Buy Piramal Healthcare Ltd.
Target : Rs 595
CM Price: Rs 504.30
Most profitable business sold out…
Abbott, US has bought the domestic formulation business of Piramal Healthcare (PHIL) for cash consideration of US$3.7 billion (US$2.12 billion upfront and equal annuity payment of US$400 million for four years starting CY11). The deal is valued at ~9.3x the revenue of the domestic business and is expected to close by Q2FY11 end. The domestic formulation business contributed ~54% to the FY10 topline. The deal includes transfer of manufacturing facilities at Baddi, rights to 350 brands and trademarks and transfer of ~5,200 employees of the domestic formulations business to Abbott.
PHIL has received Rs 350 crore as nonabatement fees whereby the Piramal group companies will not enter the branded domestic business for the next eight years. We estimate the residual businesses will clock an EPS of Rs 8.2 in FY12E. Valuing the cash per share at Rs 496 and residual business at Rs 98, we have arrived at a fair value of Rs 595 for PHIL, providing 18% upside from current levels. We are assigning BUY rating to the stock.
- Highlights of Analyst Meet
PHIL has retained its CRAMS, global critical care, diagnostics and domestic API and vitamins/minerals business. The company is considering a special dividend post the deal. The proceeds from the deal will be used to retire debt of ~Rs 1300 crore and venture into other emerging opportunities. The company will also look at acquisitions to complement the residual business and enter newer businesses.
Valuation
PHIL is set to receive US$3.3 billion on NPV value. This works out to Rs 496 per share (post long-term capital gains taxed at 21.5%, book value adjustment and debt repayment of ~Rs 1300 crore). The residual business is valued at Rs 98 (12x FY12E EPS). We rate PHIL as BUY with a target price of Rs 595. With cash utilisation by the management post the deal we expect the stock to get re-rated, going forward.
- The deal
We value the residual business at Rs 98/share on FY12E earnings. We value the cash inflow, including the upfront payment (US$2.12 billion) and the discounted value of the annuity payments adjusted for debt repayment and book value and capital gains tax, at Rs 496/share.
The combined value of the entity stands at Rs 595/share. We expect the stock to get re-rated on account of deployment of cash by the management.
- Residual business to remain key focus
Post the deal with Abbott, PHIL is left with the CRAMS, global critical care, diagnostics, domestic API and vitamins/minerals business. These businesses contributed ~45% to the FY10 topline. We expect a revamp in the international CRAMS business to lead the majority of the growth, going ahead. We expect the India-based assets to offset a decline in the international CRAMS business in the near term. The
Abbott-PHIL deal will lead to greater focus for PHIL to turn around its CRAMS business and drive the future growth of the critical care business.
Valuation
In the contract manufacturing space, PHIL grew at a slower pace on account of control over the channel inventory by PHIL’s CRAMS clients. However, with the closure of the Huddersfield plant and lower capacity utilisation of Morepeth, the outlook is robust in light of signs of the easing environment and significant cost saving to CRAMS clients via outsourcing to players like PHIL. We believe PHIL’s CRAMS business will see a recovery in FY11 as innovator pharma companies come out of the current mode of inventory destocking.
New orders from Pfizer will help revive Morepeth operations. We believe growth in the overseas CRAMS business will improve during FY11E.
We expect the India-based assets to offset a decline in the international CRAMS business in the near term. We expect margin expansion from Minrad operations due to sales ramp up and better sourcing. Going ahead, we expect the stock to get re-rated on account of a) future strategy and outlook b) incremental revenue from Minrad c) higher contribution of the CMG business and d) utilisation of cash. Margin improvement will be aided by a) higher realisation at Minrad and b) cost saving on account of closure of the Huddersfield facility.
PHIL is set to receive US$3.3 billion on NPV value. This works out to Rs 496 per share (post long-term capital gains taxed at 21.5%, book value adjustment and debt repayment of ~Rs 1300 crore). The residual business is valued at Rs 98 (12x FY12E EPS). We rate PHIL as BUY with a target price of Rs 595. With cash utilisation by the management post the deal we expect the stock to get re-rated, going forward.
Report card
| Attribute | Value | Date |
|---|---|---|
| PE ratio | 23.75 | 28/05/10 |
| EPS (Rs) | 21.21 | Mar, 10 |
| Sales (Rs crore) | 683.89 | Mar, 10 |
| Face Value (Rs) | 2 | |
| Net profit margin (%) | 11.08 | Mar, 09 |
| Last bonus | 1:2 | 30/09/93 |
| Last dividend (%) | 270 | 10/05/10 |
| Return on average equity | 23.15 | Mar, 09 |
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ICICI Securities Ltd has given a fresh call to Add Piramal Healthcare Ltd with a target of Rs.526.
Piramal Healthcare’s (PHIL) Q1FY11 results were very much off the line mainly on account of dismal pharma solutions (CRAMS) performance and subdued growth in the outgoing healthcare solutions business. Net sales grew by just 2.5% against our expectation of ~13% growth YoY.
EBITDA declined by ~14% while the margin also dropped by 310 bps YoY on account of structural cost changes. Except for Piramal Critical Care, which grew by 49% YoY, all segments registered slow to negative growth.
The management has altered its guidance for the CRAMS business from ~15% (given at the end of Q4FY10) to flat growth YoY. With further downsizing of business segments after the sale of the diagnostics business, the company will have its task cut out to improve the prospects of the CRAMS business.