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Piramal Health: The 'big sale' impact - Views on News from Equitymaster
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Piramal Health: The 'big sale' impact
Oct 23, 2010

Piramal Healthcare has announced its 2QFY11 results. The company has reported 25% YoY decline in revenues and a substantial jump in net profits. Here is our analysis of the results.

Performance summary
  • Revenues fall by 25% YoY in 2QFY11 largely due to the sale of the domestic formulations business and below par performance of the CRAMS business.
  • Operating and net profits are also impacted by the sale of the domestic business to Abbott Laboratories.
  • The Board announces a buyback offer for 41.8 m shares representing upto 20% of the outstanding share capital of the company at a price of Rs 600 per share.

(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Net sales    10,000        7,520 -24.8%     18,215      15,944 -12.5%
Expenditure      8,226        7,648 -7.0%     14,884      14,782 -0.7%
Operating profit (EBDITA)      1,774         (128) -107.2%       3,331        1,162 -65.1%
EBDITA margin (%) 17.7% -1.7% 18.3% 7.3%
Other income              0           203               0            203
Interest (net)         254             29 -88.6%           508            174 -65.7%
Depreciation         375           318 -15.2%           760            699 -8.1%
Profit before tax      1,145         (272) -123.7%       2,064            493 -76.1%
Extraordinary item            (4)   162,240               4    162,221
Forex loss/(gain)          (15)           127           (60)              38
Tax            94     36,439           207      36,465
Minority interest            (0)              (1)              (1)               (1)
Profit after tax/(loss)      1,063   125,404       1,921    126,212
Net profit margin (%) 10.6% 1667.6%   10.5% 791.6%
No. of shares (m)             209.0        209.0  
Diluted earnings per share (Rs)*#       15.9  
* based on trailing 12 months
# excluding extraordinary income and tax thereon

What has driven performance in 2QFY11?
  • The sale of the domestic formulations business to Abbott Laboratories largely impacted Piramal Healthcare’s performance during the quarter. As a result, the domestic business saw a decline of 22% YoY decline in sales and will no longer be reflected in the financials of the company FY12 onwards. The CRAMS and the Global Critical businesses also saw a 28% YoY decline in sales each during the quarter. The CRAMS business had been facing rough weather over the last few quarters on account of the subdued conditions in the US and Europe. Having said that, the management clarified that while there was nothing inherently wrong with any of these 2 businesses, what really impacted performance during the quarter was the lack of management focus given the magnitude of the deal with Abbott.

    (Rs m) 2QFY10 2QFY11 Change
    Branded formulations 4,397 4,613 4.9%
    CMG 2,104 1,748 -16.9%
    Pathlabs (Diagnostics) 485 536 10.6%
    Global critical care 729 1,082 48.5%
    Others 501 445 -11.1%
    Total      8,215        8,424 2.5%

  • The company reported an operating loss of Rs 128 m in 2QFY11 as against a profit of Rs 1.8 bn in 2QFY10, once again impacted by the sale. The scenario at the net profit level was also skewed as it included extraordinary income of Rs 162 bn from the sale plus tax expenses of Rs 36 bn.

What to expect?
At the current price of Rs 515, the stock is trading at a price to earnings multiple of 37 times our estimated FY13 earnings (excluding the cash per share from the sales proceeds of the domestic formulations business). The company sold its domestic formulations business to Abbott Laboratories, in May 2010 and the first tranche of proceeds were received by the company in 2QFY11 after factoring in tax payments as well. The remaining proceeds of US$ 1.6 bn will be received in equal installments over the next four years starting 2011.

Thus, the company has announced a buyback scheme for the purpose of rewarding shareholders. As per this, Piramal would buyback 41.8 m shares representing upto 20% of the outstanding share capital of the company at a price of Rs 600 per share. This represents a premium of 19% to the average share price of the last 3 months. The buyback will result in a cash outflow of Rs 25 bn. As far as the tax implications are concerned, tax will accrue to shareholders depending upon whether they are long-term, short-term investors or whether they are mutual funds/FIIs. The buyback process is subject to shareholder approval and if approved is expected to be completed by February 2011.

The balance money will go towards repayment of debt and investing in existing businesses. Plans on the anvil also include looking at areas beyond healthcare, although the management has not divulged specific details with respect to the same. Interestingly though, the management has cited its intention of not entering real estate. Thus, Piramal Healthcare which was primarily a healthcare company prior to the deal, will now become a significantly altered company two years down the line. We have yet to factor in the buyback in our estimates. However, overall, based on growth in the existing businesses and the large amount of cash that will accrue to the company from the sale of the domestic formulations business, we maintain our view on the stock.

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