Piramal Enterprises Ltd


(Donald Francis) #1

Our friend Ayush Mittal asked me to look at Piramal Healthcare closely, now that the stock has corrected quite a lot. I could not help thinking this deserves more scrutiny from all of us. So here goes.

Prof Sanjay Bakshi recommended Piramal Healhcare, 26 Mar at Rs 460. His well articulated analysis can be found here.http://fundooprofessor.wordpress.com/. Scroll down to blog post dated 26 Mar.

Outlook Profit carried an abridged version of this post. Equitymaster recommended buying at 460 levels as did PPFAS in April/May 2011.

Some more links to familiarise you with the latest on the stock opportunity:

1). CNBC-TV18 Inteview with Mr Ajay Piramal, post the Abbot deal

2). Outlook Money interview with Mr Piramal - assuring that focus will be back on Pharma

The stock is quoting at 369 as on 17 June, 2011. It has shed almost Rs. 100 since the reccos. The market did not like the uncertainity on how the huge cash will be deployed, and then it did not like announcements of NBFC Foray (1000 Cr) and REIT foray (250 Cr).

There seems to enough value on the table for us to get interested.

The basic elements for valuation assessment would be:

1). Cash on Books (including PV of future cash receivables in 4 years)

2). Residual Value present businesses- CRAMS, OTC, and Critical care, and expected growth

3.NCE unit of Piramal Lifescience transfer of assets & debt

4.Equity Dilution - NCE unit of Piramal Life Sciences merger (1 PHL stock for every 4 PLL stock)

5). IndiaREIT investment and prospects/risks

6). NBFC investment and prospects/risks

I will do more homework on the above and come back. Request you all to pay good attention to this opportunity and help take the discussion forward.

-Donald


(Vikrant Upadhyay) #2

I added this stock at 415 levels and will continue to add more if i see it going down more than 20% from by last buy price.

I think its a great stock and i know that TIP GUY (TIPblog.in) has also added some at same levels.


(Siddharth Shukla) #3

After Prof Bakshi’s excellent post its hard not to be convinced. I am personally invested since a decent time,but this is more of a buy & wait kind of stock. It can take a long time by the time Ajay Piramal invests & we reap the benefits of all this cash. Given his past record , we can be reasonable confident that he shall put the cash to good use. However the market never likes cash & it didn’t like that there wasn’t a big special dividend paid out. The stock has corrected due to all of this, only making it more of a bargain. A wonderful Management & Company selling for less than cash, i think the downside is pretty well covered here. Just buy & forget :slight_smile:


(prabhakar) #4

Has anyone evaluated what is the opportunity cost of buying this stock and waiting, when there are a number of companies around us growing at 25-30% at reasonable valuations?

Stocks like this with its apparent extremely high margin of safety should be bought when the overall market is extremely over-valued and there are no compelling opportunities around for your money.

It doesn’t in any way mean this is not an under-valued opportunity - it certainly could be,but do look around to see if there are secular growth stories around that can give you more visibility and possibly more certain return on your money.


(Siddharth Shukla) #5

Hi Prabhakar,

Thats a good point, but i think there is no clear answer, its quite subjective. Any other story where there is more certainty is accordingly bound to be pricier. I believe its in the uncertain(not risky) where opportunity lies.If u have limited cash to invest then its your call but at these market levels(definitely not cheap), one can always put some money into this apart form the growth stories. Again this is my personal view. I have more of a Value than growth bent.


(Donald Francis) #6

Here is my calculation, based on all the information so far, on the Net Cash per share still on the books of Piramal Healthcare.

Piramal Healthcare - cash per share

Cash Receivable in yr1 ($400 mn)

1750

PV (discount rate 13%)

1,549

Cash Receivable in yr2 ($400 mn)

1750

PV (discount rate 13%)

1371

Cash receivable in Yr3 ($400 mn)

1750

PV (discount rate 13%)

1213

Cash Receivable in Yr4 ($400 mn)

1750

PV (discount rate 13%)

1073

PV of all future cash receivable

5205

Cash Received

10000

Total cash incl PV of receivables

15205

less Taxes paid

3800

11405

less Debt tobe retired

1300

10105

less Share buyback

2508

7597

less Dividend

200

7397

less REIT purchase

225

7172

less NBFC capital outlay

1000

6172

less Piralmal Lifesciences Tx

150

6022

net Cash

6022

No of shares

16.79

Net Cash/Share

359

Let me know if I have missed anything or used wrong figures. These accounts for the announced use of cash for NBFC foray, IndiaReIT purchase and the Piramal Life Sciences Tx.
Next I will work on the residual business value. Please help.
Donald


(Shiv Kumar) #7

Management has indicated that it is looking to buy into existing CRAMS businesses.

http://www.business-standard.com/india/news/piramal-health-looks-at-buyout-for-expansion/439452/

any announcement could cause re-rating.

but the management is very conscious of paying the right price, so the acquisitions could take long unless the prevailing bearish sentiments give the right opportunities.


(Hitesh Patel) #8

Ajay Piramal may exit real estate PE fund
Arijit Barman, Raghavendra Kamath & P B Jayakumar / MumbaiSeptember 14, 2010, 1:31 IST

Denies move; sources say IL&FS, Blackstone approached.

After selling off his domestic formulations business and diagnostic centers in quick succession this year, Ajay Piramal is now planning to exit his real estate private equity and asset management company, Indiareit Fund Advisors (Pvt) Ltd, said two independent sources.

Indiareit Fund Advisors, which began in 2006, currently has close to $1 billion (Rs 4,700 crore) of assets under management (AUM) including a new fund, Indiareit Domestic Fund Scheme IV, being raised and the recently acquired portfolio of Trikona Trinity, an AIM-listed India-focused fund.

Indiareit is promoted by Piramal Enterprises and is led by ex-entrepreneur Ramesh Jogani, who also has a minority stake. It has over the years raised third-party money from domestic and offshore investors, with Piramal as anchor investor.

Indiareitâs promoters, however, denied any move on an exit. âThe information is not correct,â said Jogani, the managing director.

âThe information is not true. I am not planning to exit from Indiareit and its asset management business. We have just raised Rs 900 crore in a very difficult market situation and the company is in a good growth trajectory,â said Ajay Piramal, chairman of the Piramal Group when asked by BS.

Excluding Trikonaâs portfolio, Indiareit alone manages over 40 million sq ft of saleable area across five Indian cities. Indiareit recently grabbed the headlines when it paid Rs 600 crore to regain control of Crossroads Mall, now known as SOBO Central from Kishore Biyani, promoter of Future Group.

This move is seen as a part of an overall shakeout in the private equity (PE) industry in India, where over 500 funds jostle for good stories to invest in.

Investment banking and PE industry sources say itâs still early days for a deal and preliminary discussions have taken place with a couple of funds as part of a valuation seeking exercise. These sources add, IL&FS Investment Managers (IIML) and Blackstone Indiaâs real estate fund have been approached by Indiareitâs promoters for a possible buyout. Itâs believed the promoters are looking at a $50 million valuation, five per cent of the total AUM.

Recently, IIML acquired Saffron Asset Advisors Pvt Ltd, a $440 million (Rs 2,050 crore) real estate-focused PE fund, making it Indiaâs largest PE firm.

Global PE giant Blackstone, too, is in advanced negotiations to take over the management of the Asian real estate investments of Bank of America-Merrill Lynchâs high-profile Asian Real Estate Opportunities Fund, whose portfolio, including debt, is pegged at $3.5 billion.

IIML officials could not be asked for comments, despite several attempts.

Realty focus
Real estate industry sources say Piramal is keen to concentrate on his realty development business â Piramal Suntek Realty, a JV between Ajay Piramal Group and Sunteck Realty.

In 2008, the developer via its unit, Starlight Systems, had bought two residential plots with a developable area of 7,050 sq metres each in the Bandra Kurla Complex from the regional development authority. But the project got embroiled in controversy over payment of pending dues.

Indiareit currently manages one offshore fund, of $200 million, which has 3i Group Plc as the anchor investor. Indiareit also manages two other domestic funds â Indiareit Domestic Fund Scheme I with a corpus of Rs 430 crore and the Rs 537 crore-Indiareit Domestic Fund Scheme III.

It is also raising another local fund of Rs 750 crore called Indiareit Domestic Fund Scheme IV, with a greenshoe option of Rs 250 crore. Fund raising, however, has not been easy, taking close to a year.

Indiareitâs portfolio spanning the three different funds includes IT Parks in Chennai, a 1.41 million sq ft commercial complex in Kurla, 10 residential projects totalling a saleable area of 2.5 million sq ft spread across the southern cities of Bangalore, Chennai, Kochi and Mangalore. Its flagship, say sources, is the Hindewadi SEZ project in Pune, where a 138-acre land parcel will get converted into an SEZ and an integrated township.

Trikonaâs Trinityâs portfolio, which Indiareit manages, includes Luxor Cyber City, Uppal IT Park, a slum rehabilitation project in Worli Mumbai. It also included investments in DB Realty, Phoenix Mills and Pipavav Shipyard.

The above article lists IndiaReit Fund Advisors as beloging to Piramal enterprises back in Sep 2010. So is it the same one which Piramal bought for Piramal Healthcare?

an announcement on bse on 6 may states the following:

Piramal Healthcare Ltd has informed BSE that the Board of Directors of the Company at its meeting held on May 06, 2011, inter alia, has taken the following decisions :

1. The Board has for some time, been deliberating on new business opportunities. One of the business opportunities which were being explored in this regard was in the area of Financial Services. At its meeting held on May 06, 2011, during the continued deliberations on Financial Services as a new business opportunity, it was decided to venture into the Financial Services sector. In this regard, the Board approved the following proposals:

(a) Acquisition of the Indiareit Fund Advisors Pvt. Ltd., who are Advisors to the indiareit Fund, for a total consideration of Rs. 110 crores. The Indiareit Fund is a Real Estate Private Equity Fund focused on the Indian market. At present, the total funds under management is about Rs. 1950 crores;

(b) Acquisition of the Indiareit Investment Management Company, Mauritius, who are Managers to Real Estate Private Equity Funds investing in India through the FDI route, for a total consideration equivalent to Rs. 115 crores. Total funds under management is currently about US$ 430 million;

So probably markets did not like the company taking over another company being owned by the promoter himself. And if you look at the price slide, it began right from 6th may from a level of around 458 to current levels of 358.

And while looking at Piramal Healthcare, I would ask myself a question whether I would buy a Shilpa Medicare at around 240, or Sanghvi Movers at 118 or IDFC at around 119 with a view of around 2-3 years?

Buying Piramal Healthcare is like betting on the acumen and honesty of Mr Piramal. Why not bet on ourselves to pick up good businesses at bargain prices.




(Donald Francis) #9

Excellent point Prabhakar. Pls participate more at ValuePickr where new investors can gain a lot from your experience & perspective.

I have not gone on to valuing the Residual business of CRAMS, OTC & Critical care, so will wait to comment specifically on this.

In my opinion following should also be considered:

a) Abott bought the domestic formulations business which constituted 55% of total sales. This means residual business has almost half of the sales still remaining

b) if Q4 results are anything to go by these businesses are back on track.The remaining businesses haveshown good growth if compared with the same unit revenue from Q4FY10. Pharma Solutions (CRAMS) grew 37%YoY, Critical Care grew 31% YoY & OTC grew 26% over the same period. Operating profits (before investmentincome) are Rs. 1070 Mn, compared to sequential operating losses since the past two quarters. The reversal is mainlyon account of business getting back on track. Inventory levels are up, which might indicate restocking for fulfilling neworders or slow off-take from customers. Overall, this quarter is not strictly comparable YoY as well as sequentially withany previous quarters.

c) Looks like these businesses are capable of growing 25-30% and may be as good as any other opportunities from the growth perspective

Now what is a fair value to pay should be the next question

-donald


(Donald Francis) #10
[quote="hitesh2710, post:8, topic:522501656"] while looking at Piramal Healthcare, I would ask myself a question whether I would buy a Shilpa Medicare at around 240, or Sanghvi Movers at 118 or IDFC at around 119 with a view of around 2-3 years? ** Piramal Healthcare is like betting on the acumen and honesty of Mr Piramal. Why not bet on ourselves to pick up good businesses at bargain [/quote]

Thanks Hitesh for the article. There are several corporate governance questions at stake.

a) There could have been a better deal structure for the Abbot deal , so that everyone oculd have benefited from the open offer effect (besides the 20% who get the open offer benefits)

b) There is a very sizeable non compete fee (800 cr?) which went to Piramal Enterprises (owned by Ajay Piramal & family) which should actually have accrued to the company

c) Ajay Piramal using Piramal Healthcare money (by buying IndiaREIT) to effectively exit his REIT venture at a 9x sales valuation. Apparently Blackstone and IL&FS weren't willing to pay up as much

All of these are not issues that can be ignored for sure.

But I am of the opinion we should weigh all these and see if the market has still over-reacted and is still over-reacting, by going thru with the valuation exercise.

:)

And

Buying prices.


(Donald Francis) #11

Thanks Shiv Kumar. Nice to see you here. Pls participate more and help new investors with your experience and perspective.

Yes a re-rating is very much on the cards, when the dust settles down on speculation about how the money will be put to use.

I do think the market is over-reacting on many aspects

a) Its unreasonable to assume all the money should go into the Pharma company as Piramal Healthcare is a pharma company.What are the needs of this Pharma company CRAMS, NCE Research, and manufacturing for OTC, Critical care. if we look at other such companies an asset base of 3000 Cr suffices!

b) is it better to leave the rest of the money in the bank and earn 8% returns or invest into financial services which everyone agrees can scale by bringing more funds are management

c) yes the REIT tx seems motivated as Hitesh has also pointed out, but the magnitude is only 225 Cr as compared to some 7000 cr left to be ustilised

Link: http://www.business-standard.com/india/news/piramal-health-looks-at-buyout-for-expansion/439452/ http://www.business-standard.com/india/news/ Link: http://www.business-standard.com/india/news/ piramal-health-looks-at-buyout-for-expansion/439452/


(Shiv Kumar) #12

Forbes India recently profiled Ramesh Jogani who heads India REIT

http://business.in.com/printcontent/24002


(Donald Francis) #13

I couldn't resist some quick back of the envelope calculations on valuation. Might have missed somethings in the hurry. But this is just an initiation. Lets refine this further with all your help.

Cheers

Donald

Assumptions:

a) CRAMS, OTC, and Critical care businesses are back on track in Q4. They generate same level of business in FY12 as Q4 annualised (investment income excluded and no growth factored in for the year, similarly no hit on margins factored in on account of P Lifecare debt and expenses, no revenues included eaither on P Lifecare account)

b) These businesses retain the same profitability level and compound at 25% for next 2 years

b) Net cash on Hand Rs 360 (after all payouts and after the Lifecare, REIT and NBFC Txs) compounds at 10% for next 2 years

c) No Income/profits from REIT and NBFC factored in for next 2 years

d) The residual pharma business valued at 12x for all the 3 years . Several reports have calculate residual business value at rs 100 approx.

Go ahead and pick holes. make the assumptions as conservative as you want. Is there still reasonable value left on the table and possibly decent returns in the next 2 years??

Piramal healthcare ((back of envelope calculations)

Residual Business Value

Business projection

Fy12E

FY13E

FY14E

income

290.2

exp

231.2

EPS

7.2

9.1

11.3

PBIT

59.01

12x

87

109

136

interest

13.02

Net Cash

360

396

436

PBT

45.99

REIT

0

0

0

Tax

15.57

NBFC

0

0

0

PAT

30.42

Fair Value

447

505

571

# of shares

16.79

Buy Price

369

QEPS

1.8

1 yr return

36.78%

Annualised EPS

7.2

2yr return

54.87%

15x

108.7

Times Sales Value

Sales

1000

2xsales

2000

# of shares

16.79

per share

119.1


(Sajan Verghis Mathew) #14

Donald

I think the right metric for the IndiaREIT business is Price to AUM or PE and not Price to Sales.

The acquisition was at 5.75% of AUM and 9 times PAT. Does not seem terrible overvalued to me. Please see the investor presentation on the company’s website.


(Sajan Verghis Mathew) #15

On Piramal Life Sciences - I would value this at its 52 week low of Rs 75 translating to market cap of 175 Cr ie Rs 10/share as part of Piramal Healthcare valuation.

Also, assigning zero value to the REIT business is a bit too conservative since it is generating around 22 Cr PAT. Considering their track record, they should be able to grow the business. There is enough business because banks have stopped lending to real estate companies and PE guys have a good play there. However, we can be conservative and value this again at Rs 10/share as part of Piramal Healthcare valuation.


(Donald Francis) #16

Thanks Sajan

for pointing out the error. thanks for the info on investor presentation -will look that up.

9x earnings is right. the point made being that Blackstone & IL&FS were not offering that valuation. If Ajay Piramal has conviction in the REIT business, why would Piramal enterprises want to exit the REIT venture in his personal capacity. instead he chose to exit in his personal capacity but bring it under the company’s books.

Doesn’t seem very defensible, unless I am missing something.

-donald


(Donald Francis) #17

Thanks Sajan.

What you suggest seems reasonable. So what’s yr take on fair value today?

Reason why I used ultra conservative estimates, is to check whether we do have a big enough margin of safety. It appears there is, unless we have missed something big.

As someone suggested I will check with Investor relations if our estimate of net cash per share after every liability and reported Txs of Rs 360 is more or less there. did we miss taking into account some major expense head, or calculated something grossly in error.

-Donald

I couldn’t resist some quick back of the envelope calculations on valuation. Might have missed somethings in the hurry. But this is just an initiation. Lets refine this further with all your help.


(Rahul Patil) #18

Very interesting discussion. I have been tracking Piramal Healthcare since Prof Bakshi came out with that article. I feel there’ll be some more correction from current levels which hopefully will give some further MOS.

I agree with Hitesh when he said, “Buying Piramal Healthcare is like betting on the acumen and honesty of Mr Piramal”.


(Ayush Mittal) #19

Hi Donald,

Nice and quick work. Couple of observations:

1). The calculations/article at Prof. Bakshi’s blog suggested cash equivalents at 517/share. So what are the difference between then and now? I think post article, only two transactions have happened - 1. Acquisition of Indiariet Funds 2. Acquisition of Piramal Lifescience’s business. Both shouldn’t have a huge impact on the calculations.

2). The BV of the co as on 31st March, 2011 is at about 700 /share. We should consider the significance of the same.

Regards,

Ayush


(Donald Francis) #20

Ayush,

1). I have shown all the elements that I have considered. Also I have used a higher discounting rate of 13%

2). You can create your own small excel, put in all that Prof Bakshi has mentioned in the article use the lower discounting of 10% that he used to crosscheck.

You are right BV at 700/share is important to take note of. That should also provide comfort that the company is available at half the book!