High on cash, low on growth

After an unimpressive June quarter result, the Piramal Healthcare stock lost 3.5 per cent last week but soon covered the lost ground on the back of some compelling valuations. The transition of its domestic formulations space and the steep drop in revenue from its CRAMS business are the main reasons for its dismal performance, according to analysts.

Revenues were up only a marginal 2.5 per cent at Rs 842 crore, while earnings before interest, taxes, depreciation and amortisation (Ebitda) margins tanked 364 basis points due to higher costs and lower revenue growth. Also, there is still no clarity on how the extra cash (from sale of its division to Abbott for about Rs 17,000 crore) will be utilised. Analysts estimate that a part of it is likely to be used for a one-time dividend in October.

After the recent sale of its diagnostic business for Rs 600 crore, the company – in addition to the CRAMS business – is left with critical (anaesthetics) and over-the-counter/formulations medication businesses.

CRAMS focus
The company is likely to focus on its CRAMS (contract, research and management services) business, which has been going through rough times in the recent past due to the economic slowdown. The business, which is likely to contribute over 40 per cent of the revenues in 2010-11, experienced a 16.5 per cent year-on-year fall in revenues in the last fiscal.
 

HEALTHY OUTLOOK
In Rs  crore	FY10	FY11E	FY12E
Net Sales	3,671	4,135	4,682
Ebitda	726	897	1,024
Ebitda (%)	19.8	21.7	21.9
Net profit	476	595	720
EPS (Rs )	22.8	28.5	34.5
P/E (x)	22.2	16.6	13.7
E: Estimates                                                      Source: Religare

The 17 per cent year-on-year fall in revenues in the June quarter indicates that all is not well with the recovery (in such markets as Europe) and outsourcing is yet to gain strength. In addition to repaying the Rs 1,300-crore debt, the company is likely to use a large chunk of the remaining cash to expand its operations (both organic and through acquisitions) in this segment.

Critical care business
The management is likely to continue its inorganic growth strategy for the critical care business, which saw revenues jump 49 per cent to Rs 108 crore in the June quarter. In this space, the company has acquired overseas firms Rhodia, Minrad and RxElite over the last five years, adding Bharat Serum and Vaccines’ anaesthetic product business in April this year. The company is eyeing a $1.8-billion (Rs 8,460-crore) global market in inhalation and other anaesthetics and a $300-million (Rs 1,410-crore) opportunity in the blood plasma volume expander segment.
 

A MOUNTAIN OF CASH
	Rs /share
Abbott deal	563
SRL deal	20
Residual biz	60
Total	643
Less: Debt	62
Value of business	581
Source: M F Global

Investment rationale
Given the cash available with the company (Rs 583 per share), at the current price of Rs 500.1, investors are getting such businesses as CRAMS, which have good long-term potential, at no extra cost. Expect a 15-20 per cent return from these levels over the next one and a half years.