Piramal Healthcare Ltd Buyback price not attractive:: Religare Research

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Piramal Healthcare Ltd
Buyback price not attractive; Maintain SELL
Piramal Healthcare’s (PIHC’s) Q2FY11 results were below our as well as street
estimates as its performance was impacted by several one-offs. Moreover, PIHC
has announced the buyback of its shares up to 20% of its equity. The buyback
price of Rs 600 is 17% above the CMP of Rs 515. Our calculations suggest that
this price is not attractive enough for investors. The stock should react
negatively.
This apart, we believe that uncertainty over utilisation of cash proceeds from
the Abbott deal remains an overhang on the stock. We thus reiterate our SELL
rating on PIHC with a target price of Rs 480 (7% downside).
Buyback announcement: PIHC has declared the buyback of its shares up to 20%
of its equity. Current equity capital stands at Rs 418mn (face value: Rs 2, no of
shares: 209mn). The company can buy back up to 418mn shares and the total
outgo can touch Rs 25bn. Promoters will tender their shares to match the
participation from non-promoters, implying that the shareholding pattern (52%
promoters, 48% non-promoters) will remain unchanged after the buyback. The
buyback process is expected to be completed by Feb ’11.
Buyback price not attractive: If we assume the CMP as the price post open offer,
the pre-tax return will be 3%—an unattractive proposition in view. Besides, there
is a significant downside to the CMP as it factors in the NPV from the current
cash balance that should go down as Rs 25bn will be utilised for the buyback.
Results impacted by one-offs: For Q2FY11, PIHC reported a 26% decline in sales
and a loss at operating and PBT levels (before exceptional items). The company’s
performance was impacted by several one-offs, mainly because Q2FY11 was the
transition period for the Abbott deal.
Uncertainty over cash utilisation remains an overhang, Reiterate Sell: We
remain cautious on the stock due to the risk associated with the utilisation of
cash proceeds from the Abbott deal. Therefore, while the NPV of these cash
proceeds is Rs 480, we ascribe a 20% discount to this value; our risk adjusted
NPV thus stands at Rs 380. The valuation of the remaining business is Rs 100.
The total target price is Rs 480, a 7% downside from current levels. Maintain
SELL.