Piramal Healthcare

Shareholders can remain invested in the stock of Piramal Healthcare, at least until such time they become eligible for the special dividend following the sale of a key business to Abbott Laboratories.



Piramal had in May this year sold its domestic formulations business to the MNC for a whopping $3.72 billion (about Rs 17,400 crore). It later sold its diagnostic services business to Super Religare Laboratories for about Rs 600 crore. While these no doubt would add to its cash coffers, investors need to note the inherent risks that come with it.

For one, the lack of clarity on the company's future plans. While the management has said that it would invest a part of the sale proceeds into its residual businesses, the outlook as yet is ambiguous. Slackening growth guidance for the custom manufacturing business — the most significant contributor in its residual business — too is a concern. Second, there is uncertainty over the new business venture that Piramal would take up with its excess cash.

The company expects to make an announcement on this by the end of the current quarter. Finally, though Piramal would reward its shareholders with a special one-time dividend on closure of the deals, the amount remains unknown as yet (expected by end of September).

While the stock price has held its ground so far, it is has largely been only in anticipation of the dividend.

The stock could come under selling pressure if there are disappointments in terms of the company's long-term growth plans or a lower-than-expected special dividend. It merits note here than between March and June 2010, the promoters hiked their stake in the company from 49.2 per cent to 52.1 per cent. It closed Friday at Rs 478.

Valuations

The company's current valuations are largely based on the huge cash inflows it would get on consummation of recent deals. After accounting for a tax liability of about Rs 3,500 crore for the deals, the net cash value per share works out to about Rs 500.

The value falls lower to Rs 375 per share, discounting for the risks and uncertainties regarding cash deployment, as the management has not yet made up its mind on the proportion of the cash it plans to invest back into the existing business, give out as special dividend and invest into its new business venture.

The intrinsic per share value of its residual business, comprising of custom manufacturing, critical care, and OTC works out to be about Rs 114.

This puts the fair value of the share at about Rs 489, slightly higher than its closing price (the fair value would add up to about Rs 614, without discounting for the investment risk).

June quarter disappoints

The company's performance in the June quarter however has not been very impressive. Overall, it reported a sales growth of 2.7 per cent, while profits fell by over 5 per cent. As the performance of its domestic formulations (only 5 per cent growth) and diagnostics business would no longer have any bearing on the stock's fundamentals, the poor performance of its custom manufacturing and OTC segment do raise some concerns. Revenues from its custom manufacturing business were lower by about 17 per cent. The management attributed the fall in revenues (about 16 per cent) from its overseas assets to adverse forex movements. It also said that the sales from its India assets declined (by about 18 per cent) largely due the high base last year, when the company had executed a large contract.

Notably, though the management says it has a clear visibility in terms of orders, it has lowered the revenue guidance for the segment from 10-12 per cent growth (given at the end of last fiscal) to flat sales for the year. The lower offtake in the custom manufacturing business also pushed its inventory days higher to 55 from 46.

The other concern is its poor performance in the OTC segment. Though only an insignificant contributor to overall revenues presently, this segment too reported a fall in sales to about Rs 22 crore from Rs 26 crore over the year. The fall has been in spite of the addition of the emergency contraceptive drug, i-Pill, which it had bought from Cipla in March this year, to its product portfolio.

Overall, operating profit margins declined to 16.4 per cent from 19.5 per cent. Given that the quarter was marked by the transition of its sold businesses to Abbott, performance of these two businesses in the next couple of quarters will bear a close watch.

Silver lining

The performance of its critical care business has been the only bright spot for the quarter, what with its revenues growing by about 48.5 per cent. This however was largely driven by the strong sales of Sevoflurane in the US (through its acquisition of Minrad in late 2008), as sales excluding Minrad were disappointing.

The management expects its Minrad revenues and margins to scale up further from hereon. It has already installed vapourisers across hospitals in the US and applied for registrations in 27 countries across Europe. The Desflurane approval (expected by early next fiscal) could act as a trigger for this business.

via BL