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Nicholas: Are valuations attractive?

Nov 26, 2001

Nicholas strategy of growing through the inorganic route seems to be paying off well for the company. The recent Rs 2.4 bn acquisition of Rhone Poulenc is expected to catapult its turnover into top 5 pharma companies in India. Post merger with Rhone Poulenc, Nicholas growth numbers were quite stupendous.

Exciting Numbers- The merger effect
Rs. m % Growth
1HFY02
Sales 74.9%
Operating Profits 53.2%
PBT (before extra-ordinary items 77.6%

The acquisition cost of Rs 2.4 bn for Rhone Poulenc was funded through a mix of debt (around Rs 2 bn), internal accruals and cash balance in the books of Rhone Poulenc. The beauty of the deal is a shorter pay back period expected for Nicholas Piramal. The company is expected to receive a one-time cash flow of Rs 1.2 bn from reduction in working capital and sale of properties while annual benefits are expected to be in excess of Rs 0.3 bn annually.

Rhone Poulenc Investment- A fast payback
Particulars Rs m.
Acquisition Cost plus VRS & restructuring cost 2,800
One Time Cash inflow for Nicholas  
Sale of Property at Worli 850
Reduction in Working Capital 300
Initial Liquid Assets 400
Property at Bhandup (value currently not ascertained) NA
(Source: company)

Immediate cash flows from sale of property and effective utilisation of internal accruals is expected to ensure considerable savings in interest costs for Nicholas Piramal in the next year. Apart from that annual cost savings due to synergies in operations are expected to be in the range of Rs 300-400 m. All the functions except sales and marketing operations of the company have been merged with Nicholas to derive cost benefits. Effectively, all this is expected to ensure robust one time growth in EPS for FY03.

The merger of Rhone Poulenc made sense for Nicholas Piramal, which helped the company in creating a robust revenue base without putting a considerable strain on its financials. Apart from that it helped the company in gaining entry into some key therapeutic areas like anti-histamines, CNS, respiratory and Gastro Intestinal areas. Some of its key brands like Phensedyl, Gardenal, and Stemetil added to the strong brand portfolio list of Nicholas.

Apart from this Nicholas also has investments in host of subsidiaries and other strategic investments, which have been a key strategy for growth over the years. Cumulatively, the returns from investments in its subsidiaries have been satisfactory. Some investments like Charak Piramal are at a nascent stage, which could generate good revenues for the company going forward.

Nicholas Piramal- Hidden Assets
Subsidiaries/ Strategic Investments Effective
Holding (%)
Sum Invested
(Rs. m)
NPIL Share of
PAT (FY01)
Gujarat Glass (incl. Ceylon Glass) 54 93  82
Dr. Trivedi (Pathology Labs) 90 23  19
Dr. Phadke 60 56  3
Reckitt Piramal 40 40 4
Sarabhai Piramal 50 225 97
Boots Piramal 40 17 17
Allergan India 49 39 26
Solumiks Piramal* 50 32 -1
Charak Piramal 50 43 -5

* - Nicholas has announced sell of its stake in Solumiks Piramal, a joint venture for ayurvedic products to its joint venture partner at a price exceeding Rs 30 m. Nicholas would concentrate on Charak Piramal venture for the ayurvedic segment.

Going forward Nicholas intends to focus primarily only on the domestic market. The therapeutic areas, which Nicholas caters to, are well diversified. It has launched several new products in last six months in the cardiovascular, anti-diabetic, anti-arthritic and anti-infective segments. Two anti-infective brands launched by the company viz, Gatrim and Gres (both glatifloxacin) are expected to help the company clock sales in excess of Rs 50 m in the first year of its launch.

Sustained new product introductions should ensure reasonable growth for the company. However, one thing is clear that the growth in the company would be more or less in line with domestic pharma market, which in itself is not exciting. Further, the company’s operating margins don’t compare favourably with that of its peers mainly due to its non-presence in the export markets.

(Based on latest available results)

On the R&D front, Nicholas has received bit of initial disappointment with the withdrawal of its first NCE molecule (Ablaquin, anti-malarial) from the market. Nicholas’ research pipeline currently has 5 molecules. The most promising amongst them is one anti-cancer molecule. All the molecules are in pre-clinical stages and it would take time before one can expect revenues, even from out licensing of the pipeline.

Research Initiatives- Good start, but at a nascent stage
Cancer 1 molecule in advanced stages of pre-clinical trials
CVS 2 molecules in pre-clinical trials
Diabetes 1 molecule each in pre-clinical trials
Anti-Fungal

To summarise, the company’s investments and acquisition synergies are expected to start percolating into the financial numbers from early next year. Robust growth numbers (on account of merger without a major strain on balance sheet), a faster payback period, absence of extra-ordinary expenses are expected to make FY03 numbers of the company attractive.

Comparative Valuations
Particulars Nicholas Piramal* Wockhardt Sun Pharma
CMP (Rs.) 231 405 571
P/e (FY 02E) 11 16 14
P/e (FY 03E) 8 14 NA
Market Capitalisation (Rs. m) 8,778 14,702 26,722
Mkt Cap/Sales (x) 1.0 2.4 3.5
(*- Excl. extraordinary and one time items)

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