Market Cap and Share Price Indicate that Piramal Healthcare group Does Not Know How to Invest its Cash

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Piramal Healthcare may not be in the pink of health

Not a satisfactory Q1

Piramal Healthcare has not produced a satisfactory Q2 results for the quarter ended 30.09.11 as compared to the quarter ended 30.06.11. Revenue dropped from Rs.334 crore to Rs.331 crore. Revenue for the financial year 2010-11 was at Rs.1990 crore. Net profit dropped from Rs.101.09 crore to Rs.95.39 crore. Net profit for the year 2010-11 was at Rs.12896.91 crore. This is a misleading figure as it includes a one time exceptional profit also. Operating profit margin has increased from 44.27% to 45.28% but net profit margin dropped from 30.19% to 28.76%. The shares of Piramal Healthcare are traded in Indian stock markets at Rs.366.40 now (05.11.11). The highest price recorded in the last one year was at Rs.550 (14.03.11) and the lowest price was at Rs.341.60 (19.08.11). The present share price is close to its lowest price in the last one year. This gives a temptation to the investors to buy the shares at the current price level. Is it justified? Let us analyse.

Waiting for a good opportunity to deploy funds

Piramal Healthcare has settled the patent litigation with Baxter Healthcare over the anaesthetic drug Suprane. It can now launch the product in the US market from January 2014. Ajay Piramal, Chairman of Piramal group is very careful in taking a decision about investing the money received from the sale of two of its businesses last year. Ajay Piramal stated that he did not want to invest the money in ventures that will give sub-optimal returns. The company has been waiting patiently for the last one year to seek good opportunities to deploy the huge funds that are at its disposal. Last year, Piramal Healthcare sold its domestic formulations division to Abbott Laboratories for a whopping Rs.17000 crore. It got Rs.10000 crore ready cash and the remaining amount will be repaid by Abbott Laboratories in for instalments of Rs.1800 crore each. Piramal Healthcare also sold its diagnostics business to Super Religare Laboratories for Rs.600 crore. The company wants to foray into an unrelated area of financial services. It is also rumoured that the company may apply for permission to start a bank in the future. Waiting for the right opportunity to invest is a good strategy. But in the name of waiting, one should not spend too much time. Every month passed, inflation eats away the real worth of the cash. In fact Ajay Piramal is known for taking quick decisions. It is not known why he is spending too much time in taking a decision regarding investment.

Will Piramal Healthcare be another ITC?

The company’s core competency is in the pharmaceutical business. If the company deviates from its core competence and starts unrelated business, will it succeed? There are more chances for failure than success. Of course, one would like to quote the example of ITC for success. ITC deviated from its core competence of tobacco business and forayed into hotels, agro and even biscuits and tasted success. In fact a stage has come in which ITC can even look forward to earn a majority of its income from its non-core businesses. But exceptions cannot become examples. Piramal Healthcare should tread on caution while testing deep waters in unknown areas.

Launching of CarGel in Europe next year

Piramal Healthcare is planning to launch its new drug CarGel in Europe next year. The company has completed regulatory filing on the drug with British regulatory authorities. CarGel is the drug that can be used for cartilage repair for rheumatoid arthritis cases. Piramal Life Sciences, another Piramal group company in the pharmaceutical business, is looking forward to launching more promising molecule in 2013. By the end of the year, demerger of innovative segment of Piramal Life Sciences into Piramal Healthcare will take place. The company is waiting for the clearing of regulatory issues in this regard. Piramal Healthcare expects a 20% growth this year in sales turnover.

Entering telecom?

The doctor-turned business woman Swati Piramal is running the company Piramal Healthcare very efficiently. Piramal Healthcare has become one of India’s top five pharmaceutical companies. Piramal Healthcare has signed an agreement to acquire 5.5% stake in Vodafone-Essar. Piramal Healthcare expects a 36% return from the investment in 2 years. Vodafone-Essar is the Indian subsidiary of the British company Vodafone. Piramal Healthcare will buy the stake from an Essar group company ETHL Communications Holdings. The investment involved is Rs.2912.5 crore ($631.1 million). Vodafone-Essar is valued at $11.6 billion. After this deal, Vodafone’s stake in its Indian venture will come down to around 70%. In March this year, Vodafone purchased a 33% stake in Vodafone Essar from Essar group for Rs.25380 crore ($5.5 billion), thereby increasing its stake to 75.3%. This crossed the FDI cap of 74% prescribed by the Indian government. The deal indicates that Piramal Healthcare wants to diversify into an unrelated area of telecom.

Ajay Piramal irritates shareholders

Since Piramal Healthcare sold its domestic generics business to Abbott Laboratories in September 2010, the share price has fallen by more than 40% when the stock indices themselves have fallen by 5.6%. The huge cash that the company received from its sale remains invested in low yielding debt securities for the last one year. This has sapped the confidence of the investors and hence the share price of the company has precipitously declined. The company paid a special dividend of Rs.6 per share involving an outgo of Rs.120 crore, which were peanuts compared to the huge inflow into the coffers of the company. In fact this move only irritated the shareholders. In March, the company bought back its own shares by spending Rs.2500 crore at a price of Rs.600 per share. But this move failed to arrest the fall of the share price. In fact, without this buy-back move, the share price would have fallen to still lower levels. The investment in Vodafone Essar has also failed to rouse confidence in the company among the investors, as telecom sector is mired in controversies and competitive stress. In fact this is a cheating of the shareholders on the part of the company. When the shareholders have parted with their money hoping that they were investing in a healthcare company, they have been taken for a ride. Piramal Healthcare sold the cream of its pharmaceutical business and is deploying the money in unrelated sectors like telecom, real estate and financial services. Ajay Piramal is telling that he has no intention to enter telecom sector and his investment is purely for returns.

30 deals in 10 years

Ajay Piramal bought Nicholas Laboratories from its international parents in 1988 and gave birth to Piramal Healthcare. He had acquired over a period of time different pharmaceutical entities like Boeringer Mannenheim, Indian operations of Roche Products, Rhone Poulenc, Hoechst Marrion Roussel’s Research Centre, Aventis’ Research facilities and ICI India’s pharma division. Piramal Healthcare became second largest Indian pharma company in terms of sales next to Cipla. Piramal group had concluded 30 deals in the last decade which translates into 3 deals every year.

Scouting for pharma acquisitions in USA

After the sale of domestic generic business to Abbott Laboratories, what is left behind now is minor. Over the Counter (OTC), contract manufacturing and research still remains with Piramal Healthcare. But with these minor pieces and paltry returns from securities where the surplus money has been deployed, one shudders to think what will be the shape of the company’s balance sheet this year. The existing pharma business will require around Rs.7000 crore investments in the next five years. Out of this, Rs.600 crore will be spent on new drugs discovery. Piramal Healthcare is also scouting for pharma acquisitions. It is interested in acquiring small research oriented firms. Particularly the company is scouting opportunities in USA as valuations have climbed down following economic crisis there. For example Piramal Healthcare bought US company Biosyntech for around $4 million in 2010. Biosyntech manufactured hydrogels called BST gel that can be used to repair damaged tissue like bone, cartilage and chronic wounds.

Succession chart drawn

Ajay Piramal has drawn the succession chart in his company. His son Anand will be heading the real estate business and daughter Nandini will be with the pharmaceutical business. Piramal group is valued at Rs.3500 crore. It has interests in pharmaceutical, real estate, glass and financial services. Piramal Healthcare is negotiating with Enam Financial to buy its stake in ING Life Insurance. ING Life Insurance is valued at Rs.2400 crore. Battery maker Excide Industries and the well known investment banker Hemandra Kothari have stakes in the insurance company. Many cash rich companies are opting to invest in reputed insurance ventures. At present the foreign investment cap in insurance business in India is pegged at 26%. This cap is expected to be lifted by the government of India in a year or two. At that time, the insurance companies will be listed in the stock markets. They are expected to be quoted high as no insurance company in India has been listed in the stock market yet. Even Reliance Industries purchased Mittals’ stake in the French insurance company AXA.

Advertisement in the guise of ‘awareness campaign’

In the guise of ‘awareness campaign’, Piramal Healthcare advertised its contraceptive medicine sold under the brand i-pill. But the Drug Controller General of India (DCGI) sent a notice to the company to airing the advertisement. Piramal Healthcare acquired i-Pill from Cipla in March last year. Piramal Healthcare has launched perfumes for children. The perfumes come packaged in animal figurine bottles. The natural perfumes include fragrances like orange and green apple. Bundling the concept of charity and gift, the perfumes are slated to bring attention if not revenue to the company. Some time back there was a rumour that the Piramals were interested in acquiring IVRCL Infrastructure & Projects’ stake in Hindustan Dorr-Oliver, an industrial equipment company. Hindustan Dorr-Oliver denied the reports.

Do not invest now

At the current price, one should avoid investing in Piramal Healthcare. With its cream of business namely generic division already sold out, the company’s revenue will take a beating in the current year. One should wait for the current year 2011-12 balance sheet to come out and then decide whether to invest or not. Discretion is the better part of valour.

Piramal Healthcare - Q2 results

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Piramal Healthcare - share price movement

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( 14 Mar 11 )
( 19 Aug 11 )
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