Uncertainty over the newer business Piramal Healthcare- says PINC

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Uncertainty over the newer business
Piramal Healthcare’s Q2FY11 numbers reflect profit as
well as partial sale of the sold business and hence are
not comparable. We believe Q3FY11 will guide the
outlook for the remaining business. The negative
surprise was the 21% and 28% decline in CRAMS and
Critical Care businesses respectively.
We estimate an NPV of ~Rs500/share for both the deals
while awaiting greater details on the remaining business
and the end use of the cash. We re-iterate our HOLD with
TP of Rs540.
No cash dividend, buy back at Rs600
The Piramal board has approved buy back of 20% shares on
a proportionate basis at Rs600. This is a surprise since the
company was expected to pay one-time cash dividend to
shareholders. Aggregate cash outflow would be ~Rs25bn.
End use of the cash is still not clear
We believe after adjusting all the items, Piramal will hold
~Rs25bn cash. How it will use the remaining cash is still
not clear and this would guide the future direction of the
business.
Q3FY11 will guide the remaining business
Q2FY11 numbers include partial sale of the sold business,
which skews the quarterly numbers. We believe Q3FY11
would be good guide for actual profitability of the remaining
business and provide better visibility on the business.
VALUATIONS AND RECOMMENDATION
We believe Piramal’s CRAMS business will display strong
growth with higher profitability in FY12e as innovator
pharma companies come out of the mode of inventory destocking.
However, we retain our earlier estimates as we
await clarity on the business. We maintain ‘HOLD’
recommendation.