Recommendation: Buy
CMP = Rs 354
Price target: Rs 434
Key points:
- The Q4FY2008 and FY2008 results of Nicholas Piramal India Ltd (NPIL) are ahead of our expectations. The company's top line grew by 19.0% yoy to Rs 767.9 crore in Q4FY2008 and by 16.2% to Rs 2,872.8 crore in FY2008. The growth was driven by an impressive performance in the branded formulation business (up by 17.8% in FY2008, despite the temporary setback received in Q1FY2008 on account of lower phensydyl sales), strong traction in the Indian custom manufacturing (CMG) operations (up by 18.9% in FY2008) and the pathology laboratory (path lab) business (up by 71.8% in FY2008).
- The reported operating profit margin (OPM) expanded by 1,330 basis points to 26.5% in Q4FY2008 and by 340 basis points to 18.9% in FY2008. The margin improved on the back of rising operating leverage and savings arising out of the demerger of the new chemical entity (NCE) R&D unit into an independent company. Even on a like-to-like basis (without considering the impact of the savings from the NCE R&D demerger), the margin expanded by a robust 310 basis points in Q4FY2008 and by 100 basis points in FY2008.
- The company incurred a one-time restructuring charge in its international operations, on account of which the reported net profit (after extraordinary items) grew by 141.7% to Rs 132.8 crore in Q4FY2008 and by 53.1% to Rs 218.1 crore in FY2008. In FY2008 the company delivered earnings of Rs 17.5 per share, which were in line with its guidance and ahead of our estimate of Rs 17.2 per share.
- The management has guided towards a 16% like-to-like growth, with continued improvement in the OPM to 20.5%, resulting in earnings of Rs 21 per share in FY2009. Given the strong margin expansion, we believe that the earnings guidance provided by the management is conservative. The profits are expected to grow by 20.4% to Rs 533.3 crore, resulting in earnings of Rs 25.5 per share in FY2010E.
- At the current market price of Rs 354, NPIL is discounting its FY2009E earnings by 16.7x and its FY2009E earnings by 13.9x.
- I maintain Buy recommendation on the stock with a price target of Rs 434.
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