Piramal Healthcare - Muted Margin::Macquarie Research,

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Piramal Healthcare
Muted Margin
Event
 Piramal Healthcare (PIHC) announced its 2Q FY12 numbers, with net sales at
Rs4.8bn (up36 % YoY for continuing business) and PAT of Rs524m, boosted
by Rs309m investment income and Rs1bn of forex gain. EBITDA margin
declined further to -4.8% for 2Q (from 1.6% in 1Q FY12). The result was
below our estimates.
 PIHC has now corrected ~23% (underperformed BSE healthcare index by ~18%)
since 9 May 2011 (see our flyer, Piramal Healthcare – Changing risk profile), and
the stock is now trading closer to our TP. We upgrade PIHC to Neutral from
Underperform and maintain our TP of Rs360. However, we do acknowledge that
there could be further downside on value-destructive uses of cash.
Impact
 Margins muted – PLSL consolidation to add further pressure: EBITDA
margin for the quarter was -4.8%. The margin declined on account of higher
material cost, higher staff cost (one-off performance pay) and higher
investments in the OTC business. The transfer of PLSL's NCE unit into PIHC
in 2H may increase annual expenses by ~Rs1.5bn, affecting margins. The
PLSL demerger is expected to happen by the end of 3Q FY12.
 Guidance for FY12 for pharma businesses: Management guided for 20%
growth in revenue and an EBITDA margin of 4–5% for FY12. For 1H FY12
revenue grew by ~30%. This implies growth of ~10% YoY in 2H FY12.
 CRAMS (~63% of top line): Revenues grew by 32% YoY to Rs3bn in 2Q
FY12. Management continues to guide for strong traction in this business.
 Critical Care (~19% of top line): Revenues grew 43% YoY to Rs916m in 2Q
FY12. The crisis in Middle East is now resolved. PIHC has got Sevoflurane
registration approval for Europe, and sales should start by end-FY12.
 OTC & Ophthalmology (~12% of top line): This business reported net sales
of Rs571m (up 59% YoY). PIHC is making a major investment in
advertisement.
 Cash position of PIHC: Recently PIHC acquired a 5.5% stake in Vodafone
Essar Limited (VEL) for a cash consideration of US$640m. Currently, PIHC
has ~Rs7.4bn of cash and cash receivables from Abbott of Rs56bn.
Earnings and target price revision
 Upgrading to Neutral from Underperform. No change to estimates or TP.
Price catalyst
 12-month price target: Rs360.00 based on a Sum of Parts methodology.
 Catalyst: Value-destructive use of cash.
Action and recommendation
 We upgrade to Neutral from Underperform and maintain a TP of Rs360. We
value cash at a 50% discount (@ Rs275/sh) and the remaining part of the
business at Rs85/sh (at 15x FY13E EBITDA of Rs990m).