Crams business gets the cramps

Written by Reghu Balakrishnan | Updated: Jan 26 2010, 05:36am hrs
Piramal Healthcare Limiteds (PHL) consolidated revenues for the December 2009 quarter went up a mere 9%, at Rs 910 crore. Where the company disappointed the Dalal Street was in its contract research & manufacturing services (Crams) business where the sales were lower than expected. Revenues from Pharma Solutions (custom manufacturing) declined 18.4% to Rs 210 crore in the three months up to December 2009 from Rs 256 crore an year earlier. PHLs stock fell by over 6% to close at Rs 355.4 post the results.

If Piramal managed to report a 128% growth in net profit to Rs 136.2, it was because of a writeback in taxes to the tune of Rs 20 crore, as Emkay Research points out. Emkay also observes that assuming the normalised tax rate, the recurring profit would have been up just 3%.

Hit by the declining revenues from contract manufacturing and critical care, PHL has revised sales growth forecast for the year ending March 2010 to 13-15% from 16% and the operating profit margin to 20% from 21-22%. The company attributed this to the global downturn. Says Ajay Piramal, chairman, PHL: The Crams space is becoming a difficult area to operate in since many of the multinational companies are scaling back their outsourcing requirements due to the recession last year.

Motilal Oswal had expected Piramals topline in the December 2009 quarter to grow by about 18 % to Rs 970 crore, reflecting the improvement in capacity utilisation at the companys Minrad manufacturing unit in the US. It also expected strong double-digit growth in the domestic formulations business, which the brokerage felt would be partly tempered down by the ongoing slowdown in its Crams business and the closure of the Huddersfield facility in the UK.

However, revenues from facilities outside India declined 46.2% to Rs 94 crore from Rs 176 crore in the corresponding period of the previous year. The Crams division contributes just under a fourth of the companys total revenues. However, PHL fared very well in the domestic market. The healthcare solutions division (domestic formulations) grew by 21.5% compared with industry growth of 15.7% with revenues of Rs 500 crore.

Domestic revenues account for 55% of the companys total sales. The company continued to outpace industry growth on the back of increased penetration in Tier-II and Tier-III cities. That apart, it also increased focus on the high-growth chronic and lifestyle segments like nutritionals (up 45.7%), anti-infectives (up 28.2%) and dermatology (up 21.2%). Piramal launched 26 products during the nine months up to December 2009 and these contributed just over 8% of the periods sales of Rs 1,460 crore.

According to Sarabjit Kour Nangra, VP, research, Angel Broking, whats worrying is that the topline guidance for the critical care business had been lowered from Rs 450 crore to Rs 330 crore.

Despite the disappointing topline, PHLs operating profit margin for the December 2009 quarter was higher at 19.9% against 15% in the corresponding quarter of the previous year. However, there would be a change of revival and we expect the situation will be improved in the next financial year, Ajay Piramal said.

Continuous strong traction in its domestic formulation business and increasing contribution from the inhalation anaesthetic segment after the Minrad acquisition in March 2009 will help the company to post 17.9% growth in topline, a Angel Broking report said.

However, the Crams business is expected to bring better revenues by next quarter. Most Indian Crams companies will be impacted by the ongoing inventory reduction undertaken by their customers. We believe that the quarter ended December will be the last quarter of this inventory correction and a gradual restocking of inventory is expected from the next quarter onwards, said the Motilal Oswal report.

Emkay Research has downgraded the earning estimates for 2009-10 and 2010-11 by 5% and 3%, respectively. The brokerage opines that although the Crams business should show strong traction in 2010-11, it would like to wait for a while to get more clarity on the business.