Goldman Sachs -Piramal : 2011 to be year of transition; Neutral

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Piramal (PIRA.BO): 2011 to be year of transition; remain Neutral
What’s changed
We maintain our Neutral rating on Piramal as the company charts its
future strategy and growth course. In our view, a large component of the
company’s value is currently cash and a smaller component the residual
businesses of CRAMS, Global Critical Care and OTC. We maintain our
12-month TP of Rs480, implying 14% potential upside.

Implications
 We see continued uncertainty on full deployment of cash: We
believe that valuation for Piramal post the Abbott deal is mainly
dependent on effective deployment of the US$3.7bn cash accrued
from the deal. While a major catalyst following the announcement
of the buy-back proposal on October 22 (up to 20% equity at
Rs600/sh; promoters to tender an equal number of shares) is behind
us, uncertainty regarding the cash deployment continues.
 Limited upside until certainty emerges: Management
commentary on seeking acquisitions beyond healthcare implies
uncertainty on cash returns and the multiples it could command.
While share price could rise around the buy-back period (Feb/Mar
2011), we believe there is reduced potential for complete utilization
of cash in the near-term and thus limited upside in the shares.
 Residual business in flux: We believe the residual businesses (post
Abbott deal and Pathlabs divestiture) consisting of CRAMS, critical
care and OTC are in a state of flux as management focus has been
occupied by the closure of the Abbott deal and upcoming share buyback
program. While margins have taken a hit in this transition
period, we expect margins to recover to normalized .
 We expect revenue growth for Piramal’s CRAMS business over
FY11E-FY13E to be driven by a recovery in the global CRAMS cycle
on the back of restocking of inventory. We also expect increased
presence in the global critical care business through an enhanced
portfolio of products to contribute to revenue growth. We finetune
our FY11E-FY13E EPS estimates for 3QFY11 results.
Valuation
 Our 12-month SOTP-based target price of Rs480 implies 14%
potential upside. We apply a 20% discount to the cash available post
the buy-back (Rs438/sh), leading to a value of Rs350/sh. For the
residual businesses, we use a multiple of 12X on FY12E EPS of
Rs10.9 to arrive at a value of Rs130.
Key risks
 Upside: Earlier-than-expected turnaround in CRAMS business;
Downside: Large-scale acquisition outside the healthcare sector.
INVESTMENT LIST MEMBERSHIP
Neutral