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Piramal Healthcare: OTC takes the lead

Nov 7, 2011

Piramal Healthcare has announced the second quarter results of financial year 2011-2012 (2QFY12). The company reported a decline of 35.6% YoY in sales and net profits fell to Rs 524 m against Rs 124.9 bn in the comparable quarter last year. Here is our analysis of the results.

Performance summary
  • Sales decrease by 35.6% YoY due to the sale of healthcare solutions business in September 2010 and subsequent sale of the diagnostic business. However, comparing the continuing business, the sales grow by 32.1% YoY led by Over-the-counter (OTC) and critical care businesses.
  • The operating loss stands at Rs 233 m against a loss of Rs 127 m in 2QFY11.
  • Net profits fell to Rs 524 m in 2QFY12 against Rs 124.9 bn in the comparable quarter last year as the figures for 2QFY11 includes proceeds from the sale of the domestic formulation business

Financial performance: A snapshot
(Rs m) 2QFY11 2QFY12 Change 6mFY11 6mFY12 Change
Net sales 7,520 4,843 -35.6% 15,942 9,253 -42.0%
Expenditure 7,647 5,076 -33.6% 14,782 9,414 -36.3%
Operating profit (EBIDTA) (127) (233) 83.1% 1,160 (161) -113.9%
EBDITA margin (%) -1.7% -4.8%   7.3% -1.7%  
Other income 496 505 1.7% 736 1,214 65.0%
Depreciation 318 286 -10.1% 698 556 -20.4%
Interest 322 196 -39.2% 705 303 -57.1%
Profit before tax (271) (210) -22.5% 493 195 -60.4%
Tax 36,439 276   36,465 545  
Exceptional Gain / (Loss) 162,240 (11)   162,221 (11)  
Forex Gain / (Loss) 127 (1,026)   38 (1,790)  
Minority Interest - 5   (1) (13)  
Profit after tax/(loss) 125,404 524   126,212 1,442  
Net profit margin (%) 1668% 11%   8 0  
No. of shares (m) 210 168   210 168  
Diluted earnings per share (Rs) 598.4 3.1   602 9  
Price to earnings ratio (x)*   21.6        
**trailing twelve month earnings

What has driven performance in 2QFY12?
  • Piramal Healthcare's net sales decreased by 35.6% YoY due to the sale of the domestic formulations business to Abbott in September 2010 which contributed nearly 50% to its annual revenues. However, the continuing business grew by 32.1% YoY. Pharma solutions segment grew by 32.4% YoY on account of strong sales in the domestic market. Critical care segment grew by 43.1% YoY as the political problems in the Middle-East got resolved. The OTC and Opthalmology segment grew by 59.1% YoY on the back of strong focus by the management. The pharma solutions business and the critical care businesses are expected to do well over the next few years.

    Financial performance: A snapshot
    (Rs m) 2QFY11 2QFY12 Change 6mFY11 6mFY12 Change
    Pharma Solutions 2,304 3,051 32.4% 4,379 5,953 35.9%
    Critical Care 640 916 43.1% 1,722 1,827 6.1%
    OTC & Opthal 359 571 59.1% 735 1,128 53.5%
    Financial Services Income 496 505 1.8% 736 1,215 65.1%
    Other 250 305 22.0% 274 345 25.9%
    Total Sales 4,049 5,348 32.1% 7,846 10,468 33.4%

  • The investment income stood at Rs 505, a decrease of 29% QoQ, on account of acquisition of 5.5% stake in Vodafone. Even though the company is cash rich, it does not plan to pay back its existing debt as the loans are available at a very attractive rate of interest in the form of External Commercial Borrowings (ECB)

  • In the current quarter, the company posted operating loss (EBITDA) of Rs 233 m as against a loss of Rs 127 m in 2QFY11. However, this is not directly comparable with the 2QFY11 results, as the latter includes the results of the sold healthcare business. In the current quarter, the employee costs increased by 300 bps (3%) due to employee bonus and increments. The company is spending aggressively in brand building of its OTC business which is also dragging the margins. The management guided that the operating margins for the year will be around 5% and will continue to remain subdued till 2013.

  • The tax rate for the quarter was close to 34%; however after the demerger of PLSL's (Piramal Life Science Ltd) NCE Research into Piramal Healthcare, the tax rate for the consolidated entity will come down to 7% (on a full year basis) for the next two years. The merger is expected to be completed by 3QFY12.

  • The net profit for the quarter stood at Rs 524 m compared to Rs 125 bn in 2QFY11 as the latter included exceptional income Rs 162 bn which were the proceeds that Piramal Healthcare received towards the sale of its domestic formulations business to Abbott.

What to expect?
At the current price of Rs 367, the stock is trading at a price to earnings multiple of 8.5 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.

An element of uncertainty remains with respect to the NCE business and the company's foray into financial services as it will be a while before the latter business begins to take off. Thus, it would be difficult to assign 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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