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Nath Balakrishnan

INVESTORS can consider exposures in the stock of Nicholas Piramal that trades at about Rs 860. This represents a reiteration of the buy recommendation given on the stock when it was trading at about Rs 540 (Business Line, November 23, 2003). The ability to grow consistently at higher-than-market rates in the domestic space and the improving momentum in exports are the two principal drivers behind our view on the stock.

Figures for the last quarter of FY04 are not comparable with the corresponding previous quarter, as the company has given effect to the merger of Sarabhai Piramal and Canere Actives.

Without accounting for the effect of the merger, sales growth has been sedate at about two per cent. However, in the latest quarter, Nicholas did not have the benefit of six brands of Roche that registered sales of close to Rs 10 crore in the corresponding previous quarter.

Operating margins for the quarter have dipped marginally, largely on the back of an increase in R&D expenditure and a receivable write-off to the extent of about Rs 5 crore. However, for the year-ended March 2004, margins at about 20 per cent have remained at their FY03 levels. The merger of Sarabhai Piramal should provide further impetus to the strong domestic franchise that Nicholas already possesses. The strength in the domestic market should be well-complemented by the pick-up in momentum in the export market.

Nicholas' strategy to not compete, but collaborate with innovator companies (by not launching generic versions of their molecules) should work to its advantage in the custom manufacturing space. For instance, its deal with Advanced Medical Optics of the US, supplies to which are expected to commence by January next year; sales could be as much as $25 million in FY06. Deals such as this provide for a steady stream of profitable sales over an extended period; further, they serve as reference points for similar deals with other customers. Further developments on this front could be in the pipeline.

The acquisition of the Canere Actives unit should provide a further fillip to Nicholas' export thrust. Canere has a state-of-the-art bulk drug facility that can produce high-end active pharmaceutical ingredients.

Given Nicholas' adherence to IPR, supplies to innovators for on-patent molecules can be expected from this facility, the negotiations for which are already underway.

Typically, such supplies would also mean better margins as opposed to supply of generics, where only price serves as the key source of competitive advantage.

Considering the sharp run-up in price over the past few months, returns from the current level may not be as spectacular as seen in the past; up move in price is also likely to pan out over a longer time-frame. Buy with a medium-term perspective.

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