Profitable buyback

Over the past week, Piramal Healthcare shares rose 4.5 per cent after its shareholders gave their consent to the company’s buyback proposal. According to the announcement made on Friday, the company would buy back 20 per cent of the outstanding shares at Rs 600 per share. The buyback price is 30 per cent higher than Monday’s closing price of Rs 460.55. According to analysts, shareholders should tender their shares.

Attractive offer
The company’s board of directors had decided to reward shareholders with Rs 2,500 crore, following the sale of its domestic formulation (Rs 17,810 crore) and diagnostics businesses (Rs 600 crore). The company had chosen a buyback as the preferred route for the distribution of this surplus cash.

The company has justified the buyback vis-à-vis other forms since it is more tax efficient with a long-term capital gains rate of 10.3 per cent compared to the 16 per cent that would be charged as dividend distribution tax if dividends were given out. The other benefit of a buyback is that it reduces the shareholder base and, hence, lowers the need to service a large quantum of shareholders.
 

SITTING PRETTY
In Rs crore	FY11E	FY12E
Sales	3,520	3,695
Ebitda	650	801
Net profit*	474	549
P/E (x)*	20.3	14
E: Estimates;  * Adjusted for extra-ordinary items on pre-buyback equity for FY11, while for FY12, a 20% reduction in equity has been assumed Source: Bloomberg consensus estimates

Analysts believe if the promoters, who have 53 per cent in the company, participate in the buyback offer and if the offer is subscribed fully, the acceptance ratio will be 20 per cent (one out of five shares tendered will be accepted). However, if the promoters do not participate (which analysts indicate is unlikely) and some shareholders do not tender their shares, then the acceptance ratio will be almost half (45-50 per cent).

Can outpace average industry growth
While the recent quarters have not been smooth sailing for the custom manufacturing business (which contributes nearly 70 per cent of the revenues), analysts believe the outsourcing business has potential and the company can grow faster than the industry’s average rate of 20 per cent.

Analysts believe the bottleneck for the company recently has been the transfer of operations/processes which were hitherto carried out at its plant in Baddi to its other bases across the country. The Baddi plant went to Abbott when the company sold its formulations business. Of the other two businesses (critical care and OTC products), analysts are bullish on the prospects of the OTC business. The company, which acquired the i-pill brand from Cipla for Rs 95 crore, is likely to scout for new brands to expand its portfolio.

Overall, analysts expect the company to clock an EPS of Rs 22.65 and Rs 32.83 in 2010-11 and 2011-12, respectively. Given the growth prospects for the company and the mountain of cash (approximatelys475-500 per share currently), analysts say new investors can also take fresh exposure to the stock with a two-three year perspective.