Buy Nicholas Piramal: Edelweiss Research

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Buy Nicholas Piramal: Edelweiss Research

Broking house, Edelweiss Research is bullish on Nicholas Piramal and has recommended buy rating on the stock.

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Broking house, Edelweiss Research is bullish on Nicholas Piramal and has recommended buy rating on the stock.

Edelweiss Research report on Nicholas Piramal:

International acquisitions offer Nicholas Piramal a global footprint

"The acquisitions of Avecia and Morpeth have given Nicholas Piramal (NPIL) access to innovator companies for contract manufacturing of patented products. They have also enabled the company to offer a comprehensive range of custom manufacturing services to cater to a global customer base. This will help Nicholas gain more  local as well as international contracts."

Morpeth acquisition offers near and long term upsides

"Along with the acquisition of Pfizer's Morpeth facility, NPIL has earned a contract of USD 350 mn from Pfizer spread over five years. This contract will utilise only 50% of Morpeth capacity and still will earn Nicholas an EBITDA margin of 15%. With 50% spare capacity in the USFDA approved facility, NPIL has a great potential of gaining additional contracts, which could augment its sales and improve EBITDA margins. Besides, the Morpeth facility also enables NPIL to become Pfizer's strategic partner in manufacturing operations, offering significant upsides to NPIL's earnings beyond FY08E."

Branded formulations: Worst is over

"After facing withdrawals in the domestic market, NPIL's domestic business is back-on-track. In addition, the domestic formulation industry's revival from an earlier growth of 7-8% to 15-16% augurs well for NPIL. Further, we expect an absolute reduction in NPIL's excise duty (by INR 160 mn) in FY08E, following the transfer of 60% of its manufacturing activities to the Baddi plant, located in an excise free zone."

Financial outlook - no change in EPS estimates, albeit, improved outlook

"We increase our FY07E and FY08E sales estimate by 7% and 4%, respectively, on account of a better than expected outlook on domestic formulations. We also upgrade our EBITDA estimate by 13% and 5% in FY07E and FY08E respectively. However, there is no change in the net income, as the increase in EBITDA gets compensated by decrease in other income. We also introduce our FY09E earnings without assuming any new contracts."

Valuation - Reiterate our 'BUY' recommendation

"After having gone through a bad year, we estimate NPIL's EPS to grow at a CAGR of 42.5% (FY06-09E) without accounting for any new contracts. We believe that with a global foot print, the company's chances of bagging contracts have increased, which provides a greater sustainability post FY08E. At CMP of INR 236, the stock trades at a P/E of 16.7x on FY08E earnings and do not reflect this greater sustainability. We reiterate our 'BUY' recommendation."