Piramal sell-off domestic formulation to Abbott - Elara Securities

Piramal Healthcare has announced a definitive agreement with Abbott Ltd to sell-off its Indian formulation business excluding OTC products for a total consideration of USD3.72bn, of which, USD 2.12bn (INR97.5bn) would be paid upfront (post the legal completion of the deal in H2 2010) and the residual amount in four years (USD400mn each) beginning from 2011. Abbott has paid 8x of FY10 sales and 43x of FY10 EBITDA. Details of the deal post the analyst conference are:

• With the transfer of INR18.4bn (52% of sales in FY10) sales, Piramal Healthcare would pass on 350 domestic brands (ethical products), 5,250 employees, INR1.6bn net block, and the Baddi plant as per the terms of the deal
• Piramal Healthcare retains INR17bn (48% of sales in FY10) sales where CRAMS contributes INR8.8bn, followed by critical care of INR3.2bn, diagnostic, and the OTC. Division wise, the company retains customs manufacturing, global critical care (inhalation anesthetic market), diagnostic services, OTC, pathology, vitamins/ fine chemicals, ophthalmology (Allergan JV), and CRAMS. Post the deal, Piramal Healthcare would retain 12 manufacturing plants in India and abroad
• Operating margin of the domestic formulations is 22-25%, while residual business has an operating margin of 18-20% as per management of the company
• Current promoter (of Pirmal Healthcare) had bought the company at INR60mn in 1988 and now sold off its domestic formulation business at INR171bn, implying a 44% CAGR in the last 22 years
• Promoters of the company have a non-competing agreement with Abbott for eight years for the domestic formulation business. The company believes that the OTC business would expand going forward, given the prospects
• The management plans to declare a one-time special dividend out of cash received from the domestic business sell-off. The company has a current capex requirement of INR2bn while it plans to repay INR13bn debt post the receipt of consideration from the deal. It has to pay 21.5% (~20% post indexation) long-term capital gain tax on the amount received from Abbott. Giving a hint that it would look at other businesses, the company says it plans to reinvest the cash in businesses with significant opportunities. Post the sell-off, the book value of Piramal Healthcare will be INR5bn
• With INR10.5bn in Indian sales (post Solvay acquisition), Abbott India would assume the number one in rank (with sales of INR 2.8bn) post the acquisition of Piramal Healthcare. Abbott India's market share would be 6.4% after the addition of 4.1% market share of Piramal Healthcare. Presently, Abbott holds 12th rank and 2.1% market share in India
• Abbott Inc plans to operate Piramal Healthcare's business as a standalone entity, and expects overall sales of INR 2.5bn in Indian market in 2020, implying a 17% CAGR. However, the Abbott's management is not expecting value accretion in the first three years post buyout of the Piramal's domestic formulation business
• With the assumption of a 15% growth in residual business, another 20% in long term capital gain tax, savings of interest cost, the repayment of INR 13bn debt, and a 10% net profit margin, we estimate INR595 per share for Piramal Healthcare with an 18% upside from the current market price at INR502. However, we believe that there would be selling pressure from FII investors in the short term as there is a major possibility of the stock to be excluded from the MSCI India Index

Source : Equity Bulls

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