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Nicholas Piramal: Mixed signals - Views on News from Equitymaster
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Nicholas Piramal: Mixed signals
Jul 25, 2007

Performance summary
  • Revenues grow by 16% YoY largely on the back of a 40% YoY growth in contract manufacturing sales (this quarter includes the revenues from the Morpeth facility, which was not there in the same period last year).

  • Revenues from the domestic formulations business grow by a mere 1% YoY due to lower sales of Codeine-based formulations.

  • EBDITA margins contract by 300 basis points (3%) owing to a rise in raw material and staff costs (as percentage of sales).

  • PAT falls by 19% YoY due to the 4% YoY decline in operating profits and substantially higher interest costs (up 145% YoY).

    Financial snapshot (Consolidated)
    (Rs m) 1QFY07 1QFY08 Change
    Net sales 5,226 6,081 16.4%
    Expenditure 4,348 5,240 20.5%
    Operating profit (EBDITA) 877 841 -4.2%
    EBDITA margin (%) 16.8% 13.8%  
    Other income 0 20  
    Interest (net) 46 111 144.8%
    Depreciation 228 249 9.3%
    Profit before tax 604 501 -17.1%
    Extraordinary item - (3)  
    Tax 65 63 -2.5%
    Minority interest 1 (0)  
    Profit after tax/(loss) 539 434 -19.4%
    Net profit margin (%) 10.3% 7.1%  
    No. of shares (m) 209.0 209.0  
    Diluted earnings per share (Rs)*   10.4  
    Price to earnings ratio (x)*   26.1  
    (* 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% 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 acquired the contract-manufacturing organisation (CMO), Avecia Pharmaceuticals, UK (in November 2005) to establish a footprint in the global custom manufacturing space.

    What has driven performance in 1QFY08?
    Revenues – Domestic disappoints: Nicholas Piramal’s revenues grew by 16% YoY during 1QFY08, largely driven by the 41% YoY growth in the contract manufacturing sales. It must be noted that this quarter included the revenues from Pfizer’s Morpeth facility, which the company had acquired in June 2006 and which was not reflected in the 1QFY07 numbers. Contract manufacturing revenues relating to contracts from Indian facilities reported revenues of Rs 235 m (up 40% YoY).

    Segmental snapshot
    (Rs m) 1QFY07 1QFY08 Change
    Branded formulations 2,894 2,907 0.5%
    CMO 1,868 2,627 40.7%
    Pathlabs 140 252 79.5%
    Others 324 295 -9.2%
    Total 5,226 6,081 16.4%
    Revenues from the domestic branded formulations business grew by a staid 1% YoY during the quarter due to lower sales from Codeine-based formulations. It must be noted that the respiratory segment accounts for around 20% of the domestic formulations sales and within this its key brand ‘Phensedyl’ requires codeine as a raw material. As a result, the respiratory segment witnessed a 44% YoY decline in revenues during the quarter. Codeine is a raw material controlled by the government and it is taking steps to increase the availability of the same. The top 10 brands of the company contributed around 26% to sales during the quarter, while new product launches (in the past 2 years) accounted for 5% of total sales. The company launched 9 new products during the quarter.

    Consolidated cost break-up
    (% of sales) 1QFY07 1QFY08
    Material cost 35.3% 36.0%
    Staff cost 15.3% 19.1%
    Other expenditure 26.8% 25.8%
    R&D expenses 5.8% 5.3%
    Operating margins shrink: Operating margins contracted by 300 basis points (3%) during the quarter, which was largely due to a substantial rise in staff costs (as percentage of sales). While raw material costs (as percentage of sales) also increased, the company was able to keep its R&D and other expenditure under control. Nevertheless, the shrinkage in EBDITA margins led to the 4% YoY decline in operating profits.

    Bottomline picture: Nicholas’ bottomline fell by 19% YoY during 1QFY08 owing to the decline in operating profits and substantially higher interest costs. The rise in interest costs could be attributed to the fact that the entire Morpeth and Avecia acquisition was funded through debt and the rising interest rates.

    Quarterly trend
    (%) 4QFY06 1QFY07 2QFY07 3QFY07 4QFY07 1QFY08
    Net sales growth 19.5% 31.2% 74.4% 60.1% 51.7% 16.4%
    Operating profit margin 13.2% 16.8% 15.1% 14.9% 13.2% 13.8%
    Net profit growth -26.5% 7.3% 30.1% 30.1% 262.2% -19.4%

    What to expect?
    At the current price of Rs 272, the stock is trading at a multiple of 20.8 times our estimated FY09 earnings. We believe that the global custom manufacturing business will drive the performance of the company going forward. While the Avecia acquisition will be the critical growth driver, the company’s acquisition of Pfizer’s Morpeth facility in the UK will also provide a considerable fillip to the custom manufacturing business in the future. Having said that, the company is likely to face pressure in the medium term given the shortage of codeine, which is likely to hamper the overall domestic formulations sales. Overall, we believe that the risk-reward ratio is largely skewed towards the former and hence we advise investors to exercise caution while investing in the stock.

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