Nicholas Piramal an outperformer, target Rs 318: ICICI

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ICICI Direct is bullish on Nicholas Piramal and has maintained market outperformer rating on the stock with target price of Rs 318, which implies upside of 34% with time of 12-15 months. 

 

ICICI Direct Research report on Nicholas Piramal

 

Lucrative formulation Nicholas Piramal (India) Ltd (NPIL) has created a growth canvass for itself by buying depressed assets and turning them around. We believe the company would follow a similar strategy to grow. It has a long track record of successful collaboration with innovator companies and is today among the largest CRAMS players in India. We initiate coverage on the company with an outperformer rating. 

 

Custom manufacturing from Indian assets gaining traction

 

We expect revenues from custom manufacturing operations (CMO) to increase significantly on the back of new orders. We expect CMO revenues from Indian assets to grow at a CAGR of 130% to Rs 237.83 crore over FY06-09E (included in total CRAMS revenue of Rs 911 crore). 

 

Avecia operations seen contributing this fiscal

 

Avecia, NPIL's UK subsidiary, was a drag on its financials due to its negative EBIDTA. We see this trend reversing with Avecia turning the corner on the back of increased sourcing from India. We expect its revenues to grow at a CAGR of 42% over FY06-09E to Rs 289 crore. 

 

In-licensing of molecules in pre-clinical stage

 

NPIL's deal with Eli Lilly is a pointer to the potential gain from this segment. We expect a fast scale-up in revenues from the current USD100 million.

 

VALUATION

 

We believe a robust growth in NPIL's CMO business from Indian assets is the main earnings multiplier for the company as this segment offers the highest EBIDTA margin of 25%. The company's bottom line will be positively impacted by increased visibility on the revenue from this business. Avecia turned the corner in Q4FY07 and will no longer be a drag on the company's margins. On the domestic pharma business front, increasing sourcing from a tax incentive zone of Baddi would further boost its margins. At the current price of Rs 237, the P/E multiple works out to 14x FY09 EPS. On an EV/EBIDTA basis, the stock trades at 9.62x FY07E earnings and 12.02x FY08E earnings. We believe the stock deserves a higher P/E multiple due to the superior growth in its CMO revenues and turnaround of Avecia. A DCF valuation gives us a value of Rs 362 per share. At the target price, the stock will trade at 17.73x its FY09E EPS of Rs 17.93.

 

P/E band

 

Historically the stock has traded around 30x one-year forward EPS till December 2005. Declining sales due to Phensedyl problem, discontinuance of Valdecoxib and Carex divisions led the stock to correct. Acquisition of loss making Avecia (having EBIDTA of  12%) depressed the stock price to below a P/E multiple of 20x one-year forward EPS. The stock has been trading between the P/E band of 15-20x since January 2006. With Avecia turning around and CMO from Indian assets gathering momentum, we believe a re-rating would happen.