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Piramal Healthcare: Pharma solutions grows - Views on News from Equitymaster
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Piramal Healthcare: Pharma solutions grows
Sep 8, 2011

Piramal Healthcare has announced its results for first quarter 2011-2012. The company reported 47% YoY de-growth in sales and 10.5% YoY growth in net profits. Here is our analysis of the results.

Performance summary
  • Revenues decrease by 47.6% YoY due to the sale of domestic formulation and diagnostic business.
  • Operating margins rise by 2.6% due to a significant decrease in other expenditure (as a % of sales).
  • Net profits register a growth of 10.5% YoY due to the increase in interest income.

Financial performance: A snapshot
(Rs m) 1QFY11 1QFY12 Change
Net sales 8,422 4,410 -47.6%
Expenditure 7,045 3,575 -49.3%
Operating profit (EBIDTA) 1,377 835 -39.3%
EBDITA margin (%) 16.3% 18.9%  
Other income 240 710 195.8%
Depreciation 381 270 -29.2%
Interest 383 107 -72.1%
Profit before tax 853 1,169 37.0%
Tax 27 269 910.5%
Exceptional Gain / (Loss) (19) -  
Forex Gain / (Loss) - -  
Minority Interest 0 (8)  
Profit after tax/(loss) 807 892 10.5%
Net profit margin (%) 10% 20%  
No. of shares (m) 209 168  
Diluted earnings per share (Rs) 3.9 5.3  
Price to earnings ratio (x)*   21.6  
*On trailing 12 month basis

What has driven performance in 1QFY12?
  • Piramal Healthcare's net sales decreased by 47% YoY due to the sale of domestic formulation to Abbott in May 2010 which contributed nearly 50% of its annual revenues. Out of the remaining business, the Pharma solutions business grew by 40% YoY due to increased customers, while the critical care segment de-grew by 16% on account of deferment of sales in the Middle-East due to the unrest. The OTC and Opthalmology segment grew by 47.7% on the back of renewed focus in these segments by the management. The pharma solutions business and the critical care businesses are expected to do well over next few years.

    Revenue break-up - Continuing Business
    (Rs m) 1QFY11 1QFY12 Change
    Pharma Solutions 2,075 2,902 39.9%
    Critical Care 1,082 911 -15.8%
    OTC & Opthal 377 557 47.7%
    Financial Services Income 240 710 195.8%
    Other 24 4 -83.3%
    Total Sales 3,798 5,084 33.9%

  • The investment income increased to Rs 710 m, an increase of 196%, due to the interest earned on the cash received from the sale of domestic formulation and diagnostic businesses. Even though the company is cash rich, it does not plan to pay back its existing debt of Rs 9,269 m. This is because these loans are available at a very attractive rate of interest in the form of ECBs (External Commercial Borrowings).

  • Operating margins (EBITDA) rose by 2.6% (as a % of sales) led by 1,000 bps (10%) decrease in other expenditure. However, this is not directly comparable with the 1QFY11 results, as the latter includes the results of the sold formulation business. The management has indicated that the current continuing business will be able to maintain a margin of 16% to 18%.

  • In the previous quarter, the company acquired the NCE (New chemical entity) business of molecule development from the company Piramal Life Science at book value. Due to the accrued losses from this business, the tax rate for the consolidated entity will come down to 6% (on full year basis) for the next two years.

  • If we consider the continuing business for 1QFY12 and 1QFY11, the net profits stood at Rs 892 m as against a loss of Rs 182 m in 1QFY11.
What to expect?

At the current price of Rs 360, the stock is trading at a price to earnings multiple of 8.3 times our estimated FY14 earnings. This is after considering the 20% buyback program completed 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. But based on the growth prospects of the continuing businesses and the cash on its books as a result of the sale of the domestic business, we maintain a positive view on the stock.

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