Nicholas Piramal: Buy

Investors with a 12-month perspective should consider buying shares of Nicholas Piramal, a leading pharma company engaged in custom manufacturing drugs for Western companies and selling branded formulations in India. It is one of the top contenders in India to capture a fair share of the $15-billion outsourced pharmaceutical manufacturing market, as it has both the expertise and capacities to make the cut.

At the current market price of Rs 355, the stock trades at 17 times its estimated 2008-09 earnings per share. This appears reasonable given the company’s strong growth in 2007-08, which has the potential to improve over the next couple of years.

In the last 12 months, Nicholas Piramal’s sales grew by a handsome 16.2 per cent and net profit by 53 per cent. The company has turned its focus to contract research and manufacturing services recently, buying Pfizer’s drug unit in 2006 and Avecia’s unit in 2005 (both in the UK).

Operating margins have scope for improvement to 20 per cent-plus on greater momentum in its India-based custom manufacturing (CMG) contracts and the rationalisation measures at its UK operations. With increasing number of long-term supply contracts (shipments to five started this year) and rising profitability of the CMG business with the expected entry into injectables, Nicholas Piramal has significantly expanded its portfolio to over 175 molecules. This endows the company with a strong product pipeline.

Nicholas Piramal also derives about 45 per cent of its revenues from the domestic market through sale of branded formulations. The company is set to see good growth in anti-infectives, nutritionals and anti-diabetic segments, where it has already outpaced the market.

Sales from the newly acquired Anafortan and CEFI brands, introduction of a new derma-cosmetic division and launch of new over-the-counter products are some of the initiatives to watch out for. Along with a huge field-force (above 3,000), Nicholas Piramal is positioned to perform well.

Adverse movement in euro-rupee rates may hurt the drug major’s profitability, because of euro denominated realisations. The historical pattern suggests that first half results may be muted. Given the significant domestic component, any increase in the scope of drug price controls or restrictive policies on the same, will hurt the company.