We came back from Piramal Healthcare?s analyst meet with mixed views. While it undoubtedly got a great valuation for the sale of its healthcare solutions business to Abbott, the likely foray into non-healthcare areas builds in uncertainty and makes us cautious. The sale consideration of c$3.72 bn values the business at 8xFY11e and 7xFY12e sales and 31xFY11e & 27xFY12e earnings before interest, taxes, depreciation and amortisation (Ebitda) respectively?a huge premium to average sector multiples. Moreover, the post-tax NPV of sale proceeds (for 50% of the company by sales) at c$2.6bn (cRs 560/sh) is higher than Piramal Healthcare?s current enterprise value (EV) (c$2.5bn). This significantly strengthens its balancesheet.
However, we are cautious on the company?s intent to expand into non-healthcare areas, as also the possibility that Piramal Lifesciences (R&D affiliate) may be brought back into the fold going forward. These could materially alter the risk profile of the business. Given this uncertainty, we do not expect cash on the B/S to be valued fully till we get more clarity on future plans although the likely special dividend & management track record should limit further downside. We maintain our Hold (2M) rating & TP of Rs 560, as we await clarity on the company?s future business plans.
Piramal has agreed to sell its healthcare solutions business to Abbott for $3.72bn. This includes branded formulations in India, Nepal and Sri Lanka. However, it excludes over-the-counter (OTC). Piramal will transfer its plant at Baddi, c5,250 employees and c350 brands/ trademarks to Abbott. The funds would be used to repay debt, expand in other businesses and pay a special dividend.
Piramal will receive $2.12bn on closure and $400m every year for four years from CY11. This values the biz at 8xFY11E & 7xFY12E sales & 31xFY11E & 27xFY12E Ebitda respectively ?a huge premium to average sector multiples. Moreover, the post tax NPV of sale proceeds (for 50% of the company by sales) at c$2.6bn (c Rs560/sh) is higher than Piramal?s current EV (c$2.5bn)Piramal retains its various other biz, with Crams, Critical Care, OTC & Pathlabs being the key ones. These are potentially higher growth over the long term but could be more volatile as Piramal is not yet a very large player in most of these areas. We estimate that while these made up c50% of sales in FY10, share of Ebitda was lower at c40%.
We are cautious on Piramal?s intent to expand into non-healthcare areas, as also the possibility that Piramal Lifesc. (R&D affiliate) may be brought back into the fold going forward ? as these materially alter the risk profile of the business. Given this uncertainty, we do not expect cash on the B/S to be valued fully till we get more clarity on future plans although the likely special dividend and manaGEment track record should limit further downside.
Abbott will pay Piramal Healthcare a sum of $3.72bn over five years $2.12bn on closure of the deal (H2CY10) and an additional sum of $400m each year for the next four years. As per the Indian taxation law, Piramal Healthcare will have to pay capital gains tax @ 21.5%. The post tax net present value (NPV) of sale proceeds works out to c$2.6bn?higher than Piramal Healthcare?s current EV of c$2.5bn.