Visit http://indiaer.blogspot.com/ for complete details Piramal Healthcare |
Await further clarity; maintain Hold |
HOLD
CMP: Rs 515 Target Price: Rs 531
n Piramal’s Q2FY11 performance was disappointing with a) Revenue of Rs7.5bn (down 25%), and b) EBIDTA loss of Rs128mn
n Poor performance was driven by de-growth in the formulations, CRAMS and the critical care business
n Company has announced the buyback of 20% equity @Rs600 per share
n Utilization of cash will remain a key; maintain Hold
Disappointing quarter; company will revise earnings guidance downward
going forward
Piramal’s revenue for the quarter de-grew by 25% to Rs7.5bn. Management has
iterated that concentration of focus on completing the transaction with Abbott and Super
Religare Labs led to de-focus on the business areas. This accounted for the subdued
performance during the quarter. Key factors that led to overall de-growth in revenues
are a) Domestic formulation business (contributed 54% to the overall revenues) de-grew
by 22% to Rs4.1bn, b) CRAMS business (contributed 28%) de-grew by 28% to
Rs2.1bn, c) Critical Care business (contributed 9%) de-grew 28% to Rs640mn and, d)
Diagnostics business (contributed 4%) de-grew 39% to Rs334mn. The CRAMS
business declined on account of ~41% YoY de-growth in assets in India and ~15% YoY
de-growth in assets outside India.
Management has indicated that they will prune down their guidance in the coming
quarters. Earlier the management has guided for a 10-15% growth in the CRAMS
business. We believe, the performance of residual business will improve on account of
gradual up tick in CRAMS business coupled with improvement in the global critical care
business. In the GCC business incremental growth from Sevoflurane and monetization
of Minrad products in emerging markets will drive growth. We expect management to
give further clarity on its residual business post Q3FY11E.
Announced buyback of 20% equity @Rs600per share through tender offer
Piramal Healthcare has announced buy-back of 20% equity (41.8mn share) @Rs600 per
share which entails a cash outflow of Rs25.08bn. Promoters will tender the share in
proportionate thus limiting the acceptance ratio at 20% level. Piramal has received upfront
cash of Rs105.3bn from Abbott and Super Religare (Rs3bn), out of which company has
paid Rs35.7bn as tax, Rs3.5bn as non-competing fees to promoters and Rs6.5bn as debt.
Adjusting to cash outflow on buy-back, company will have net cash of Rs34.5bn
(Rs206/share on 167.2mn shares). This amount will be used to fund the growth of existing
businesses (US$45-50mn annual capex) as well as to scout for opportunities in other
sectors. The cash per share of future cash works out to be Rs347 per share, taking total
cash value per share to Rs554 on reduced equity. Value per share of residual business on
FY10 numbers is Rs110 per share. This takes the fair value of Piramal Healthcare to Rs664
per share. Maintain buy with a target price of Rs336
Utilization of cash will remain a key for stock performance; maintain Hold
Deployment of cash still remains an unanswered question for Piramal Healthcare and a big
overhang on the stock performance. Management has indicated that they are studying
various business proposals and it will take more than 6 months to from a decision.
However, they have stated very clearly that they do not see enough opportunities in the
healthcare space to deploy such a large amount and are looking non-healthcare segments
(no real estate investment in this company). In fact, Management has stated that the
business profile of this company (Piramal Healthcare) will change significantly in next two
years.
Owing to lack of clarity on the utilization of cash; we continue to retain our Hold rating on
the stock with a price target of Rs531. We will revisit our rating once the company
announces concrete plans to deploy cash from the deal.
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