Piramal Healthcare - Unrelated diversification-The key risk!:: Macquarie Research,

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Piramal Healthcare
Unrelated diversification-The key risk!
Event
 PIHC announced its 1Q FY12 numbers, with net sales at Rs4.4b (up 24% YoY
for continuing business) and PAT of Rs893m boosted by Rs710m investment
income. The result was below our estimates. EBITDA margin remained weak at
1.6% for 1Q adjusting for the Rs764m forex gain. We maintain Underperform.
Impact
 Margins muted – PLSL consolidation in 2H to further put pressure:
EBITDA margin for the quarter was a mere 1.6% adjusting for the forex gain.
The pending transfer of PLSL’s NCE unit into PIHC in 2H may increase
annual expenses by ~Rs1.5bn, affecting margins of the remaining business.
 CRAMS (~ 66% of top line): Revenues grew by 40% YoY to Rs2.9 bn in 1Q
FY12. Management continues to guide strong traction in this business going
forward, given the visibility of the order book. PIHC aspires to a Rs50b top line
in 2016 for this segment, with planned investment of Rs27b going forward.
 Critical Care (~ 21% of top line): Revenues decreased16% YoY to Rs911 m
in 1Q FY12 due to deferment of sales in the Middle East, given political
unrest. PIHC aspires looks to a Rs20b top line in 2016 for this segment, with
planned investment of Rs15b going forward.
 OTC & Ophthalmology (~13% of top line) business reported net sales of
Rs557m (up 48% YoY). PIHC is making a major investment in advertisement
to establish the brands. PIHC aspires for a Rs10b top line in 2016 for this
segment, with planned investment of Rs25b going forward.
 Unchartered territory – financial services foray: PIHC is setting up an
NBFC for lending to infrastructure and other sectors. Fund management for
the real estate and infrastructure sectors is being pursued through the recent
acquisition of promoter group company Indiareit Fund. PIHC plans further
investment of ~ Rs25b into its financial service foray.
 2016 aspiration: PHL to have revenues of Rs100b with an EBITDA margin of
~ 18-20% by then, with plans to have a specialized financial service business.
Earnings and target price revision
 Introducing FY14 estimates. Now valuing remaining business Rs85/sh (@ 15x
FY13EBITDA vs. 1FY11A Sales earlier).TP revised to Rs360 (earlier Rs370).
Price catalyst
 12-month price target: Rs360.00 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 Rs85/sh (at 15x FY13E EBITDA of Rs990m).