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Piramal Healthcare (PIRA.BO)
Wait and Watch
Cut TP to Rs400, Maintain Hold — We maintain our Hold/Medium Risk (2M) rating on
Piramal Healthcare (PIRA), with a revised TP of Rs400 (was Rs560). While there are
signs of recovery on the outsourcing biz, we still do not have much clarity on how the
management proposes to use the significant cash at its disposal. Near term earnings
(excl other income) will also likely remain under pressure, following the merger with
Piramal Lifesciences. We thus choose to stay on the sidelines for the time being. Dr
Reddy’s (REDY.BO; Rs1,490.00; 1L) and Lupin (LUPN.BO; Rs474.85; 1L) remain our
top picks in Indian Pharma.
Revising Estimates — We revise our estimates to reflect PIRA’s changed business
model – including divestments (Indian formulations, Pathlabs) and acquisitions
(IndiaReit fund, stake in Vodafone, merger with Piramal Lifesciences). Consequently,
we lower FY12 topline / EPS estimates by 59%/74%. A major part of the lower
bottomline is driven by the merger with Piramal Lifesciences (a pure R&D company).
We forecast topline CAGR of 21% over FY12E-14E, while EBIDTA margins would
remain subdued, given the high cost base (corporate overheads) and R&D spend.
Lowering Target Price to Rs400/sh — We now value PIRA on SoTP basis – 1) Base
biz valued at Rs190/sh based on 14x Sep’12E FDEPS (earlier 18x Jun’11E) & 2)
incorporating the NPV of the future cash inflows (from divestments of Indian
formulations and pathlabs businesses) – valued at Rs210/sh. Cumulatively, we arrive
at a target price of Rs400/sh.
Potential Catalysts — a) progress / greater clarity on deployment of idle cash,
especially any acquisitions – either in existing businesses or representing a foray into
new areas; b) signs of further improvement in contract manufacturing and research –
order wins, pricing improvement; c) any decision to return some of the idle cash to
investors – in case, there are not too many interesting acquisition opportunities.
Wait & Watch
We maintain our Hold/Medium Risk (2M) rating on Piramal Healthcare (PIRA), with a revised TP
of Rs400. While there are signs of recovery on the outsourcing biz, we still do not have much
clarity on how the management proposes to use the significant cash at its disposal. Near term
earnings (excl other income) will also likely remain under pressure, following the merger with
Piramal Lifesciences. We thus choose to stay on the sidelines for the time being. Dr Reddy’s &
Lupin remain our top picks in Indian Pharma.
Revising Estimates & Target Price
Piramal Healthcare’s business model has changed considerably over the last two
years, with a series of divestments as well as entry into new businesses. We factor
all of these into our estimates. Consequently, we lower FY12 revenue / earnings
estimates by 59%/74% and forecast 21% and 66% CAGRs in topline and earnings
over FY12E-14E.
Divestments – 1) Domestic branded formulations business to Abbott & 2)
Piramal Diagnostics to Super Religare Labs (now part of Fortis Healthcare)
Merger of Piramal Lifesciences (NCE/NBE research company) with itself – to be
completed by end of CY11 – share swap ratio of 1:4
Acquisitions /Investments – 1) Acquired IndiaReIT fund (AUM of Rs38bn) for
Rs2.3bn. IndiaReIT is a PE firm focused on real estate investments; 2) Creation
of non-banking financial company (NBFC) for real estate lending – proposed
investments of Rs7.5bn; 3) Acquisition of 5.5% stake in Vodafone India for
Rs28.5bn
The sharply lower earnings are largely a function of the much higher R&D cost,
following the merger of Piramal Lifesciences.
We also incorporate FY13E and FY14E estimates and forecast a topline CAGR
(FY12E - FY14E) of 21%, as existing businesses (especially OTC & contract
manufacturing) continue to show strong growth. EBITDA margins are expected to
remain muted, given the high cost base (corporate overheads) & NCE R&D cost.
Other income should remain high, owing to significant idle cash on the balance
sheet and further inflows over the next three years
PIRA’s FY11 balance sheet reflects cash and cash equivalents of Rs32bn with
receivables (related to the divestments) of Rs71bn. This is the main driver behind
the c66% CAGR in EPS over FY12E-FY14E.
Lowering Target Price to Rs400/sh
We now value PIRA on SoTP basis – 1) Base biz valued at Rs190/sh based on 14x
Sep’12E FDEPS (earlier 18x Jun’11E) & 2) incorporating the NPV of the future cash
inflows (from divestments of Indian formulations and pathlabs businesses) – valued
at Rs210/sh. Cumulatively, we arrive at a target price of Rs400/sh.
Piramal Healthcare
Company description
Piramal Healthcare (PIHC), is a company focused on global contract manufacturing
and research services along with a global anesthetic products biz, India OTC biz
and ophthalmology JV in India. The company has recently divested two of its key
businesses 1) India Branded Formulations & 2) Diagnostics biz for a total
consideration of cUS$4bn. As a strategy for future growth, over the last one year it
has acquired Piramal's NCE research and made new investments in financial
services business (a PE fund & an NBFC). The company still holds significant cash
and is looking to invest into pharma as well as other areas.
Investment strategy
We rate PIHC Hold/Medium Risk. It has remained focused on leveraging its
manufacturing capabilities and relationships with global majors, and has positioned
itself as a 'partner of choice' for innovator companies across the product life cycle
and value chain which should help future growth. It will also continue to
aggressively expand its existing businesses and look for diversification into other
areas. In the near term we think that the earnings would remain subdued owing to
higher costs.
Valuation
Our target price for Piramal of Rs400 is based on SOTP methodology. We value
PIRA on SoTP basis – 1) Base biz valued at Rs190/sh based on 14x Sep’12E
FDEPS and 2) incorporating the NPV of the future cash inflows (from divestments of
Indian formulations and path labs businesses) – valued at Rs210/sh. Cumulatively,
we arrive at a target price of Rs400/sh. The multiple is in line with our multiple for
other CRAMS companies.
Risks
We rate Piramal Medium Risk, as suggested by our quantitative risk-rating system.
The main downside risks to our target price are: 1) While custom manufacturing
should drive Piramal's revenues and profitability, any slip-up in executing the
contracts would be a big negative. 2) A break-up of any major association could
have a short-term impact on revenues and earnings. 3) Any unfavorable trend in
growth or pricing could have an adverse impact on the company's financials. Key
upside risks to our target price are: 1) Faster than expected recovery in the CRAMS
business; 2) A victory in the patent litigation with Baxter on Desflurane; 3) Better
than anticipated performance in the critical care business.
Dr Reddy
(REDY.BO; Rs1,490.00; 1L)
Valuation
Our Rs1,835 target price for DRL is based on a sum-of-the-parts valuation approach.
We use a target multiple of 20x to value DRL's core earnings. This is in line with its
historical trading range. At 20x Sep'12E earnings, we value DRL's base business at
Rs1,760. We continue to value DRL's Para IV pipeline separately at Rs75, based on
a probability adjusted DCF valuation. We use a range of probabilities from 25% to
90%, based on individual product dynamics, and a discount factor of 12.5% for the
opportunities being targeted over the next few years.
Risks
We rate DRL as Low Risk based on our quant-based risk-rating system, which
tracks 260-day historical share price volatility. Key Downside risks to our target price
include: (1) Further delay in approval for fondaparinux (Arixtra) could entail
downward revision of estimates; (2) Patent challenges are win-lose situations and
often cause stock-price volatility; and (3) Any rise in regulatory pressure on pricing /
competition in Russia/CIS.
Lupin
(LUPN.BO; Rs474.85; 1L)
Valuation
Given that pharma is a growth sector, we use P/E as our primary method to value
the base business of pharma companies. Lupin has historically (last six to seven
years) traded in a band of 10-34x one-year forward earnings. We value Lupin at 20x
12m forward earnings, in line with the sector leaders such as Cipla, Dr Reddy’s &
Sun Pharma due to its leadership in key markets/products & robust financial
metrics. At 20x Dec12E recurring FDEPS, we arrive at a target price of Rs 565.
Risks
We rate Lupin Low Risk, inline with the recommendation of our quantitative riskrating
system, which tracks 260-day historical share price volatility. Key downside
risks to achieving our target price include: 1) Earlier than expected Generic
competition in Suprax; 2) INR appreciation would hurt, given its exposure to global
markets; 3) Reasonable exposure to the domestic formulations market (c30% of
sales) leaves Lupin vulnerable to any significant widening of the price control net. 4)
Inability to effectively scale up the Kyowa operations or Antara sales.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Piramal Healthcare (PIRA.BO)
Wait and Watch
Cut TP to Rs400, Maintain Hold — We maintain our Hold/Medium Risk (2M) rating on
Piramal Healthcare (PIRA), with a revised TP of Rs400 (was Rs560). While there are
signs of recovery on the outsourcing biz, we still do not have much clarity on how the
management proposes to use the significant cash at its disposal. Near term earnings
(excl other income) will also likely remain under pressure, following the merger with
Piramal Lifesciences. We thus choose to stay on the sidelines for the time being. Dr
Reddy’s (REDY.BO; Rs1,490.00; 1L) and Lupin (LUPN.BO; Rs474.85; 1L) remain our
top picks in Indian Pharma.
Revising Estimates — We revise our estimates to reflect PIRA’s changed business
model – including divestments (Indian formulations, Pathlabs) and acquisitions
(IndiaReit fund, stake in Vodafone, merger with Piramal Lifesciences). Consequently,
we lower FY12 topline / EPS estimates by 59%/74%. A major part of the lower
bottomline is driven by the merger with Piramal Lifesciences (a pure R&D company).
We forecast topline CAGR of 21% over FY12E-14E, while EBIDTA margins would
remain subdued, given the high cost base (corporate overheads) and R&D spend.
Lowering Target Price to Rs400/sh — We now value PIRA on SoTP basis – 1) Base
biz valued at Rs190/sh based on 14x Sep’12E FDEPS (earlier 18x Jun’11E) & 2)
incorporating the NPV of the future cash inflows (from divestments of Indian
formulations and pathlabs businesses) – valued at Rs210/sh. Cumulatively, we arrive
at a target price of Rs400/sh.
Potential Catalysts — a) progress / greater clarity on deployment of idle cash,
especially any acquisitions – either in existing businesses or representing a foray into
new areas; b) signs of further improvement in contract manufacturing and research –
order wins, pricing improvement; c) any decision to return some of the idle cash to
investors – in case, there are not too many interesting acquisition opportunities.
Wait & Watch
We maintain our Hold/Medium Risk (2M) rating on Piramal Healthcare (PIRA), with a revised TP
of Rs400. While there are signs of recovery on the outsourcing biz, we still do not have much
clarity on how the management proposes to use the significant cash at its disposal. Near term
earnings (excl other income) will also likely remain under pressure, following the merger with
Piramal Lifesciences. We thus choose to stay on the sidelines for the time being. Dr Reddy’s &
Lupin remain our top picks in Indian Pharma.
Revising Estimates & Target Price
Piramal Healthcare’s business model has changed considerably over the last two
years, with a series of divestments as well as entry into new businesses. We factor
all of these into our estimates. Consequently, we lower FY12 revenue / earnings
estimates by 59%/74% and forecast 21% and 66% CAGRs in topline and earnings
over FY12E-14E.
Divestments – 1) Domestic branded formulations business to Abbott & 2)
Piramal Diagnostics to Super Religare Labs (now part of Fortis Healthcare)
Merger of Piramal Lifesciences (NCE/NBE research company) with itself – to be
completed by end of CY11 – share swap ratio of 1:4
Acquisitions /Investments – 1) Acquired IndiaReIT fund (AUM of Rs38bn) for
Rs2.3bn. IndiaReIT is a PE firm focused on real estate investments; 2) Creation
of non-banking financial company (NBFC) for real estate lending – proposed
investments of Rs7.5bn; 3) Acquisition of 5.5% stake in Vodafone India for
Rs28.5bn
The sharply lower earnings are largely a function of the much higher R&D cost,
following the merger of Piramal Lifesciences.
We also incorporate FY13E and FY14E estimates and forecast a topline CAGR
(FY12E - FY14E) of 21%, as existing businesses (especially OTC & contract
manufacturing) continue to show strong growth. EBITDA margins are expected to
remain muted, given the high cost base (corporate overheads) & NCE R&D cost.
Other income should remain high, owing to significant idle cash on the balance
sheet and further inflows over the next three years
PIRA’s FY11 balance sheet reflects cash and cash equivalents of Rs32bn with
receivables (related to the divestments) of Rs71bn. This is the main driver behind
the c66% CAGR in EPS over FY12E-FY14E.
Lowering Target Price to Rs400/sh
We now value PIRA on SoTP basis – 1) Base biz valued at Rs190/sh based on 14x
Sep’12E FDEPS (earlier 18x Jun’11E) & 2) incorporating the NPV of the future cash
inflows (from divestments of Indian formulations and pathlabs businesses) – valued
at Rs210/sh. Cumulatively, we arrive at a target price of Rs400/sh.
Piramal Healthcare
Company description
Piramal Healthcare (PIHC), is a company focused on global contract manufacturing
and research services along with a global anesthetic products biz, India OTC biz
and ophthalmology JV in India. The company has recently divested two of its key
businesses 1) India Branded Formulations & 2) Diagnostics biz for a total
consideration of cUS$4bn. As a strategy for future growth, over the last one year it
has acquired Piramal's NCE research and made new investments in financial
services business (a PE fund & an NBFC). The company still holds significant cash
and is looking to invest into pharma as well as other areas.
Investment strategy
We rate PIHC Hold/Medium Risk. It has remained focused on leveraging its
manufacturing capabilities and relationships with global majors, and has positioned
itself as a 'partner of choice' for innovator companies across the product life cycle
and value chain which should help future growth. It will also continue to
aggressively expand its existing businesses and look for diversification into other
areas. In the near term we think that the earnings would remain subdued owing to
higher costs.
Valuation
Our target price for Piramal of Rs400 is based on SOTP methodology. We value
PIRA on SoTP basis – 1) Base biz valued at Rs190/sh based on 14x Sep’12E
FDEPS and 2) incorporating the NPV of the future cash inflows (from divestments of
Indian formulations and path labs businesses) – valued at Rs210/sh. Cumulatively,
we arrive at a target price of Rs400/sh. The multiple is in line with our multiple for
other CRAMS companies.
Risks
We rate Piramal Medium Risk, as suggested by our quantitative risk-rating system.
The main downside risks to our target price are: 1) While custom manufacturing
should drive Piramal's revenues and profitability, any slip-up in executing the
contracts would be a big negative. 2) A break-up of any major association could
have a short-term impact on revenues and earnings. 3) Any unfavorable trend in
growth or pricing could have an adverse impact on the company's financials. Key
upside risks to our target price are: 1) Faster than expected recovery in the CRAMS
business; 2) A victory in the patent litigation with Baxter on Desflurane; 3) Better
than anticipated performance in the critical care business.
Dr Reddy
(REDY.BO; Rs1,490.00; 1L)
Valuation
Our Rs1,835 target price for DRL is based on a sum-of-the-parts valuation approach.
We use a target multiple of 20x to value DRL's core earnings. This is in line with its
historical trading range. At 20x Sep'12E earnings, we value DRL's base business at
Rs1,760. We continue to value DRL's Para IV pipeline separately at Rs75, based on
a probability adjusted DCF valuation. We use a range of probabilities from 25% to
90%, based on individual product dynamics, and a discount factor of 12.5% for the
opportunities being targeted over the next few years.
Risks
We rate DRL as Low Risk based on our quant-based risk-rating system, which
tracks 260-day historical share price volatility. Key Downside risks to our target price
include: (1) Further delay in approval for fondaparinux (Arixtra) could entail
downward revision of estimates; (2) Patent challenges are win-lose situations and
often cause stock-price volatility; and (3) Any rise in regulatory pressure on pricing /
competition in Russia/CIS.
Lupin
(LUPN.BO; Rs474.85; 1L)
Valuation
Given that pharma is a growth sector, we use P/E as our primary method to value
the base business of pharma companies. Lupin has historically (last six to seven
years) traded in a band of 10-34x one-year forward earnings. We value Lupin at 20x
12m forward earnings, in line with the sector leaders such as Cipla, Dr Reddy’s &
Sun Pharma due to its leadership in key markets/products & robust financial
metrics. At 20x Dec12E recurring FDEPS, we arrive at a target price of Rs 565.
Risks
We rate Lupin Low Risk, inline with the recommendation of our quantitative riskrating
system, which tracks 260-day historical share price volatility. Key downside
risks to achieving our target price include: 1) Earlier than expected Generic
competition in Suprax; 2) INR appreciation would hurt, given its exposure to global
markets; 3) Reasonable exposure to the domestic formulations market (c30% of
sales) leaves Lupin vulnerable to any significant widening of the price control net. 4)
Inability to effectively scale up the Kyowa operations or Antara sales.
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