• OCTOBER 24, 2002

Nicholas: Operational gains

Nicholas Piramal has recorded an encouraging 5% topline growth for 2QFY03. Net profit excluding extraordinary expenses grew by a considerable 103% YoY. The extraordinary charge of Rs 24 m seems to have been on account of amortisation of VRS and restructuring expenses. Including the extraordinary charges also the company has reported an encouraging 86% growth in bottomline.

(Rs m)2QFY022QFY03% Change
Sales 2,419 2,543 5.1%
Other Income 181 155 -14.4%
Expenditure 2,056 2,063 0.4%
Operating Profit (EBDIT) 363 479 32.0%
Operating Profit Margin (%)15.0%18.9% 
Interest 71 128 79.6%
Depreciation 42 49 17.8%
Profit before Tax 432 458 6.0%
Other Adjustments (165) (24) 
Tax 126 173 37.3%
Profit after Tax/(Loss) 141 262 85.7%
Net profit margin (%)5.8%10.3% 
No. of Shares (eoy) (m) 38.0 38.0  
Diluted Earnings per share 14.8 27.5  
P/E (at current price) 8 

Strict cost control measures have ensured that the margins have improved on a YoY basis. Operating margins registered a 380 basis points rise. Interest expenses of the company have however gone up considerably but must be viewed from the prism of a lower base. The net profits would have been even better if it were not for higher interest expenses. The second quarter numbers of the current year include figures of ICI Pharma Ltd, acquired by the company recently. Hence, the results are not exactly comparable with corresponding previous quarter.

The company's formulations business had recorded a 20% growth in 1QFY03 on a YoY basis, outperforming industry growth rates. Nicholas Piramal, together with its joint ventures, continued to maintain its second rank in domestic formulations as per ORG. The company also enjoys first rank in the cardio-vascular segment (CVS), post-acquisition of the pharma business of ICI India Ltd. in March 2002. The rise in operating margins reflect restructuring plans, including reshuffling of product portfolio implemented by the company in the last financial year.

Nicholas' strategy of growing through the inorganic route seems to be paying off. The merger of Rhone Poulenc made sense for Nicholas Piramal, helping it create 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 Rhone's key brands like Phensedyl, Gardenal, and Stemetil augemented the brand portfolio of Nicholas. Nicholas acquired ICI Pharma's formulation business for Rs 700 m. These acquisitions have given Nicholas a strong base with robust share in the domestic pharma market. Combined with the joint ventures, the Nicholas group is the second largest player in the local market. Apart from this, annual cost savings due to synergies in operations are expected to be in the range of Rs 300-400 m.

On the R&D front, Nicholas has witnessed initial disappointment over the withdrawal of its first NCE molecule (Ablaquin, anti-malarial) from the market. Nicholas’ research pipeline currently has 5 molecules. Nicholas Piramal recently filed its first patent for NCE (New Chemical Entity) for its oncology molecule in India and the USA. 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.

At the current market price of Rs 222, the stock is trading at 8x it annualised earnings for 2QFY03. On a consolidated basis, the company now has a robust revenue base. The company’s investments and acquisition synergies are expected to start percolating into the financial numbers in the current year. 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 current year.

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