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Nicholas Piramal India Limited May9, 2001 Innovations Continue INTRODUCTION Nicholas Piramal is one pharma company, which has a big penchant of growing through mergers, acquisitions, joint ventures and it has successfully done so in the past one decade. Its acquisition of a majority stake in Rhone Poulenc and a subsequent decision to merge is clearly going to create a good value in the long run. The company is stepping into an interesting phase now and is worth a re-look. More details follow in the report. ** Inside The Report ** Business Model & Development * Financials * Valuations * Business Model & Development Formulations continue to be the core business of NPIL consisting 75% of the revenues. Vitamin A and premix constitute about 13% of the business followed by diagnostics having 11% share of the total business. As a strategy, NPIL has decided to discontinue the generics business contributing only 1% to the revenues. The sales composition for FY01 has been indicated in the following chart: NPIL has a leadership position in clinical chemistry segment in the area of diagnostics. The company has installed 150 Hitachi make analysers in India. This business had a temporary setback during FY01 due to exit of businesses of Stryker and G-II companies. The vitamin A business suffered during the year due to reduction in customs duty leading to cheaper imports and reduced demand from the poultry segment. The company is developing new avenues of increasing the usage in the areas of speciality molecules and perfumery chemicals. Formulations- a thrust area As per ORG, The domestic formulation market was placed at Rs. 14155.1 Cr. in the year 2000 compared to Rs. 12804.3 Cr. showing 10.5% improvement. However, this growth rate was lower than the previous year growth rates of 15% on an average. During the year, 1157 new products were launched in different therapeutic segments, contributing Rs. 309.7 Cr. (2% of the total market). NPIL has reported 10.3% growth for FY01 against the industry growth rate of 8.8%. The company’s ranking improved to 11 from 13 in FY00.The market share in the domestic formulations market was maintained at 2.1% during the year. The major growth came from therapeutic segments such as: Nutritional (growth rate: 71%), Biotek (43%), Diabetes (57%), NSAIDS (58%) and gastrointestinal (45%). The overall growth was placed at 26%. New products- a driving force NPIL introduced 11 new products during FY01. The new and acquired brands contributed 14% to the total revenues. The new products Rejoint and Cellcept achieved Rs. 8 Cr. and Rs. 6.5 Cr sales respectively in the first year of launch. The other products introduced were in the anti-diabetic and anti-cancer areas. NPIL has filed 10 patents for its new anti-malarial drug Aablaquin. R & D –innovations will pay in the long run NPIL has acquired R & D center located at Mulund from Hoechst Marion Roussel. The company has undertaken various research activities in the area of NCE and NDDS research. NPIL has commenced its clinical trial Research Centre at Parel during FY01.The company has earmarked Rs. 8 Cr. for the Genome project to be spent over next 3 years. Financials ANNUAL RESULTS FOR THE YEAR ENDED MARCH 31, 2001 Nicholas Piramal (NPIL) has declared encouraging results for the year FY01 with sales increasing by 17% from Rs. 486.5 Cr. to Rs. 566.8 Cr in the previous year. The net profit was higher by 20% at Rs. 66.7 Cr. against Rs. 55.6 Cr. The EPS increased from Rs. 16.0 to Rs. 19.1. The company has raised the dividend from 65% to 70%. The dividend from various joint ventures was lower at Rs. 3.0 Cr from Rs. 7.5 Cr. This is due to deferring the same in view of reduction in dividend tax in the budget 2001-02.Other income was lower by 25% at Rs. 7.8 Cr. compared to Rs. 10.3 Cr. The operating margin declined marginally from 17.4% to 17.2%. Interest was lower by 14% from Rs. 11.2 Cr. to Rs. 9.6 Cr. Depreciation was higher by 31% from Rs. 10.6 Cr. to Rs. 13.9 Cr. profit before tax was higher by 17% to Rs. 73.7 Cr. from Rs. 62.9 Cr. Taxes were lower by 4% from Rs. 7.3 Cr. to Rs. 7.0 Cr. The company had benefits of MAT provision for FY01 resulting in lower taxation. The net profit enhanced by 20% from Rs. 55.6 Cr. to Rs. 66.7 Cr. The formulation business was the major thrust area during the year. This business exhibited handsome growth of 26% from Rs. 335.7 Cr. to Rs. 423.3 Cr. Vitamin A & premix business has a de-growth of 2% from Rs. 75.7 Cr. to Rs. 74.4 Cr. Diagnostics also grew marginally by 4% from Rs. 62.7 Cr. to Rs. 65.3 Cr. The poor performance of vitamin A and diagnostic businesses were attributed to various restructuring measures taken by the company. Generic business had a de-growth of 69% from Rs. 12.4 Cr. to Rs. 3.8 Cr. NPIL has decided to discontinue this business. Consolidation of subsidiary businesses NPIL has 4 major subsidiaries viz.: Gujarat Glass and Ceylon Glass, Dr. Tribedi & Roy pathological labs, Dr. Phadke pathological lab and recently acquired Rhone Poulenc India (RPIL). Other JV includes: Reckitt Piramal, Boots Piramal, Allergan, Sarabhai Piramal, Solumiks Piramal and Charak Piramal. Out of these, Solumiks and Charak were formed during FY01. After taking into consideration of all these subsidiaries, the consolidated sales were up by 28% to Rs. 937.4 Cr. from Rs. 733.8 Cr. mainly due to the addition of RPIL business of Rs. 78 Cr. against nil for the previous year since RPIL was acquired in FY01.The operating profit was higher by 31% to Rs. 222.9 Cr. from Rs. 169.6 Cr. On consolidated basis, the net profit jumped by 41% from Rs. 65.3 cr. to Rs. 92.4 Cr. The net margins improved from 8.9% to 9.9%. There was substantial increase in RONW from 15.7% to 19.2%. The consolidated EPS went up from Rs. 18.7 to Rs. 26.5. Valuations The proposed merger of RPIL and NPIL opens up a good scope of value creation for the shareholders. The merger ratio has been decided at four shares of RPIL to be exchanged for 7 shares of NPIL. Merger of Rhone Poulenc India with NPIL The merger of RPIL with NPIL has already been announced. Four shares of NPIL will be exchanged for 7 shares of NPIL. The company is likely to derive the benefits of merger substantially. RPIL has reported sales of Rs. 262.9 Cr. and net profit of Rs. 33.3 Cr. for FY01.On an equity capital of Rs. 4.5 Cr. the EPS works out to be Rs. 74.0.NPIL currently holds about 60% equity of RPIL through its subsidiary NPIL Finvest Limited. On merger, the equity capital of NPIL will increase only by 9% from Rs. 34.85 Cr. to Rs. 38.0 Cr. The debt of Rs. 200 cr. raised from ICICI for the acquisition of RPIL will get transferred to NPIL. The company has decided to maintain RPIL sales force as independent entity. The merged company is expected to have sales of more than Rs. 705 Cr. in the domestic formulation market and will occupy 2nd position, next to Glaxo-Smithkline. With the addition of 89 products of RPIL, the total number of products in the NPIL portfolio will go up to 256. The merger will bring benefits of integration of various functions and economies of scale. This will lead to substantial cost reduction and improvement of profits. We expect an EPS of Rs. 40 for FY02 for NPIL. The current market price of Rs. 286 discounts the FY02E earnings by 7.2X giving opportunity for capital appreciation. For further clarifications/ suggestions please contact-KRC Research É 91-22-830 4914Ê 91-22-820 5311 KRC Sales É 91-22-265 5353Ê 91-22-265 4372* krc@vsnl.com | Disclaimer: This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. While the information contained therein has been obtained from sources believed to be reliable, investors are advised to satisfy themselves before making any investments. Kisan Ratilal Choksey Shares & Securities Pvt. Ltd. and/or individuals thereof may have positions in securities referred herein and may make purchases or sale thereof while this report is in circulation. |