Piramal Healthcare - Changing risk profile:: Macquarie Research,

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Piramal Healthcare
Changing risk profile
Event
 PIHC announced its 4Q FY11 numbers, with net sales at Rs5.6bn (up 38% YoY
for continuing business) and PAT of Rs2bn. Operating income was Rs6.9bn,
boosted by Rs1.3bn investment income. EBITDA margin was 8.2% for 4Q.
 The NCE unit of Piramal Life Sciences (PLSL IN, Not rated) will be transferred
into PIHC. Also, PIHC will set up an NBFC and will get into fund management
for real estate and infra sectors. PIHC is also acquiring Indiareit Fund
Advisors Pvt Ltd. (IFAL) and Indiareit Investment Management Company
(IIMC) for a consideration of Rs2.25bn.

 We believe diversification into the high-risk profile, non-healthcare businesses
and the uncertainty involved therein changes the risk profile of PIHC
significantly. We are now valuing the remaining cash at a higher discount of
50% (vs.15% earlier). We thus downgrade PIHC to UP from OP and cut our
TP to Rs370 from Rs600.
Impact
 Back to square one – transfer of the NCE unit of PLSL into PIHC: All
assets and liabilities of the NCE division will be transferred to PIHC at book
value. The transfer results in a share dilution of 3.1% for PIHC (value of 4
PLSL shares for 1 PIHC share). PIHC’s total debt will increase by Rs4.85bn
and annual expense by ~Rs1.5bn, affecting the margin.
 Unchartered territory – financial services foray: PIHC plans to set up an
NBFC for lending to the infrastructure sector and to other sectors. It also plans
to get into fund management for the real estate and infrastructure sectors
through the acquisition of promoter group companies Indiareit Fund Advisors
Pvt Ltd(IFAL) and Indiareit Investment Management Company (IIMC) for a
total consideration of Rs2.25bn. IFAL is advisor to the Indiareit Fund ( a
domestic real estate Private Equity fund). IIMC is a manager to offshore Real
Estate Private Equity funds investing in India through the FDI route. Total
funds under management for these funds are Rs38bn.
 Continuing businesses – targeting 25% 3-year sales CAGR: The
remaining business grew 38% YoY in 4Q FY11. PIHC is targeting a 25% 3-
year sales CAGR in these business, expecting a future margin recovery.
Earnings and target price revision
 Due to the sale of the domestic formulations business (more than 50% of sales)
in 1Q FY11, our previous earnings esitmates for FY11-13 are no longer
applicable. TP cut to Rs370 from Rs600; we now value cash at a 50% discount.
Price catalyst
 12-month price target: Rs370.00 based on a Sum of Parts methodology.
 Catalyst: Value destructive acquisition.
Action and recommendation
 Given the uncertainty regarding the use of cash for risky ventures, we believe
there will be pressure on the stock and that clarity is unlikely in the medium
term. We now value cash at a 50% discount (@ Rs275/sh) and the remaining
part of the business at Rs95/sh (at 1x FY11A sales of Rs16bn)