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Piramal Healthcare: Forex hits net - Views on News from Equitymaster

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Piramal Healthcare: Forex hits net
Oct 22, 2008

Performance summary
  • Revenues grow by 17% YoY in 2QFY09 led by the domestic branded formulations and pathlabs businesses.
  • Operating margins expand substantially by 3.5% driven by considerable reduction in R&D and staff costs (as percentage of sales).
  • Net profits decline by 13% YoY hampered by forex losses (forex gain in 2QFY08). If one were to exclude the impact of the same during both the periods, then the bottomline grows by 41% YoY.


Financial snapshot (Consolidated)
(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 7,611 8,893 16.8% 13,644 15,976 17.1%
Expenditure 6,317 7,066 11.9% 11,557 12,724 10.1%
Operating profit (EBDITA) 1,294 1,827 41.1% 2,087 3,252 55.8%
EBDITA margin (%) 17.0% 20.5%   15.3% 20.4%  
Other income - 1   20 2 -92.1%
Interest (net) 111 170 53.4% 222 291 30.7%
Depreciation 263 288 9.5% 512 558 8.9%
Profit before tax 920 1,369 48.7% 1,373 2,406 75.2%
Extraordinary item (27) (96)   (30) (136)  
Forex loss/(gain) (35) 408   (82) 639  
Tax 80 114 43.0% 143 201 40.5%
Minority interest 0 17   0 15  
Profit after tax/(loss) 848 734 -13.4% 1,282 1,415 10.4%
Net profit margin (%) 11.1% 8.3%   9.4% 8.9%  
No. of shares (m)       209.0 209.0  
Diluted earnings per share (Rs)         16.6  
Price to earnings ratio (x)         13.3  

What has driven performance in 2QFY09?
  • Piramal Healthcare’s revenues grew by 17% YoY during 2QFY09 and were driven by the branded domestic formulations and pathlabs businesses. The strong 27% YoY growth in branded formulations was aided by the CNS, gastro-intestinal, cardiovascular and opthalmology therapy segments. The top 10 brands of the company contributed around 23% to sales during 2QFY09, while new product launches (in the past 2 years) accounted for 7.6% of total sales in 2QFY09. Lifestyle products accounted for 28% of total sales. The company launched 10 new products during the quarter.

  • Revenues from the custom manufacturing business registered a 9% 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 an impressive 32% YoY growth during the quarter. Revenues from the custom manufacturing business outside India remained flat. The pathlabs business also clocked an impressive 46% 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) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
    Branded formulations 3,543 4,491 26.8% 6,450 7,991 23.9%
    CMG 2,538 2,753 8.5% 4,527 5,024 11.0%
    Pathlabs 312 454 45.5% 564 859 52.3%
    Others 1,219 1,196 -1.9% 2,103 2,103 0.0%
    Total 7,611 8,893 16.8% 13,644 15,976 17.1%

  • Operating margins improved by a significant 3.5% during the quarter. This was led by a substantial reduction in R&D, raw material 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 declined by 13% YoY during the quarter on account of forex losses to the tune of Rs 408 m (gain of Rs 35 m in 2QFY08). If we exclude the impact of the same during both the periods, then the growth in the bottomline stood at 41% YoY in tandem with the growth in operating profits. This is despite interest costs surging by 53% YoY during the quarter. At the end of September 2008, Piramal Healthcare’s debt equity ratio stood at 0.9, which it expects to come down to 0.7 by the end of the year.

What to expect?
At the current price of Rs 220, the stock is trading at a price to earnings multiple of 6.9 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. As far as Avecia is concerned, the focus is on shifting a large part of the business to India.

As regards Morpeth, the company is aiming to get more business besides the one from Pfizer. 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. While the growth in topline has been a tad higher than what we have estimated, the operating margins have been in line with our estimates. However, we will have to downgrade our earnings estimates for the full year due to the forex losses incurred by the company. Overall, we maintain our positive view on the stock.

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