Nicholas Piramal: Buy

Recommendation:Buy

Sanjiv Shankaran

Nicholas Piramal started 2001 by snaring a preferred prey: An MNC pharmaceutical company!

Nicholas Piramal has often used acquisition as a way to grow. In 2001, it bought out the stake of Aventis, the global pharma company, in Rhone-Poulenc (India). Subsequently, Nicholas Piramal initiated steps to merge Rhone with itself.

Strengths: The company's track record of alliances and joint ventures with big names in healthcare, both domestic and overseas, is considered a source of strength. Boots, Reckitt Benckiser, Allergan and Ambalal Sarabhai are some of the better known names that have tied up with Nicholas Piramal for marketing healthcare products.

A track record of alliances and a large marketing force should make Nicholas Piramal one of the better equipped Indian players to seek alliances in the domestic market after the patent laws change in 2005 to prevent duplication of drugs under patent elsewhere. In that environment, MNCs that see promise for a new drug may have to look for a marketing partner to make the best use of the product. Nicholas Piramal should find itself on a good wicket.

The acquisitions over the years have left the company with a fairly good portfolio of products. In terms of therapeutic segments, the portfolio has a balanced mix between anti-infectives, cardio-vasculars and nutritionals that together accounted for about 45 per cent of the dosage form sales in 2000-01. Of the three segments, in keeping with the aggregate market trend, cardio-vasculars and nutritionals grew faster than anti-infectives.

Concerns: For a company of its size, Nicholas Piramal is a relatively late entrant into the world of research. Thus far it has paid little attention to the market potential for generic drugs in the US and Europe. Lack of tangible progress on these fronts have had a telling effect on its equity valuation.

Recommendation: Nicholas Piramal currently trades at around Rs 250, about 13 times its 2000-01 EPS of Rs 19.14. The company appears to be in a position to register a growth of about 15 per cent in its EPS over the next couple of years.

For investors willing to be patient, the company's valuation is likely to improve over the next couple of years following a good performance in the domestic market, and thereby present the prospect of moderate capital appreciation. A significant fall in the share price seems unlikely and therefore, this may be an appropriate time to buy.