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Piramal Healthcare: Diversification starts
May 9, 2011

Piramal Healthcare has announced its Q4FY11 results. The company has reported 40.6% YoY de-growth in sales and 30.8% growth YoY in net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues decrease by 40.6% YoY in 4QFY11 due to the sale of domestic formulation and diagnostic business.
  • Operating margins fall sharply by 14.9% due to sale of high margin domestic formulation business
  • Net profits register a growth of 30.8% YoY due to the interest income and forex gain reported in 4QFY11 as against gains in 4QFY10.
  • Board recommends a dividend of Rs 12 per equity share (dividend yield of 2.8%).


Financial performance: A snapshot
(Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
Net sales 9,418 5,591 -40.6% 36,711 25,560 -30.4%
Expenditure 7,255 5,138 -29.2% 29,443 24,272 -17.6%
Operating profit (EBDITA) 2,163 453 -79.1% 7,268 1,287 -82.3%
EBDITA margin (%) 23.0% 8.1%   19.8% 5.0%  
Other income 0 0 -100.0% 0 0  
Interest (net) 192 (1,131) -689.1% 916 (2,354) -357.0%
Depreciation 233 260 11.6% 1,427 1,199 -16.0%
Profit before tax 1,738 1,324 -23.8% 4,925 2,443 -50.4%
Exceptional items (66) (15)   -69 162205  
Forex loss/(gain) (49) (878)   (141) (986)  
Tax 178 164 -8.0% 180 36797.4  
Minority interest 0 4   (2) 3 -255.0%
Profit after tax/(loss) 1,543 2,019 30.8% 4,819 128,833 2573.3%
Net profit margin (%) 16.4% 36.1%   13.1% 504.0%  
No. of shares (m)       209 167.9  
Diluted earnings per share
(Rs) before extraordinary items
      21.1 15.3  
Price to earnings ratio (x)         27.5  

What has driven performance in FY11?
  • Piramal Healthcare's net sales decreased by 40.6% YoY in Q4FY11 due to the sale of domestic formulation to Abbott in May 2010. Later the company also sold its diagnostics business to Religare SRL. Out of the remaining business, the Pharma solutions business increased 37% growth in sales YoY for the 4QFY11 due to increased customers, while the critical care segment grew by 31.2% to Rs 1,160 m on account of new products introduction and increased market share of existing products. Also, the pharma solutions business and the critical care businesses are expected to grow well.

    Segmental snapshot
    Net Sales Break-up 4QFY10 4QFY11 Change FY10 FY11 Change
    Pharma Solutions 2,536 3,493 37.7% 9,394 10,206 8.6%
    Piramal Critical Care 884 1,160 31.2% 3,277 3,877 18.3%
    OTC + Opthalmology 535 676 26.5% 1,770 1,958 10.6%
    Others 85 261 206.1% 500 688 37.6%
    Investment Income 218 1,301 497.4% 922 3,358 264.4%
    Total 4,258 6,891 61.8% 15,863 20,087 26.6%

  • The investment income skyrocketed to Rs 1,301 m, an increase of 497%, due to the interest earned on the increased cash after the sale of existing businesses. Even though the company is cash rich, it does not plan to pay back its existing debt of Rs 7,568 m. This is because these loans are available at a very attractive rate of interest as they are in the form of ECBs (External Commercial Borrowings).

  • Operating margins (EBITDA) for the existing business is a mere 8% but is improving steadily with increase in sales. Net profit for 4QFY11 increased 30.8% YoY due to the increase in interest income and also due to the foreign exchange gain of Rs 878 m.

  • The company announced the plan to acquire the NCE (New chemical entity) business of molecule development from the company Piramal Life Science at the book value. For this acquisition, the company will issue additional shares to Piramal Life Science diluting the Piramal Healthcare shares by minimal 3-4%. The company will further invest approximately Rs 2,000 m per year to develop its existing pipeline of molecules.

  • Apart from this the company plans to use its excess cash by entering into the financial services sector. In that direction, the company has taken its first step by establishing a NBFC for infrastructure and real estate lending. The company will also foray into the private equity venture and has acquired a real estate trust, REITS for Rs 2,250 m.

What to expect?
At the current price of Rs 417, the stock is trading at a price to earnings multiple of 24 times our estimated FY13 earnings. This is after considering the 20% buyback program done by company at Rs 600 per share and excluding the cash per share from the sales proceeds of the domestic formulations business.

The NCE business and the foray into financial services are too long term and cannot be assigned a specific value at this point in time. For the same reason, we maintain our positive view on the stock.

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