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Piramal: Margins play spoilsport
Oct 23, 2009

Performance summary
  • Revenues grow by 12% YoY in 2QFY10 largely driven by the domestic branded formulations and global critical care businesses.
  • Operating margins reduce by 2.8% due to an increase in raw material and staff costs (as percentage of sales).
  • While net profits register a growth of 45% YoY, the same is largely due to higher extraordinary expenses and forex loss reported last quarter. Thus, excluding this impact, net profits decline by 15% YoY during the quarter.


Financial snapshot (Consolidated)
Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 8,893 10,000 12.4% 15,976 18,215 14.0%
Expenditure 7,066 8,226 16.4% 12,724 14,884 17.0%
Operating profit (EBDITA) 1,827 1,774 -2.9% 3,252 3,331 2.4%
EBDITA margin (%) 20.5% 17.7%   20.4% 18.3%  
Other income 1 -     2 0  
Interest (net) 170 254 49.0% 291 508 74.7%
Depreciation 288 375 30.2% 558 760 36.3%
Profit before tax 1,369 1,145 -16.3% 2,406 2,064 -14.2%
Extraordinary item (96) (4)   (136) (4)  
Forex loss/(gain) 408 (15)   639 (60)  
Tax 114 94 -17.6% 201 207 2.9%
Minority interest 17 (0)   15 (1)  
Profit after tax/(loss) 734 1,063 44.8% 1,415 1,914 35.3%
Net profit margin (%) 8.3% 10.6%   8.9% 10.5%  
No. of shares (m)       209.0 209.0  
Diluted earnings per share (Rs)         17.5  
Price to earnings ratio (x)         20.8  

What has driven performance in 2QFY10?
  • Piramal Healthcare’s revenues grew by 12% YoY during 2QFY10 and were largely driven by its domestic branded formulations, pathlabs and global critical care businesses. The strong 16% YoY growth in branded formulations was aided by the anti-infective, respiratory, anti-diabetic, dermatology and OTC segments. Besides promoting brands heavily, the company also strengthened its presence in the tier 2 cities thereby contributing to the growth across therapeutic areas. The top 10 brands of the company contributed around 28% to sales during 1HFY10, while new product launches (in the past 2 years) accounted for 7.4% of 1HFY10 sales. Lifestyle products accounted for 31% of 1HFY10 sales. The company launched 18 new products during the half year period.

  • Revenues from the custom manufacturing business declined by 2% YoY during the quarter. Out of this, sales from custom manufacturing outside India fell by 18% YoY, which was largely due to the inventory rationalization exercise undertaken by global pharma in wake of the global economic slowdown and the shutdown of the Huddersfield facility in the UK. It must be noted, however, that while inventories are still being cleaned up by global pharma, the scenario during this quarter was better compared to the previous few quarters. Nevertheless the company expects revenues from this business to be flat during the year and growth to pick up next year onwards. Custom manufacturing revenues relating to contracts from Indian facilities reported a robust growth of 31% YoY during the quarter.

  • The pathlabs business grew by 21% YoY, which was largely organic growth as there were no acquisitions made during the quarter. After the acquisition of Minrad in the Inhalation Anaesthetics (IA) segment, Piramal Healthcare formed a new division called ‘Global Critical Care’. This business witnessed a stupendous growth during the quarter largely due to the revenues from Minrad, which has now been fully integrated with the company.

    Segmental snapshot
    (Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
    Branded formulations 4,491 5,218 16.2% 7,991 9,615 20.3%
    CMG 2,753 2,701 -1.9% 5,024 4,600 -8.4%
    Pathlabs 454 548 20.7% 859 1,032 20.2%
    Global critical care 296 885 199.2% 457 1,614 253.3%
    Others 900 647 -28.1% 1,646 1,354 -17.7%
    Total 8,893 10,000 12.5% 15,976 18,215 14.0%

  • Operating margins fell by 2.8% during the quarter to 19% largely due to an increase in raw material and staff costs (as percentage of sales). Raw material costs rose on account of the inclusion of Minrad’s costs, which are higher than the average raw material costs of Piramal. Staff costs were also higher due to the inclusion of Minrad. It must be noted that while Minrad was loss making at the operating level when Piramal had acquired it last year, the latter has managed to turn it around and during this quarter, Minrad was able to record margins of around 6%.

  • While Piramal Healthcare’s bottomline came in at a stronger 45% YoY during the quarter, the same was largely due to lower extraordinary expenses and absence of forex losses. Infact, in 2QFY09 the company had reported a forex loss of Rs 408 m as against a gain of Rs 15 m this quarter. Thus, if you exclude the impact of both these items, net profits declined by 15% YoY due to an increase in interest costs and depreciation charges. Interest costs were higher due to additional loans taken to fund the Minrad acquisition.

What to expect?
At the current price of Rs 364, the stock is trading at a price to earnings multiple of 10.5 times our estimated FY12 earnings. We believe that both the domestic formulations and the 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. While the current slowdown is impacting the company’s custom manufacturing business, the scenario is expected to improve next year onwards by which time the inventory rationalization exercise undertaken by global pharma should come to an end. As far as the trend for the next three years is concerned, the company expects outsourcing to gain momentum led by the pressure on global pharma to cut down costs. Having said that, revenues from this business will be flat during this year.

As regards Morpeth, the company is aiming to get more business besides the one from Pfizer and has successfully negotiated for the renewal of contracts. Minrad is also expected to bolster the overall performance of Piramal as the former’s margins and sales ramp up. The company is also taking initiatives to boost growth in the domestic market by in-licensing new products, promoting existing products and improving the productivity of its field force. Overall, we maintain our positive view on the stock.

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