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Return ratios to improve NPIL would continue to invest in inorganic acquisitions. The capex for Baddi and the Pithampur plant is complete and the facility is being utilized for the CMO for international business. The investments made in plants would now start generating revenue, boosting RoCE from 14% in FY06 to 22.6% in FY09E. The redemption of preference shares by FY08 would leave more earnings for the equity shareholders, which is likely to boost the RoNW from 14% in FY06 to 23% in FY09E. Exhibit 15: Improvement in return ratios RoNW & RoCE (%) 25% 20% 15% 10% 5% 0% Source: Company, ICICIdirect Research RISKS & CONCERNS FY '06 FY '07 FY '08E FY09E RoNW (%) RoCE (%) Revenues from domestic markets have been impacted due to the Phensedyl controversy, a large brand with annual sales of around Rs 120 crore. Similar issues with other large product could impact the sales and profits of the company. We have assumed that the CMO from Indian assets would start as scheduled. Any delay due to regulatory approvals or other issues may impact the sales and net profit of the company. We have assumed that the company would not make any sizeable capex. However, if the company does undertake a major capex, which requires lots of cash and necessitate the sale of investments, the EPS will get impacted as we have assumed a 9% yield from the cash parked in investments. 10 | P age
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. Exhibit 16: P/E band 600 500 400 300 200 100 0 Apr-03 Jan-04 Oct-04 Jul-05 Apr-06 Jan-07 Source: ICICIdirect Research 30x 20x 15x 10x 11 | P age
Page 1 and 2: August 27, 2007 | Pharmaceuticals I
Page 3 and 4: INVESTMENT RATIONALE Emerging as a
Page 5 and 6: Major player in domestic market Do
Page 7 and 8: In-licensing - an opportunity to gr
Page 9: Strong margin expansion likely in e
Page 13 and 14: Profit and Loss Statement (Rs crore
Page 15: RATING RATIONALE ICICIDirect endeav

himani.singh@icicidir ect.com Nicholas Piramal (NICPIR) Lucrative ...

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