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PIRAMAL HEALTHCARE
Receding headwinds in CRAMs
�� Receding concerns in CRAMs drive top-line growth
Q3FY11 results (first quarter post closure of deals) reflect Piramal Healthcare’s
(PIHC) residual business (40% of FY10 sales) performance, with sales of INR 4
bn, up 26% Y-o-Y, in-line with our estimates, led by strong growth in CRAMs
India assets (40% Y-o-Y); CRAMs business (outside India) grew 6% Y-o-Y. GCC
grew 28% Y-o-Y with strong ramp-up in Sevoflurane and Propofol. Operating
EBITDA margin (ex-other income) of -8% had an impact from higher fixed
overheads. PIHC recorded one-time forex gain of INR 145 mn and investment
income of INR 1.3 bn (~8% returns on cash and investments of USD 2.7 bn),
driving PAT to INR 603 mn. Tax rate of 27% was above our estimate; PIHC
guides 17% tax rate for FY11E.
�� Guidance reflects positive outlook for residual business
PIHC has indicated that operating margins during the quarter have been
unusually affected by business sell-offs and expects profitability to normalize in
the coming quarters. Management guidance for Q4 FY11 depict strong revenue
growth (32% Q-o-Q) with sales of INR 5.3 bn and EBITDA margins (excluding
other income) at 14% versus -8% in Q3FY11. Overall management has indicated
positive outlook and expects strong ramp-up in CRAMs India assets from FY12,
reflecting receding headwinds from destocking of inventories.
�� Fair value of business: Function of cash and residual business
We estimate the fair value of the stock (post share buyback) at INR 610 per
share, based on residual business (11x FY12E valued at INR 40) and cash
retained (valued at 1.0x at INR 570), which provides downside support to CMP,
in our view. PIHC’s share buyback proposal (20% of outstanding shares at INR
600 per share) will lead to a potential cash outflow of INR 25 bn (INR 120 per
share), already factored in our estimates. The company has indicated completion
of share buyback by March 2011 end.
�� Outlook and valuations: Cash utilization remains the key; Under Review
We believe lack of clarity on utilization of cash remains a key overhang on the
valuations. At CMP of INR 420 per share, the market is discounting cash value
per share by 33% (adj. for INR 40/share value of residual business), which could
narrow post clarity by management on utilisation of cash proceeds, in our view.
Further, current cash in business provide downside support to valuation.
However, we remain conservative and maintain ‘UNDER REVIEW’ rating.
�� Company Description
PIHC hived off its domestic formulation and diagnostics businesses which accounted for
60% of its total sales in FY10 for total consideration of USD 3.9 bn. The retained
business has sales of INR 15.6 bn (~43% of total sales in FY10) and includes custom
manufacturing (CRAMs), global critical care, and OTC business (including allergen JV).
The company, through various acquisitions outside India, scaled up its CRAMs business
(pharma solutions). The company has adopted a unique strategy in regulated markets by
becoming a partner of choice for big pharma where it leverages its manufacturing skills
to provide value to innovator companies. PIHC also has a niche presence in the global
critical care business, comprising inhalation anesthetic (IA) products (sevoflurane,
desflurane, halothene and isoflurane). The company acquired Minrad (IA) in FY09 and
Injectibles anesthetics business from Bharat serums in FY10 to expand its critical care
franchise. With these acquisitions, PIHC has a complete portfolio of product offerings in
the IA segment.
�� Investment Theme
We estimate core earnings (excl investment income) from residual business at INR 617
mn FY12E. The sales is expected to grow at 11% CAGR (FY10-12) to INR 19 bn. We
expect CRAMs to turnaround with 20% Y-o-Y growth in FY12E from a low base in FY10
and FY11. Further, Minrad acquisition provides visibility to GCC business and potential
for growth post launch of desflurane by FY12. We expect critical care to grow at ~29%
CAGR over medium term, led by 47% growth in Minrad to USD 95 mn by FY12. We
believe company will purse acquisitions to scale up the residual businesses and will also
invest in new ventures, the impact of which cannot be currently estimated due to lack of
visibility on these ventures. However, cash and investments are expected generate INR
2.8 bn and INR 4.9 bn of interest income in FY11 and FY12, respectively.
�� Key Risks
Utilization of proceeds from deal consideration
The company post deal closure will likely have ~INR 108 bn in cash and expects it to
utilize the proceeds for expanding current businesses with specific focus on OTC and
Critical care. We believe PIHC would continue to build current businesses through
acquisitions. However with the large cash inflow from deal, management would likely
pursue larger transactions which increases execution risk and impacts future earnings.
Further, management intent to pursue non-healthcare business will likely be an
overhang on valuation in near term, in our view.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
PIRAMAL HEALTHCARE
Receding headwinds in CRAMs
�� Receding concerns in CRAMs drive top-line growth
Q3FY11 results (first quarter post closure of deals) reflect Piramal Healthcare’s
(PIHC) residual business (40% of FY10 sales) performance, with sales of INR 4
bn, up 26% Y-o-Y, in-line with our estimates, led by strong growth in CRAMs
India assets (40% Y-o-Y); CRAMs business (outside India) grew 6% Y-o-Y. GCC
grew 28% Y-o-Y with strong ramp-up in Sevoflurane and Propofol. Operating
EBITDA margin (ex-other income) of -8% had an impact from higher fixed
overheads. PIHC recorded one-time forex gain of INR 145 mn and investment
income of INR 1.3 bn (~8% returns on cash and investments of USD 2.7 bn),
driving PAT to INR 603 mn. Tax rate of 27% was above our estimate; PIHC
guides 17% tax rate for FY11E.
�� Guidance reflects positive outlook for residual business
PIHC has indicated that operating margins during the quarter have been
unusually affected by business sell-offs and expects profitability to normalize in
the coming quarters. Management guidance for Q4 FY11 depict strong revenue
growth (32% Q-o-Q) with sales of INR 5.3 bn and EBITDA margins (excluding
other income) at 14% versus -8% in Q3FY11. Overall management has indicated
positive outlook and expects strong ramp-up in CRAMs India assets from FY12,
reflecting receding headwinds from destocking of inventories.
�� Fair value of business: Function of cash and residual business
We estimate the fair value of the stock (post share buyback) at INR 610 per
share, based on residual business (11x FY12E valued at INR 40) and cash
retained (valued at 1.0x at INR 570), which provides downside support to CMP,
in our view. PIHC’s share buyback proposal (20% of outstanding shares at INR
600 per share) will lead to a potential cash outflow of INR 25 bn (INR 120 per
share), already factored in our estimates. The company has indicated completion
of share buyback by March 2011 end.
�� Outlook and valuations: Cash utilization remains the key; Under Review
We believe lack of clarity on utilization of cash remains a key overhang on the
valuations. At CMP of INR 420 per share, the market is discounting cash value
per share by 33% (adj. for INR 40/share value of residual business), which could
narrow post clarity by management on utilisation of cash proceeds, in our view.
Further, current cash in business provide downside support to valuation.
However, we remain conservative and maintain ‘UNDER REVIEW’ rating.
�� Company Description
PIHC hived off its domestic formulation and diagnostics businesses which accounted for
60% of its total sales in FY10 for total consideration of USD 3.9 bn. The retained
business has sales of INR 15.6 bn (~43% of total sales in FY10) and includes custom
manufacturing (CRAMs), global critical care, and OTC business (including allergen JV).
The company, through various acquisitions outside India, scaled up its CRAMs business
(pharma solutions). The company has adopted a unique strategy in regulated markets by
becoming a partner of choice for big pharma where it leverages its manufacturing skills
to provide value to innovator companies. PIHC also has a niche presence in the global
critical care business, comprising inhalation anesthetic (IA) products (sevoflurane,
desflurane, halothene and isoflurane). The company acquired Minrad (IA) in FY09 and
Injectibles anesthetics business from Bharat serums in FY10 to expand its critical care
franchise. With these acquisitions, PIHC has a complete portfolio of product offerings in
the IA segment.
�� Investment Theme
We estimate core earnings (excl investment income) from residual business at INR 617
mn FY12E. The sales is expected to grow at 11% CAGR (FY10-12) to INR 19 bn. We
expect CRAMs to turnaround with 20% Y-o-Y growth in FY12E from a low base in FY10
and FY11. Further, Minrad acquisition provides visibility to GCC business and potential
for growth post launch of desflurane by FY12. We expect critical care to grow at ~29%
CAGR over medium term, led by 47% growth in Minrad to USD 95 mn by FY12. We
believe company will purse acquisitions to scale up the residual businesses and will also
invest in new ventures, the impact of which cannot be currently estimated due to lack of
visibility on these ventures. However, cash and investments are expected generate INR
2.8 bn and INR 4.9 bn of interest income in FY11 and FY12, respectively.
�� Key Risks
Utilization of proceeds from deal consideration
The company post deal closure will likely have ~INR 108 bn in cash and expects it to
utilize the proceeds for expanding current businesses with specific focus on OTC and
Critical care. We believe PIHC would continue to build current businesses through
acquisitions. However with the large cash inflow from deal, management would likely
pursue larger transactions which increases execution risk and impacts future earnings.
Further, management intent to pursue non-healthcare business will likely be an
overhang on valuation in near term, in our view.
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