnostic and patient care division, a 40% drop in the contribution from instruments segment has resulted in a decline in the performance of this division.

    On the operations front, restructuring of high-cost loans with low cost ones has helped NPIL reduce its interest expenses. However, a sharp drop in other income and an increase in the extraordinary expenses have affected the net margins of the company. This is the key reason for the company reporting a bottomline dip. The drop in the other income was on account of a fall in the dividend income from subsidiaries and joint ventures as the company received the same in 4QFY03. The rise in extra-ordinary expenses is on account of NPIL adopting the policy of writing off the entire VRS and separation cost in the quarter in which it is incurred. Earlier, the same was written off over a period of five years.

    NPIL continues to increase its focus on research and development activities. The company has increased its R&D expenditure to Rs 54.7 m in the current quarter. However, at 2% of revenues, the R&D expenditure continues to be far below the average R&D expenditure as a percentage of sales incurred by other Indian companies.

    During 1QFY04, NPIL has incurred capex of Rs 126 m towards upgradation of the manufacturing facilities including bulk drugs facilities at Ennore and Hyderabad. Moreover, the management has approved the proposal to transfer the shares held by the company in Gujarat Glass Pvt Ltd to a separate entity. The shares of the new entity will be distributed to the existing shareholders of NPIL in the proportion as their holding in NPIL.

    NPIL is currently trading at Rs 324, implying a P/E of 12x its 1QFY04 earnings. Most of the growth achieved by the company in the recent past has been through the inorganic route. Going forward, rationalization of expenditure, reduction in the number of employees and debt restructuring is likely to improve the margins and consequently the performance of the company. However, since NPIL derives most of its revenues from the domestic markets, the introduction of product patent post 2005 could be a possible hindrance to the future growth prospects of the company.



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