Piramal Healthcare Ltd

Shareholders can remain invested in the stock of Piramal Healthcare in the near-term. With its key cash cow sold to Abbott Labs, the stock's current valuations largely take support from the cash value on its books.



Post the recently-announced buyback, which will entail a cash outflow of Rs 2,508 crore (if it is successful) the company would be left with cash of about Rs 3,500 crore.

After accounting for the staggered receipts of $1.6 billion over four years from Abbott Laboratories and Rs 300 crore over three years from Super Religare Laboratories, the total present value of cash per share (on post-buyback equity base) works out to about Rs 538.

Assigning a 30 per cent discount to this, for uncertainties regarding cash deployment, this would fall to Rs 376 per share.

The intrinsic per share value of its residual business, comprising of custom manufacturing, critical care and OTC works out to be about Rs 110 for FY11 (on reduced equity base).

This puts the fair value of the share at about Rs 486, a little higher than the stock's ruling price of Rs 477.

Buyback plans

The company recently announced a buyback plan as a means to return cash to its shareholders, following the sale of its domestic formulations business to Abbott Laboratories in May 2010. The announcement has failed to perk up the stock price on two counts.

For one, the proposed 20 per cent buyback of equity would allow each investor to tender only one-fifth of holdings while a dividend (hitherto promised) would have been distributed on all shares. Besides, the buyback would entail a higher tax outgo for short-term investors who bought the stock post the deal.

Two, the buyback price seems somewhat unattractive considering that the company had sold its growth engine and is now left with less entrenched businesses.

While the company is likely to invest some of its cash into its remaining businesses, the fiscal year nonetheless promises to be a tough one for them. The management has indicated at scaling down its earlier growth guidance for the businesses this fiscal.

In the just ended September quarter, Piramal's revenues declined by about 25 per cent. In terms of segmental break-up, while the sold domestic formulation business (which made up about 54 per cent of the overall revenue) fell by about 22 per cent, the residual businesses did not fare any better, as CRAMS and critical care businesses de-grew by 28 per cent.

The segments have put in unimpressive performances in the year so far, as the management has not been able to focus much on it following the Abbott deal. In FY-10, these businesses had enjoyed an overall sales of about Rs 1,300 crore.

Besides, there is uncertainty over what the company plans to do with the remaining cash on its books. The likely overhaul in the company's business over the next couple of years also pegs up risk.

The management has hinted that it might not remain a pure play pharma company for long.

Given these challenges, the buyback, pegged at just about 19 per cent premium to the stock's three-week average price, simply fails to stir interest, more so since the company has sold domestic formulations business for a price many times over its sales.

Exit opportunity

Even as selling the shares in the secondary market will give shareholders an immediate exit, it would deny them the chance to tender part of their shares in the 20 per cent equity buyback in February 2011, the record date for which is likely to be announced only then.

Shareholders with a low-to-medium risk appetite can consider selling their holdings at or above Rs 508 in the run up to the offer. Since we expect the share price to stabilise at about Rs 486 after the buyback, selling the share at or above Rs 508 would yield similar returns to the shareholders (assuming participation in the tender offer and without accounting for taxes).

It merits note here that the proposed buyback will see even the promoters tender their shares on a proportionate basis, thus limiting the buyback to a maximum of 20 per cent, while keeping their shareholding at its current 52 per cent level.

via BL