Hello everyone,
I am a newbie to the forum. Happy and excited to see nice value investing oriented discussion. As a late entrant to the discussion, i would like to present my viewpoints on few concerns raised about piramal healthcare and its corp gov issue.
1). why the deal was structured very poorly on slump sale basis and in tax-inefficient manner? I think Nitham desaiâs document pretty much answers the question which says slump-sale basis is simple, less time consuming (within 6 months both abbott and PHL went back to look their business when compared to ranbaxy deal which took 1 year) and less regulatory hassle. I think price says it all. Abbott paid top notch price (9x sales price) when compared to ranbaxy deal (done at 5x sales price) in exchange of less cumbersome slump-sale deal structure from PHL.
2). what is the basis for the valuation for promoter promoted India-reit acquisition?
Generally private equity funds are valued on percentage of AUM basis and 225 crores comes down to 6% of AUM. India REIT is one of five funds out of 46 real estate funds in india which actually made any money. Piramal signed the agreement with religare for the same consideration of 225 crores (amount indicated in analyst presentation Q3) but the deal was called off due to delay. Here is the story about this development in forbes - http://business.in.com/article/web-special/unveiled-why-ajay-piramal-pulled-the-plug-on-indiareit-deal/24712/1
But for retail investors like us it would be always safer to check the valuation independently. Hence i checked the valuation of only listed private equity fund - ILFS investment managers which also manages real estate fund. Its 52 week high/low is 55/28 i.e. 8% of AUM/4% of AUM. Hence payment of 6% of AUM for one of five money making real estate fund looks fine.
3). Why does he merges loss-making piramal life sciences back to PHL fold? and what does future holds for investors?
We all know that drug development is long term and high risk business. sanjay bakhsi clearly outlined the vision of ajay and swathi piramal to develop first indian global drug and part reason for divestment of formulation is to fund future drug development business(fund for drug development is drastically reduced after 2008 meltdown).
will he deliver? Few steps taken by him atleast shows that he is on right path.
A. He brought in 2 fellows of royal society in advisory board. He also brought in research people from novartis, Eli-Lily and Daiichi Sankyo for senior management team.
B. Total investment planned for the next 3 years is 600cr. Planned to launch one cancer drug (P276) (currently under phase II trial. wont involve much capex for phase III trial. Hence PHL will completed and launch the product by itself) and BST-Car Gel for cartilage repair( trials completed and awaiting reports). Also outlicensing opportunity for one Diabetes molecule (currently under phase II. Phase III trial for diabetes drug need to be involved lot of people and capex. Hence PHL explores out licensing opportunity).
C. Of late pharma deals in india got heat-up and hence piramal seeks cheap assets outside. Recent article on Financial Times says, âPiramal planned to acquire/partner with several ailing midsized biotech companies that dont have enough money to expand and patents of pharma companies that are not developing new drugs due to research and development constraints. Piramal was seeking to merge Indiaâs high research standards with the scientific expertise and cutting-edge drug-developing technology predominant in the US and Europe marketâ. (Link - http://www.ft.com/intl/cms/s/0/d8997a7c-cdaf-11e0-bb4f-00144feabdc0.html#axzz1WNDtIJ8r) I believe this method will work. For eg. canadian company called Biosyntech which was struggling to keep the heads over water. But had good product âBST-Car Gelâ in the final stage needing the last leg of financing and with the tough market conditions there finding it difficult with funds. PHL acquired it last year and invested $5mn. Now the company is staring at potential opportunity of $200mn in euro market and the company is confident of launching in 2012 end.
4). There is no lack of clarity in how he is planning to build other pharma business divisions? is he totally committed? or distracted with finance foray?
I think the results of last quater shows that the management is serious about building other pharma divisions. He has given some outline in recent Q1 analyst presentation on how the company going to deploy its funds over the next five years and revenue & EBITDA guidance for FY2016. He plans to invest 7000cr in pharma business (CRAMS-2700cr, critical care-1500cr, OTC-2500cr, piramal life sciences-600cr) and around 2000cr in piramal finance (REIT-1000cr and NBFC-1000cr). For 2016, expected Revenues to be at 10,000crores (given guidance of 5000cr sales from CRAMS alone) and EBITA margins of 18-20%.
5). Can he repeat his success in new space i.e. finance?
I feel he displayed his ability in finance space quite well in last 20 years. We all know that he diversified from textiles to pharma in 1988 and instead of growing organically, built the company through series of acquisitions (without paying high price) and instilled a FMCG mindset in selling branded generics, forayed into real estate and built peninsula land, also bought ailing glass making company and successfully turned around under piramal glass. Kept away from litigation filled western market and also stayed out of potential FCCB time-bomb. Above all divested the formulation business at the opportune time when the competition in the domestic market heating up. Further he assured in concall that, " We have created a strong team, we have created strong processes and we intend to build a loan book of 6,000 croresThe way we are doing our financial services sector is that we have got a team of people, it is not only one person, so you do not have these very very high profile if I may say executives, second thing the way we are incentivising our people is towards a long term return on these basis, not any short-term investments so they are tied-in for the long-term.we want to build conservatism in this business because we believe that to get a NBFC, solid strong foundation if you set up very aggressive target it is easy to achieve them in the short-term, but one does not know what happens in the long term".
6). Non-competent feel of 800cr: well i think it is better for the promoter to tell upfront that, âyes folks i build the company for the past 20 years and i would like to take a non-compete fee for my hard toilâ rather than trying to siphon out the money by short-circuiting minority investors.
Also the company hedged 90% of the next 4 year receivables @ 49-50 and hence it will receive atleast 1900crores instead of 1750crores we took for calculation. Management intend to book as forex gains in each quarter.
I think in addition to all these things, with the current global turmoil and debt problem in US, euro and china, we should not forget that âcash is the kingâ.
I think few people might have got little pissed of piramal saying that we will create long term shareholder value (yes i count - he invariably tells in all meetings). For those people please visit this year 2000 rediff article and scorll down to final question - http://www.rediff.com/money/2000/nov/13inter.htm and hope he repeats the magic.
would like to hear from you guys
Regards
Jagadees