We recently met the management of Piramal Healthcare (Piramal) to get an update on the company’s various businesses, especially in context of the uncertain economic environment.
With ~50% contribution to turnover, Piramal’s domestic formulation business provides a solid foundation for its overall business.
Piramal’s domestic formulation business has clearly beaten the industry growth by a wide margin with a 23% growth in M9FY2009.
With a strong field force of 3,800 people, focus on chronic therapies and ~30 new launches, it expects its domestic formulation business to continue to grow at 15-16%.
The company is increasingly focusing on high-margin early phase developmental work and has expanded its Indian facilities to cater to the same.
Through this, Piramal aims to partner with its clients right from the initial stages of development, in order to build higher comfort levels with its clients and increase the pipeline for commercial manufacturing contracts.
At Morpeth, Piramal aims to reduce its dependence on Pfizer from 95% currently to 65% in three years by increasing clinical trial packaging business and early phase developmental work.
It has already renewed its contract with Pfizer partially and is confident of renewing the balance portion also.
Piramal continues to constantly shift projects from its UK assets to its Indian base, in order to reap the low-cost advantage, thereby increasing its margins.
The Indian assets are expected to be the primary growth driver of the custom manufacturing business.
We expect the custom manufacturing revenues from India to grow at a 45% compounded annual growth rate (CAGR) over FY2008-10.
Piramal expects to end FY2009 with a debt of Rs1,450 crore, implying a debt/equity ratio of 1.1:1. The increase in debt from December 2008 levels is due to the acquisition of Minrad and Rx Elite.
However, with lower capex and lower acquisition spend, it aims to use its cash to trim down its debt levels in the coming years in order to bring down its debt/equity ratio to more realistic levels of 0.7:1 in two years.
At the current market price of Rs178, Piramal is discounting its FY2009E adjusted earnings by 8.5x and its FY2010E earnings by 7.5x.
We maintain our BUY recommendation on the stock with a price target of Rs358 (15x FY2010 earnings).