The Hindu Business Line : Nicholas Piramal: Invest

AN INVESTMENT can be considered in the rights offer of Nicholas Piramal . The offer is being made at Rs 175 per share, which is at a discount of about 35 per cent to the stock's prevailing market price. Shareholders will be entitled to one share for every ten held. We maintain our positive stance on the Nicholas Piramal stock and view it as one of the better plays in the pharma outsourcing space.

Issue objective: The funds raised from the issue are to be deployed for:

Setting up a formulations facility at Baddi in Himachal Pradesh; this would reduce Nicholas' reliance on third-party manufacturers, apart from conferring tax benefits;

Building another facility in Hyderabad for manufacturing inhalation anaesthetic products;

Capital expenditure for R&D;

Creating a fund pool to pursue other strategic initiatives.

Investment rationale: Nicholas derives over 70 per cent of its revenues from the domestic formulations (medicines in finished form) business. More important, the company has a good presence in the cardiovascular, central nervous system, nutritional and the anti-diabetic therapeutic segments, which offer higher growth potential.

To capitalise on the strength of its field force and to plug gaps in its product portfolio, Nicholas has also actively pursued a strategy of in-licensing molecules from companies located abroad for sale in the domestic market. With the transition to the product patent regime from the beginning of this calendar, multinational corporations looking for a foothold in the Indian market may be inclined to pursue such in-licensing arrangements.

The cornerstone of Nicholas' exports thrust is its custom manufacturing business, which involves aligning with global innovator companies for their product needs. We like Nicholas' model in this space, as it endeavours to collaborate with such innovator companies instead of competing with them by engaging them in patent challenges.

Nicholas has sewn up three such outsourcing deals, and supplies to one client (Advanced Medical Optics of the US) commenced in the first quarter of the latest fiscal. We expect Nicholas to ramp up its scale of operations in this space.

We note that Nicholas' anti-cancer molecule has entered into clinical trials in Canada. Though it would be inappropriate to factor in any upsides from this molecule, given that the drug discovery process is fraught with uncertainty, we view the development as the company's intent to be present across the entire breadth of the pharma value chain.

Though the bullish state of the market has led many a company to dish up liberal rights offers at a level closer to market price, we view Nicholas' offer in positive light, considering the conservative 1:10 ratio and a pricing that is at a fair discount to market price.

Investment risks: A growth slowdown in the domestic formulations business, a slower-than-expected ramp up in the custom manufacturing business and any negative news flow on the drug development effort are some of the key risks that could set the stock back.

Offer details: Nicholas Piramal is offering 1.9-crore shares to shareholders in the ratio of 1:10 at Rs 175 per share. The issue, which opened on August 1, closes on August 30, and is being lead-managed by Kotak Mahindra Capital Company and Enam Financial Consultants. Karvy Computershare is the registrar to the issue.