Peptides for sure is an exciting space, but I don’t really know how it matches Piramal Pharma’s portfolio (apart from expanding into a new venture). You need unique capabilities, class apart execution and years of experience to come out as a winner in the space. One would want to go through Neuland Labs ARs to understand how deep the space is.
Also, as mentioned by @paragbharambe , the valuation of ~6.5x (FY21 apprx) EV/sales does seems a bit on the higher side. Neuland Labs is a leader in peptide chemistry and trading at < 3x EV/Sales.
Need to understand what PPS’s strategy is going to be going forward. Time will tell how it plays out for them though!
Perhaps someone more knowledgeable with the pharma space could help understand this particular acquisition from the POV of Piramal.
This was expected…court cases from current deposit holders or shareholders. It may delay the final resolution a bit but don’t expect any other impact beyond that. It is interesting to note that DHFL shares are still being traded and going strong even when PEL has made it clear that it would be worthless as a part of acquisition process.
16,775 crs. was FS book value & a loan book of 51,522 crs as of Dec’20. Now u can put a P\B multiple on this by estimating the write-off of bad assets(reduction in BV) & premium to book value given based on ROE generated going fwd. These adjustments are purely subjective based on one’s understanding.
For me, I valued FS at P\B of 1, Pharma business at Carlyle’s valuation + Cash\Investments at face value and bought @ 20% discount to the same.
From ICICI Securities Report
Hemmo Pharma – PPL has acquired 100% of Hemmo Pharma for an upfront cash
consideration of Rs7.75bn and additional milestone linked payments. This acquisition
is expected to complete within next 4-6weeks subject to completion of necessary
approvals. Hemmo is one of India’s largest manufacturers of synthetic peptides with a
legacy of nearly four decades. It has a strong expertise in both solution and solid
phase synthesis of peptides with a healthy commercialised product basket and
pipeline of under development products. Globally peptide API market has a size of
US$2bn which is growing at 6-8% every year. Hemmo generates ~75% of sales from
exports and ~67% is to the regulated market. It has an R&D facility in Thane and a
world class GMP manufacturing facility at Turbhe that is deemed compliant by
USFDA, EU and several Asian regulators.
Financial impact – PPL believes that Hemmo will bring another growth lever for its
CDMO business by introducing integrated services with development and
manufacturing of peptide drugs. Additionally, synergies from vertical integration
between the two companies coupled with higher scale and reach for commercialised
(and under development) drugs of Hemmo would result in higher growth and better
profitability. We assume Hemmo sales for FY21E to be Rs1.1bn growing 30% over
FY20 with a margin range of 30-35%. On this financial performance, valuation of the
acquisition is pegged at 7.0xFY21E sales and 20.0xFY21E EV/EBITDA. PPL’s de
Is the P/S ratio a proper metric to value the Pharma division?
Carlyle had given a Valuation of ~21,000 crores when it took over 20% stake. Compared to that valuation 76,000 crores seems way too high.
What am I missing here?
Ajay Piramal has quoted in one of the interview about sale of pharma division that he was expecting valuation of 15 time price to EBITA for pharma division. The road show for sale started before Covid and it kept the same valuation even after covid. This is around the timeframe of June-Sept.
If we see valuation of some of the CDMO player listed in the Indian market, they have gone between 2- 3X since May/June. However, for PEL,due to financial services (which is facing turmoil) is not reflecting the same yet.
Without going into the exact valuation of pharma, I think there is lot of scope for increase and I won’t be surprised it pharma division listed with 50k+ cr valuations, however when this happens is a million dollar question.
Note- Invested so views are biased.
I think if margins and debt levels are comparable, P/S ratio can be a reasonable metric for back-of-the-envelope comparison. If debt levels vary, EV/EBIDTA is a better metric. In the present case, PEL margins are lower than the companies compared. I am not aware how much of PEL’s debt is attributable to pharma business, but I assume it is low, just as the companies compared. In that case, a P/S ratio lower than the 12 to 19 band instead of 14 may be suitable. That would still leave out the question as to why it was valued so low for the Carlyle deal, but they seem to have got a good bargain.
@ shardhr That’s a simple and clean way to think about the buying price.
The book value of the FS business should be ~18,000 crs as of March’21. 80% of pharma business can be valued at 16,000 crs (same valuation as Carlyle’s; 20% owned by Carlyle) and Cash/Investments/DTA are around 12,000 crs. Valuing the FS business at 1x BV and cash etc at face value would make the value of the company to be around 46,000 crs. At the current price of 1650 and fully diluted shares (23.86 crs), the value ascribed by the market is ~39,000 crs. The discount is around 15% now.
I am quite interested in the pharma assets. In my view, the pharma assets are one of their kind, very unique and difficult to replicate. The markets they serve are large and growing and have high entry barriers. Returns on capital should improve as asset utilization goes up. Overall, a good quality and long term compounding pharma business.
The 3 risks which I see are:
(1) Investing in Piramal is akin to buying a whole car when you like only the engine. Pharma is around 35% of the overall valuation. In order to participate in it, one has to buy the combined business of pharma + FS. The flip side is that if one waits for demerger to buy pharma business alone, the valuations may go out of buying range.
(2) FS business post demerger may sell for a considerable discount to the book value making the investment in pharma business at higher valuations.
Thanks @BudFox :- Good to see our investment paths cross again after SCUF.
The points u mentioned regarding risk are precisely wat’s causing the undervaluation here.
This is how I addressed the risks or rather, the way I’m playing it : -
Pharma :- The demerger vl definitely result in better valuations for Pharma business. So part of seeing it as an arbitrage opportunity is the option of exiting the part of busness which the investors don’t like( nd majority of thm are currently on the NBFC side on this :-)) So one can reasonably assume that gains frm pharma valuation vl cover the losses of NBFC sufficiently.
Coming to NBFC side :- This is how m playing it\ sort-of hedged it. I bought DHFL retail NCDs which are selling at 66% discount currently. Nd for accounts upto 2 lakhs holding, Piramal vl redeem fully.
So DHFL merger is completed without further issues, the NCDs vl be repaid fully nd NBFC vl get rerated to more than 1X Book value
DHFL merger completes with certain hiccups and hits NBFC valuations. In this case the IRR on NCDs vl decline bt still that has sufficient Margin of Safety.
The DHFL merger fails as well as NBFC faces further deterioration in Book value. In this case I’ll end up losing on both fronts bt still the odds of this happening are 1/3 rd.
Disclosure:- Invested. Also holding default DHFL NCDs.
But because of the IBC procedure won’t the NCD’s be assigned value based on the price Piramal paid for DHFL and determined by consortium of lenders based on the waterfall model for debt?
Shriram stake : 5000 crs
DRG Receivables : 350 crs
DTA : 1500 crs (after giving hair cut to the book value of ~ 2000 crs)
Surplus cash : 4500 crs (my estimate)
Cash from rights to be issued to CCD holders : 200 crs
Cash from upside component of Carlyle deal : 500 crs
Cash profits earned in March’21 quarter : 800 crs
Total : 12,850 crs
Rounding with margin of safety ~ 12,000 crs
I agree that the probability of loss is low. Pharma valuations when listed separately should compensate for any loss in FS business.
DHFL NCDs- Upto 2 lakhs holding (of face value), are you sure that Piramal would redeem fully ? Could you share the source of this information ? I read that FD holders up to 2 lakhs may be redeemed fully but other people including NCD holders would be paid according to the waterfall mechanism, in a proportionate manner.
Carlyle is known for getting bargains at throwaway prices. They have acquired Sequent at Rs 86 it almost 3x in 1 year. What gives me comfort in this story is
Carlyle has kept performance clause and Nandini Piramal in one of the interview was confident of achieving it by Mar’21. What valuation Carlyle paid is a rear view mirror image now, if Piramal pharma is going to meet performance clause then definitely things have turned positive and inline with Carlyle’s expectations
Pharma demerger is in medium term. Knowing participation of Carlyle my assumption is there will be a definite end date for this in initial agreement. So it is question of when than will it happen?
Piramal pharma is one of the best CDMO Pharma business in India with multiple upside triggers with absolutely clean regulatory record (for more than a decade). You can go through Piramal Pharma day recording available on YouTube to understand it.
One of the demerger risk is, FS business could take hit in terms of valuation as there could be rush to exit that business asap from investors once listed.
