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Nicholas Piramal: Global strategy on course - Views on News from Equitymaster

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Nicholas Piramal: Global strategy on course
Oct 18, 2006

Performance summary
Nicholas Piramal has announced robust results for the second quarter and half year ended September 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 (Avecia and Pfizer’s Morpeth facility). While operating margins have shrunk due to higher staff costs, the bottomline growth has been slower as compared to operating profit growth on the back of rise in depreciation charges and reduction in other income. We have also included the excerpts of the conference call in our analysis.

Financial snapshot (Consolidated)
(Rs m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Net sales 3,651 6,369 74.4% 7,634 11,594 51.9%
Expenditure 3,007 5,409 79.9% 6,235 9,757 56.5%
Operating profit (EBDITA) 644 960 49.1% 1,399 1,837 31.4%
EBDITA margin (%) 17.6% 15.1%   18.3% 15.8%  
Other income 183 2 -99.1% 201 2 -99.1%
Interest (net) 58 76 31.0% 107 122 14.5%
Depreciation 154 244 58.3% 304 471 54.9%
Profit before tax 614 642 4.5% 1,189 1,246 4.8%
Extraordinary item (1) 178   (6) 178  
Tax 121 181 49.9% 187 246 31.1%
Minority interest 1 -   2 1 -61.9%
Profit after tax/(loss) 492 639 30.1% 994 1,178 18.5%
Net profit margin (%) 13.5% 10.0%   13.0% 10.2%  
No. of shares (m) 190.0 209.0   190.0 209.0  
Diluted earnings per share (Rs)*         8.6  
Price to earnings ratio (x)*         28.8  
(* 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 2QFY07?
Acquisitions drive growth: Nicholas Piramal’s revenues grew by an impressive 79% YoY during the quarter largely driven by revenue contribution from its international businesses, namely Avecia (2QFY06 does not include Avecia and therefore to that extent the numbers are not comparable). The domestic branded formulations business grew by 22% YoY during the quarter beating the industry growth rate of 15%. This was largely due to the sales of its largest brand ‘Phensedyl’ being back on track after the controversy that this brand faced in 2QFY06. Similarly, its anti-diabetic, gastro-intestinal and dermatology portfolios also logged in healthy growth rates during the quarter. The top 10 to 15 brands of the company contributed around 30% to sales. Also, revenues from the India contract manufacturing operations contributed around 2% to total sales in 2QFY07 and 3% to sales in 1HFY07.

Segmental snapshot
(Rs m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
India sales
Branded formulations 2,625 3,203 22.0% 5,541 6,146 10.9%
CMO 198 225 13.8% 408 393 -3.9%
Pathlabs 110 176 60.9% 215 317 47.4%
Others 185 313 69.2% 371 522 40.6%
Total 3,117 3,917 25.7% 6,536 7,377 12.9%
Export sales 534 2,630 392.8% 1,098 4,395 300.3%
Total sales 3,651 6,547 79.3% 7,634 11,772 54.2%

The international business was driven by the acquisitions that the company had made, namely Avecia and Pfizer’s Morpeth facility. Both these put together contributed 25% to total revenues in 2QFY07. The main revenue drivers for Avecia were the significant scale-up of the existing contracts and initial pilot projects that the company undertook for new customers. Exports now contribute 40% to total revenues.

Margins under pressure: Operating margins contracted by 250 basis points, which largely due to a substantial increase in staff costs (on the back of higher salaries paid to the personnel at Avecia and Morpeth). Besides this, the company has created a new subsidiary called Piramal Healthcare for introducing products that are not currently present in Nicholas’ portfolio. The recruitment of field force for the same has also led to the increase in staff costs. That said, Avecia and Morpeth together reported a combined profit of Rs 16 m at the EBDITA level.

Consolidated cost break-up
(% of sales) 2QFY06 2QFY07 1HFY06 1HFY07
Material cost 38.8% 37.4% 40.6% 36.5%
Staff cost 11.7% 18.2% 10.8% 16.9%
Other expenditure 27.6% 24.8% 26.4% 25.7%
R&D expenses 4.2% 4.6% 3.8% 5.1%

Bottomline picture: Bottomline growth at 30% YoY during the quarter was slower than the operating profit growth. This was due to reduction in other income and a significant rise in depreciation charges. 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. Extraordinary income includes the consideration of Rs 178 m that Nicholas Piramal received for buying out the remaining stake of the joint venture with Boots Healthcare. With the Boots Healthcare consumer business having been acquired by Reckitt Benckiser globally, Nicholas Piramal has taken the step of promoting the OTC business on its own in India.

Quarterly trend
(%) 1QFY06 2QFY06 3QFY06 4QFY06 1QFY07 2QFY07
Net sales growth 8.8% -2.3% 8.9% 19.5% 31.2% 74.4%
Operating profit margin 18.9% 17.6% 12.4% 13.2% 16.8% 15.1%
Net profit growth 12.2% 0.9% -69.9% -26.5% 7.3% 30.1%

What to expect?
At the current price of Rs 248, the stock is trading at a price to earnings multiple of 18.9 times our estimated FY09 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. Considering all these factors, while we remain positive on the company’s long-term growth prospects, investors need to be cautious with respect to valuations.

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