Piramal Healthcare Event Update - Elara Capital

Rating : Unrated; CMP: INR505 (as on 14 July 2010); Bloomberg /Reuters Code: PIHC IN/PIRA.BO; Face Value (INR): 2; Daily Vol. (3M NSE Avg.): 2,090,535; Mkt Cap (INRbn/US$mn): 105 / 2,254

Piramal Healthcare has sold off its diagnostic business to SRL (Super Religare Ltd) in a structured deal, valued at INR6bn. SRL would give INR3bn cash up front, non convertible debentures of INR 1.65bn, and a 10% stake in a new combined entity with a committed buyback at INR1.35bn in three years. The buyback offer implies 10% IRR to the investment in the combined entity

Presently, Piramal Healthcare's diagnostic business has 107 laboratories in 58 locations across India, and has invested INR2.2bn in the business including various acquisitions. Post the acquisition of diagnostic business by SRL, the combined entity will have presence in 73 locations with 170 labs. We believe the combined entity to have large presence in the Indian diagnostic business.

Piramal Healthcare's subsidiary in the diagnostic business has sales of INR2.06bn and an EBITDA of INR377mn in FY10. Hence, the stock is valued at 3x of FY10 sales and 16x of FY10 EBITDA. Using the benchmark of peer valuation in the business (such as Vimta Labs), we value the company at 8x of FY12 EBITDA. This implies that the valuation of the deal is at a 17% premium to our valuation of the diagnostic business. Post the sell-off, Piramal Healthcare's existing base business is valued at INR100 per share.

Source : Equity Bulls

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