The Hindu Business Line : Nicholas Piramal: Buy

Nicholas' latest acquisition of Pfizer's Morpeth facility in the UK bolsters its presence in the custom manufacturing space and reinforces its collaborative business model

MR AJAY PIRAMAL, Chairman, Nicholas Piramal India Ltd

Fresh exposures can be considered — in small lots — in the Nicholas Piramal, stock which trades at Rs 187. Like many other pharma players, Nicholas' too was not spared by the recent market crash. However, after a significant correction in the price, the valuation levels have scaled down to realistic levels.

The bullish stance on the stock is based on Nicholas' potential to emerge as a premier player in the custom manufacturing (CM) space. Investors should, however, temper their return expectations and have a tolerance for volatility — a feature inherent to stocks in the mid-cap space.

A combination of factors affected performance in the past two fiscals: The imposition of MRP-based excise, the confusion surrounding the implementation of VAT, Nicholas' exit from a few products, and the controversy surrounding the company's cough syrup brand, Phensedyl. On the CM side, the translation of orders into revenues took longer than expected, affecting the numbers. Most of the negatives appear priced into the stock and prospects seem set to improve.

Pfizer deal

In line with its intent to emerge as the partner of choice in the CM arena, Nicholas recently snapped up Pfizer's Morpeth facility in the UK. The facility served as a global hub for some of Pfizer's products in the US, the EU and Japan. The revenue potential through this acquisition is pegged at $350 million over a five-year period and the deal will add to earnings in FY-07. The deal also makes Nicholas the largest supplier within Pfizer's contract manufacturing network.

The deal not only adds clarity to future revenue flows, but is also likely to push up margins as, typically, supplies to innovator companies are likely to be insulated from the brutal pricing pressures in the generics space.

Further, with the relationship with Pfizer cemented through this deal, more CM contracts could follow.

Nicholas acquired the business of Avecia in the UK in November 2005; the latter is making losses and is expected to make a positive contribution to Nicholas' numbers in FY-08.

As the contribution of CM to the overall business steps up gradually over the next two-three years, it could have a beneficial effect on the margin picture. On the domestic front, with the Phensedyl issue behind it, Nicholas' focus on chronic therapy areas and in-licensing of products should act as key drivers. Further, with the benefits from the Baddi facility in Himachal Pradesh set to kick in this fiscal, a reduction in the tax outgo should provide an added prop to earnings.

At the current price, the stock trades at 13-14 times its expected per-share earnings for FY-08. The valuation multiple has contracted sufficiently to leave room for a meaningful upside, given the business prospects.

The key risks to the `buy' recommendation would be any further delay in the commencement of supplies in CM deals and issues impeding the smooth integration of acquired outfits.

More Stories on : Stocks | Recommendation | Pharmaceuticals

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page