Piramal Enterprises Ltd

Stock Opportunities
41

Excerpt from Sharekhan Investor Eye May 09, 2011

Interesting to note that they are discounting Net cash retained at 50% discount (calling it re-investment risk). In our calculations we have already taken out the re-investment amounts (1000 Cr NBFC, 225 Cr REIT, etc).

Also interesting to note they are adding the residual value of the business (Rs.99) to the retained net cash/share. So Arindam your model may not be wrong:)

Views invited.

Value of company

Rs crore

Purchase consideration (Abbott deal)

10271

NPV of future payments (discounted at 10%)

5869.4

Purchase consideration (Religare deal)

300

NPV of future payments (discounted at 10%)

247.9

Total value recd

16688.3

Less: non-compete payment

350

Less: Debt

1795

Tax (LTCG) @21.5%

3126.8

Net value

11416.5

Cash utilized for buyback

2508

Dividend payout

201.5

Net cash retained

8707

cash per share

518.6

Re-investment risk discount (50%)

259.3

Residual business value

99.4

Total value of company

358.7
42

http://www.valuenotes.com/Investment-Strategy/Pirmal-amp-Abbott-deal-Uncertainty-on-fund-deployment/152356

**Key highlights of the deal:**Piramal Healthcare (PIHC) will transfer its domestic formulations business (excluding the OTC and ophthalmic portfolio) to Abbott, US for US$3.72b (present value of US$3.2b). Abbott will pay US$2.12b upfront and US$400m in annual payments for the next four years. The deal values PIHCas domestic formulations business at ~8x sales and ~29x EV/EBITDA based on FY10 numbers. This is one of the most expensive valuations for domestic formulation business. PIHC expects to pay tax at 21.5% on the net deal value in FY11.

**Higher tax lowers value for shareholders:**We believe the transaction structure is tax-inefficient, resulting in significantly lower value to shareholders despite the huge valuation of the deal. PIHC will have to pay tax of ~Rs34.5b on the proceeds of the deal (including tax on payment to be received over the next four years from Abbott). It will also have to pay dividend distribution tax when it rewards shareholders with a special dividend after the closure of the transaction.

**Uncertainty on fund deployment:**PIHC plans to use the net proceeds as follows: (1) to repay debt of Rs12.95b, (2) to pay Rs3.5b to promoters as non-compete fees a we are negatively surprised by this, (3) to pay a special dividend to shareholders (not quantified), and (4) it will retain some funds for future acquisitions in the residual business or for new emerging opportunities. This raises some uncertainty about which new emerging opportunities the management will consider and whether it will be able to make a success of it.

**Outlook and valuation:**CRAMS, critical care, pathlabs and other businesses will form the residual business for PIHC after the completion of this transaction. With the sale of the domestic formulations business, the focus will be on: (1) the ramp-up of the CRAMS business, (2) improving the profitability of its Minrad (US) operations, and (3) deployment of the proceeds from the sale of the domestic formulations business. While our fair value for PIHC is Rs572/share,we believe the stock will quote at a discount to fair price given the above uncertainties. Downgrade to Neutral

1 Like
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http://www.icicidirect.com/mailimages/ICICIdirect_PiramalHealthcare_Q4FY11.pdf

Not rated

Pharma solution (CRAMS) business witnessed strong growth of 38% YoYto | 349.3 crore mainly driven by 59.7% YoY growth from assets in Indiato | 190.6 crore. Sales from assets outside India were increased by 18.2%YoY to |158.6 crore. The company expects facility at Grangemouth, UK tobe audited by USFDA in June 2011. It is also planning to expand capacityat Digwal. During the quarter, Piramal acquired 76% stake in Ahmedabadbased Oxygen Healthcare (O2h). The company provides medicalchemistry (synthetic chemistry) and in-vitro biology services. Piramalexpects Pharma solution business to grow at a CAGR of 20-25% in FY12-14.

Revenues from Piramal Critical Care business increased by 31.2% to 116 crore. The market share for Sevoflurane (general anesthesia) in USmarket increased from 14% as on March 2010 to 20% in March 2011.Piramal has registered Sevoflurane in 26 countries and so far receivedapproval from 4 countries. The company expect to launch Sevoflurane inEU markets in the current fiscal. It is also in the process of registeringSevoflurane in Japan & Asia and Desflurane across the globe. Piramalexpects Critical care business to grow at a CAGR of 25-30% betweenFY12-14.

The OTC& Ophthalmology businesses witnessed a growth of 26.5% YoYto 67.6 crore. It added 660 field force during FY11 taking total count to900. It is currently covering 2.4 lakh outlets. It is planning to buy brandsand expand inorganically in this segment.

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There hasn’t been much discussion on the strengths of the existing pharma businesses of Piramal Healthcare. All of them are in a position to consolidate and grow strongly from here. Management has indicated a 20-25% CAGR for these.

An excellent resource to study the strengths of this business is the Motilal Oswal CRAMS Sector reportlinked earlier in this thread. If you haven’t looked at it, please do to ascertain the excellent credentials and potential from each of the 3 segments - CRAMS, Critical care, and OTC. Also look at the Piramal Healthcare Investor Presentation Dec 2010

a) CRAMS - Piramal Healthcare is among the top5 CRAMS players in the country and rated the no 2 bet, after Divis Labs. It has eleven multi-year contracts (most of them of 5-10 yr durations) with MNC players. Along with the top 5 players it is best placed to gain from the Outsourcing growth.PHL has been able to establish goodrelations with some of the top 10 global innovator pharmaceutical companies and is currentlyone of the largest contract manufacturers for Pfizer. The company is also graduallydeveloping capabilities in the custom chemical synthesis (CCS) segment to address theentire CRAMS value-chain. In Q4FY11Pharma solution (CRAMS) business witnessed strong growth of 38% YoYto 349.3 crore mainly driven by 59.7% YoY growth from assets in Indiato 190.6 crore. Sales from assets outside India were increased by 18.2%YoY to 158.6 crore.

b)Global critical care business - becoming a bigger player

PHL is one of the only three companies globally to have a presence across product segmentsin the US$1b inhalation anesthetics (IA) business. It has built this business through theinorganic route commencing with the acquisition of Rhodia’s IA business a few years ago.PHL propelled itself into the top-3 league through the acquisition of Minrad (USA) inDecember 2008 along with RxElite (its distributor) for ~US$62m.

The acquisition of Minrad has enabled PHL to add two of the largest IA products -Sevoflurane and Desflurane to its portfolio of older IA products (acquired from Rhodia).These two products constitute 92% value share of the inhalation anesthetics market, withSevoflurane commanding the largest share of 72% with market size of US$750m. In Q4 FY11Revenues from Piramal Critical Care business increased by 31.2% to116 crore.Piramalexpects Critical care business to grow at a CAGR of 25-30% betweenFY12-14.

c) OTC business - this segment has strong brands like I-Pill acquired from Cipla, Saridon, Lacto Calamine, Polycrol. In Q4FY11The OTC& Ophthalmology businesses witnessed a growth of 26.5% YoYto 67.6 crore. It added 660 field force during FY11 taking total count to900. It is currently covering 2.4 lakh outlets. It is planning to buy brandsand expand inorganically in this segment.

It looks to me that all 3 segments are capable of scaling up significantly. Especially the Critical Care Anesthesia segment as they are now in top3 globaly. CRAMS too will scale by leveraging on the relationships with the Innovator companies. With additional cashflows accruing the OTC segment can be strengthened by brand additions and ad-spends.

With most of the upfront money received accounted for, the Management’s focus will return to growing the existing businesses??

Views Invited!

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Based on what Donald has posted, one can assume that PHL is likely to generate most of its revenues from healthcare products and services. I guess next step should be to dig deeper into these three business segments.

My perception on nature of business of CRAMS segment:

CRAMS: It is getting attention mainly due to cost arbitrage in the form of skilled personnel at low cost, which is similar to what has been witnessed in IT sector or what is going on in Agrochemical sector, etc. Establishing facilities and getting regulatory approvals are capital intensive and time consuming. PHL seems to be in good position on both counts - the availability of skilled personnel in India and access to Research and contract manufacturing infrastructure. A major problem is that revenue generation can be lumpy in this segment. Getting these projects can be time consuming. Since these contracts are one-time-big-ticket deals, competitors will bid to fiercely to get such projects from innovator companies. Consequently, it is critical to know what is the range of profit margins in CRAMS segment as it matures. If these services are commoditized with little scope for differentiation and if cost arbitrage is the main strength, then CRAMS business will attract competition, innovator companies will bargain more and profit margins are likely to go down over a period. Another aspect that needs to be looked into is capacity utilization as lot of capital is needed to build contract research and manufacturing facilities. If the segment is too young to get these kind of information, one can look into contract research and manufacturing in other fields such as Agrochemicals sector where overcapacity and low asset utilization are a reality.

Digging deeper will yield information on possible growth curves for revenues and potential trends for operating margins. Taking other factors such as intensity of competition and competitive strengths of PHL’s CRAMS segment into consideration, one can put efforts to predict cash flows.

If one has an idea of approximate future cash flows from all three segments, it is possible to assess how much to pay for PHL’s assets. Basically, to project future cash flows an investor has to understand in and out of PHL’s business; finally the knowledge acquired in the process will help investor to decide how much of margin of safety is appropriate for PHL’s assets.

Anybody up for it?

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Thanks Shashidhara for your views.

I think CRAMS business will remain a high EBITDA margin business for the next 3-5 years just like the IT outsourcing business has despite all competitive pressures. And just like the Tier I IT companies, in CRAMS too much of the business will be garnered by the top 5 because of their infrastructure, regulatory approvals in place and deep relationships with Innovator pharma companies.

CRAMS is only 1 part of the business. Anesthesia market where there are among the Top3 seems equally promising as does teh OTc business but that will need more investment.

I think we have done enough digging to establish

a) There is good value in existing business

b) PV of future cash around Rs.300 is very handy to have to invest in and strengthen existing business

c) There cant be much downside from these levels

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Any further work is welcome, for sure.

But I sort of agree that if there is good value, it usually does not need complicated modeling - should be easily evident and transferable to all.

There are uncertainities at the moment and 2 or 3 quarters down the line everyone will be more clear. But if everything was clear and certain, then it would not remain a CONTRARIAN opportunity, would it.

Having considered most angles, I am inclined towards taking an initial position at current levels, as I feel downsides from here are pretty limited. And yes, it will be the only contrarian bet from me this year as I have mostly bet on companies with very high visibility.

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I tend to agree with you downsides are pretty limited from here.

A good Q1 could be a trigger for upmoves. And any announcement of investments/ acquisitions for furthering the existing business would be welcomed by the street I guess.

Happy Investing!

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Hi

I have one dumb question. This is also asked by a guy in fundooprofessor site. When Piramal Life sciences and Health care are getting merged for every 4 shares of Life sciences â1â health care share will be provided. But today if we see price Life sciences is at 90 and Health care is at 385. In that case is it not wise to buy life sciences?

Regards

Nagesh

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I was reading through the Q1 FY12 conf call transcript which is available on the website.

Tax rate for full year is going to come down to 5-6% vs 23% of Q1 FY12.

P.S: I have been selling my Piramal Health shares and buying Piramal Life… Aribitrage available varies from 6-8%.

-475.32Cr round:))

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Donald/others following this company:

Any views on the latest involvement with Vodafone? On the face of it this one seems to be a smart move by Mr Piramal. If one looks closely at the sector I think with Airtel raising tariffs (although to a small extent) the extremely poor times for the sector may have been a thing of the past as is amply reflected by the stock prices of the companies in the sector. (barring RCom which seems to be a rotten apple)

So if Voda were to come out with an IPO in next couple of years then I think they would be received well by the markets assuming the pricing is okay. And above all I think we should be seeing some sort of consolidation in the space with only 3-4 bigger players remaining with the smaller players giving way by selling out or merging.

His deal smacks of heads I win, tails I dont lose too much.

views invited.

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Hitesh

From what I understood / read off the internet, it looks like he has an option to sell it back to Vodafone at 900M if IPO does not happen in 12-24 months.

However, Vodafone’s purpose in doing this deal was to reduce their stake (to conform to laws of the land), so I am not how that will happen. Maybe, this gives Vodafone time to find to find another buyer ? So Piramal HC may be just a conduit because of the trust Ajay Piramal enjoys (seamless web of trust as per Sanjay Bakshi’s article).

I agree with you on telecom sector consolidation as well. I think the time has come.

Regards

Donald/others following this company:

Any

** apple)So **

** merging.His **

much.

views invited.

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http://www.livemint.com/2011/08/15210220/Our-aim-is-to-enter-retail-loa.html?atype=tp

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Our aim is to enter retail loans, housing finance

Billionaire Ajay Piramal, who heads the realty-to-research Ajay Piramal Group, says his cash-rich company Piramal Healthcare Ltdas long-term investment strategy is clear. The existing businesses of Piramal Healthcare, which divested some of its key portfolios last year forRs.17,600 crore, cannot absorb all the cash it has on the books, even after considering long-term investment plans.

So it has to look outside, and the management has made up its mind on certain areas for investment that will grow at a high rate over a long term. Piramal explained these plans in an interview. Edited excerpts:

Some media reports, after you picked up a minority stake in Vodafone, suggested that you are confused about where to invest the huge cash that your company has on its books now.

There is absolutely no confusion. We are very clear on the investment plans and it has already been laid out on a piece of paper in terms of our long-term strategies, both in the existing businesses and outside that. (The) Vodafone deal was just a short-term management of money that can bring more returns than parking it in a fixed deposit. The company has identified investment options for the existing businesses as well as some areas outside them for the long term. But in the interim, it may look at short-term portfolio investments such as the Vodafone deal, provided they can bring at least 17-20% return.

Which are those new areas?

As you know, we are already in the realty business and this is one area that will see exponential growth in India in the next several years. Catering to the financial needs of this sector and many other industry and service sectors will be a key business that Piramal Health will enter now in a big way. Going forward, there will be other financial services also that the company will look at under a broad-based non-banking financial services company (NBFC) that we are building now.

Itas a key diversification for a healthcare company.

Yes. Our existing businesses under the Piramal Health fold, including drug manufacturing service, hospital medicines, consumer health and the recently added drug discovery, will not require the money that it has on its books now, even after considering the long investment plans for these businesses over the next five years or so. Rather, we donat find enough opportunities that can consume the entire money to create value in this single sector. We are in the process of building a financial services company, Piramal Capital, which will be a fully owned subsidiary of Piramal Healthcare. There are already several experts who are knowledgable in this business, working on formalizing the structure. Under this company, we will give loans to corporates as well as consumers. As of today itas only corporate loans, and in the long term, the aim is to enter retail loans including housing finance. Other vertical of the company will deal with private equity business that will focus on investments in reality companies. We are already in the private equity business throughIndiareit Fund Advisors, and since Piramal Healthcare currently owns this company, it will get merged into Piramal Capital.

How do you plan to grow the healthcare business?

We have a total estimate of aboutRs.6,000-7,000 crore to be spent in these four areas (drug manufacturing, hospital medicines, consumer health and drug discovery) over a period of five years. It will be a combination of organic and inorganic expansionainorganic or acquisition opportunities both in India and abroad. This is currently an estimate and I think good acquisitions not only in India, but also globally would require this budget. And, drug discovery, a capital-intensive area today, which would also require good investments to turn it as money generating.

Your group is also present in areas such as real estate and glass bottles. Will the group leverage the financial capabilities of its companies for growth?

There is a tight corporate governance and there are no inter-corporate loans or something of that sort is possible within the group. But all the group companies, be it Piramal Glass Ltd or any other entity, have a strong asset base. Those can be leverage(d) for fund-raising in case there is a need. Funds havenat been a constrain for any of these entities for growth opportunities.

Will you continue looking at portfolio investments like the Vodafone deals?

It is not possible to put the entire money today as far as the long-term investments are concerned. Perhaps, such short-term investments could be made part of the NBFC that we are building now. But this will depend on the availability of surplus cash position which can be utilized for short- and medium-term investments. But my criteria for this is growing global company with strong market hold and capable of giving at least 17-20% return. In the Vodafone deal also, the understanding is that we would exit in two yearsa time at the time of its initial public offer, or if that doesnat happen they or their group companies could acquire it if the FIPB (foreign investment promotion board) or FDI ( foreign direct investment) allows them to do that, or they will help us find a buyer in the said duration.

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I have not been very comfortable with the Piramal Heathcare story so far, and have stayed away. Main reasoning was that much of the investment premise hinges on “Hope”, or what can be, rather than on wht is “visible”.

This interview throws more light on future plans. However I would have liked Mr Piramal to expound much more on existing business and how he plans to grow them. The Piramal Lifesciences merger doesn’t look to be a positive for the company despite some tax benefits.The OTC business and the Anesthesia business have their strengths, but the Lifesciences drug discovery biz isa cash guzzler, a gamble from the present scheme of things, and will be a drag on the rest of the business! I would have liked some discussion on how he plans to streamline the drug discovery business, pieline &successes, some timelines, out-licensing plans, etc.

I am tending to the view that too much of Cash is proving to be a big distraction for the Management - and short-term money management obviously is taking precedence!

2 Likes
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Hi,

There is some mention about the different molecules at work in the drug discovery business in the Q1FY12 results conference call transcripts.

http://www.piramalhealthcare.com/fckeditor/editor/filemanager/connectors/aspx/fckeditor/userfiles/file/PHL%20-%20Q1%20FY2012%20Results%20Conference%20Call%20-%20Transcript.pdf

Of interest,

1). Lead molecule P276 in phase I and in some areas phase II (indicated launch in 2014)
2). BST-CarGel in final clinical report stage and launch in end 2012.

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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 desai’s 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, “Piramal 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 market”. (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 ‘BST-Car Gel’ 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, “yes folks i build the company for the past 20 years and i would like to take a non-compete fee for my hard toil” 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 “cash is the king”.

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

1 Like
57

Hi friends,

I found following article in outlook written by ajay piramal will provide some perspective for our discussion. Link - http://business.outlookindia.com/article.aspx?277522

"Getting investors to look at the long term is the real challenge in managing investor expectations. Unfortunately, market sentiment is really driven by investors who have a short-term outlook. And since the short term investors are the ones who are most vocal and they move the markets, managements often tend to pay disproportionate attention to these investors. The real challenge, therefore, is to convert these investors to look at the long-term picture.

Even when we have done a fantastic exit, people do not appreciate it. And earlier, when we did a slew of acquisitions, they have not always been appreciative. The fact is that analysts want to see what they themselves can projectâthey find it difficult to project something that is out of the normal course of business. They build a model and they tend not to look beyond that model. So if you are doing something disruptive, which in a growing economy companies must do, they canât understand and, therefore, do not appreciate.

The models the analysts followâlike the discounted cash flow modelâdonât really work in the real world. There is nobody in the world who can predict whatâs going to happen in 10 years. Can you name anyone who had predicted that the markets will grow like they have in India today? Can anyone predict what is going to happen to the exchange rate, which is another big variable? I donât think so. Nobody could have predicted interest rates would move the way they have. So everything is variable. And yet, on that basis, we make a fixed 10-year projection and do the discounted cash flow. If at all, these models are more appropriate for mature economies where growth is steady, not in emerging economies where there are huge opportunities for growth and companies may be investing for long-term growth.

What management has to do is get investors to see that long-term view and meanwhile, focus its energies on what is best for the business and the shareholders. As a CEO, I donât owe my job to the analyst. Therefore, I can take that long-term view"

Regards

Jagadees

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Sciencesand R&D expenseson Piramal healthcare P&L,

Hi donald,

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I read in a recent q1 fy 12 update that the merger of PLS with PHL will provide tax benefits to PHL due to accumulated losses of PLS and the tax rates of PHL for next two years is likely to be close to 6%, which should augment the earnings of the parent company.

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I have been thinking a lot about this situation for investment purpose and see a lot of heated debate on TED also regarding the stock price valuations etc. I personally dont want to get too much into the science part of the investment here valuing the cash applying various types of discounting etc. We seem to have a classic Graham style situation of getting a dollar for 50 cents. Only thing one needs is patience.

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My take is that the cmp of 356-360 odd reflects the cash on hands only after applying the appropriate discounting (which I dont think needs to be applied bcos we are talking about assured cash flows going forward). So the valuations of cash for the company has some upsides possible. And this thing allows for Piramal to blow a couple of deals also wherein he doesnt make any money on the investments.(which seems unlikely looking at his past track record)

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Regarding other businesses we are left with

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1). CRAMS BUSINESS – Piramal is a formidable player here and with more investments planned to be infused here it can become even more formidable.

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2). PLS – practially nil value has been attributed to this one. It has around 24 molecules in the pipeline. This has all the likelihood of having a postive black swan effect (? a white swan??) as mentioned in parag parikh report. All the company needs is for only a handful of molecules to click and there are molecule hungry MNCs waiting to snap the molecules by paying hefty prices.

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3). Critical Care business – This has been chugging along quite nicely with the anesthetics range esp with sevoflurane and desflurane. It looks likely to have a great future as there are very few players in this field.

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4). OTC products – saridon, lactocalamine, i pill etc are all molecules capable of generating high margin sales if supported by proper marketing and advertising.

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This looks like a case of market uncertainties offering a good investment opportunity because all the talk of cash and management’s use of cash etc has taken away the limelight from the remaining pharma business which itself can generate very good growth especially in view of management intent of pumping in cash to the tune of 7000 crores into it.

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Just thinking of the amount to be invested, Even if the management manages to achieve sales of twice the money pumped in then we have a sales target of 14000 crores and one only has to think about valuations for that kind of business. And with the markets in doldrums Piramal will be again in a favourable situation of picking what he wants at very attractive valuations.

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**Views invited. **

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Hi Hitesh patel,

In the analyst presentation the management gave the guidance for the FY 2016 on a conservative basis:

Sales guidance - 10,000crores

EBITDA guidance - 18-20% i.e. 1800-2000crores (In FY 2010 their EDITA was 20.2%)

so we can expect PAT of 10-12% i.e. 1000-1200crores (In FY 200 their PAT was 13.1%)

So if we apply PE of 18, market cap can be 18000-21000crores i.e. an upside potential of 3 times of current marketcap 6000crores.

Even if we look at the stock from graham point of view, it is available at half the price of book value. As walter schloss said, “I bought the stock at cheap price. something good will happen to the stock”.

Regarding the remaining business i expressed my views above. would like to hear your comment on that.

Regards

Jagadees

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60

Hello everyone,

Here is the recent article on piramal healthcare in ET - http://economictimes.indiatimes.com/news/news-by-industry/healthcare/biotech/healthcare/ajay-piramals-problem-of-plenty-market-wants-piramal-to-start-dealing-with-cash-chest-of-rs-10000-crore/articleshow/9962748.cms

Few points important to note:

Piramal says, “I am here to create value for his shareholders. Whether I do it by running one business or selling it is not the question. I have no ego about it.”

“Why do people forget that apart from the cash we got from the Abbott deal, we can also use leverage?” he quips. The group has the capability to invest Rs 25,000 crore, Piramal estimates.

“Piramal says the company is looking to enter a strategic sector (apart from pharma, REIT, financial service), but won’t yet disclose which ones he is considering. Conversations with key members on his team suggest he is most inclined to investing in a hi-tech services sector, although it is still at a discussion stage. CFO Laddha rules out a few sectors - insurance, hospitals, and direct ownership in infrastructure” (because these 3 are long gestation business).

One thing is clear that the company no longer going to exist as pure pharma play, rather going to be company with diversified interests. views are invited.

Regards

Jagadees