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You are here : IndiaNotes >> Research & Analysis >> Companies >> Piramal Enterprises Ltd. >> Research

Piramal Healthcare: Strong fundamentals at a throwaway price

Abhishek Sinha | 18 Aug, 2011  | Follow Author | Add to my Favourites 


Established in 1988, Piramal Healthcare Ltd. (PHL) is now one of the largest pharmaceutical companies in India. It has assets across North America, Europe and Asia and is also one of the largest custom manufacturing companies across the world. It has a huge presence in the critical space with supply of anesthesia products to over 100 countries. As per United Nations Conference on Trade and Development’s (UNCTAD’s), World Investment Report, 2011, PHL ranks 5th in list of top 10 pharmaceutical contract manufacturers globally.

Company recently sold its domestic formulation business to Abbott for Rs17,600 crores and the management is planning entry into unrelated businesses like financial services and real estate. More details about its continuing businesses are presented in the table below.

Segments

Description

Growth prospects/Strengths

 

 

Pharma Solutions

(Contract Development and Manufacturing division)

 

 

Provides end-to-end support for bringing a drug to market or managing the life cycle of a launched drug.

Presence in

North America, UK and India

 

- To invest Rs 2,700 crore over the next five years

- Acquire facilities from existing players

- Strong domestic growth seen in the past few quarters

 

 

Critical Care

(Provides drug to hospitals worldwide)

 

 

 

Markets life saving pharmaceuticals which include Inhalation and Intravenous Anaesthetics, Plasma Volume Expanders and Muscle Relaxants.

 

- Presence in 102 countries

- To invest Rs 1,500 crore over the next five years

- Entry into European markets with existing and new critical care products

- Acquisition of anesthetic products business of Bharat Serums and Vaccines Limited

 

 

 

Financial Services

 

 

 

- Acquired Indiareit (a real estate management company)

- To set up a

NBFC for lending to

Infrastructure and other sectors

- New segment, still building the management team and deciding on investment areas and target customer segments

 

OTC & Ophthalmology

 

 

 

- Sales in this segment have grown by 29% CAGR in the last three years

 

 

- To invest Rs 2,500 crore over the next five years

- Portfolio of renowned and accepted brands like I pill, Saridon and Lacto Calamine

 

Source: Company annual report, ValueNotes research

Stock data (August 17, 2011)

BSE

Scrip Code

500302

Share Price (Rs.)

373.75

No. Of Shares (Crore Nos.)

16.72

Market Cap (Rs. Crore)

6,250

52 week high/low (Rs.)

560/354

Average Volume (6month)

99,474

Source: BSE

Shareholding Pattern

The shareholding pattern as on 30th June 2011 is as follows:
 

Source: BSE

Financial performance

(in Rs crore)

Mar '07

Mar '08

Mar '09

Mar '10

Mar '11

CAGR (%)

Total income

1609.7

1917.7

2321.9

2654.5

1584.2

-0.4%

Growth %

 

19.1%

21.1%

14.3%

-40.3%

 

Cost of sales

1334.5

1517.2

1814.4

2062.0

1566.8

4.1%

Growth %

 

13.7%

19.6%

13.6%

-24.0%

 

Operating profits

275.2

400.5

507.5

592.5

17.4

-49.8%

OPM %

17.1%

20.9%

21.9%

22.3%

1.1%

 

Net profit

188.3

301.5

275.3

443.2

12896.9

187.7%

Growth %

 

60%

-9%

61%

2810%

 

Net margins %

11.7%

15.7%

11.9%

16.7%

814.1%

 

Shareholders' Equity

1056.4

1016.5

1189.0

1500.6

11698.5

82.4%

Total Debt

396.2

504.3

976.9

661.0

286.3

-7.8%

Debt / equity

0.38

0.50

0.82

0.44

0.02

 

EPS

8.9

14.4

13.2

21.2

768.1

204.8%

DPS

3.5

4.2

4.2

5.4

12.0

36.1%

Dividend payout %

39.3%

29.2%

31.9%

25.5%

1.6%

 

Operating Cash Flow

157.34

167.33

133.18

-92

564.08

37.6%

ROE (%)

17.8%

29.5%

23.2%

29.5%

110.2%

 

Source: Dion Global Solutions

PHL has grown at an exceptional rate of 29% CAGR since 1988 in terms of sales. Net profit has grown at 33% for the same period. The financial numbers in the table above cannot be compared with previous year’s figures as the company sold off its domestic formulations business to Abbott for around Rs17,600 crore. Company has received Rs10,000 crores cash and will receive the remaining amount in parts over the next few quarters. It also sold its diagnostics arm to Super Religare Laboratories Ltd for Rs600 crore in July 2010. Company has bought back 20% of its outstanding shares which amounts to around Rs2,500 crores.

On 10th August PHL announced its decision to acquire 5.5% stake in Vodafone Essar Ltd. for Rs2,856 crores. Management plans to exit Vodafone in two years and expects 17-20% return from this investment. The management’s explanation for this acquisition is that it is a better avenue than fixed deposits to park surplus funds. Even if the Vodafone IPO doesn’t get through in two years, PHL could sell its stake back to Vodafone for $900 million.


Quarterly Performance
PHL’s core business, CRAMS (Contract Manufacturing and Research) registered a year-on-year sales growth of 39% for Q1FY2012. OTC segment grew by 48% in the same period. Operating profit margins for the quarter were 30.2% as compared to 10.5%. Operating profit for the quarter stood at Rs154 crore as against Rs40 crore in Q1FY2011.
 


Concerns

- Management’s decision to enter new business like financial services and real estate is not appreciated by the investment community
- Investments in real estate and financial services may not give returns as expected by the management because of escalating competition in these sectors.
 
Valuation and recommendation
Bearing in mind the excellent track record of management since inception of the company, the stock has significant upside potential from the current undervalued levels. Historically, Ajay Piramal has bought companies at cheap valuations and sold them for high bids. For instance, the recent sale of domestic formulations business to Abbott was valued at nearly 9 times its FY2010 sales which is one of the highest in Indian pharmaceutical industry.

PHL has consistently achieved good returns on capital since 2000 and dividends have been paid out consistently (with a growth of 36%). An interesting fact to consider for investment is that current cash per share is around Rs347 (after buyback and stake acquisition in Vodafone) when the stock itself is selling for around Rs373 on the bourses.

However, the street is not pleased with the management’s decision to diversify and consequently punished the stock; PHL stock has lost 22% in the last one year. However, a point to consider is that Ajay Piramal’s decision to venture Pharma business in 1998 was too a diversification. These concerns may limit the capital appreciation for next 1-2 years but in the long run this stock has high upside potential and low downside risk.


Disclaimer:
The author has taken due care and caution in compilation of data and analysis. The recommendations are his/her personal views. He/She shall not accept any liability whatsoever arising from the use of any of the above content.

Sources have been mentioned at relevant places in the article. In spite of this, the author does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.
The author holds positions in the stock.


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