Piramal Healthcare Ltd - Weak 1Q; Uncertainty over use of cash remains - PINC Result Review

Weak 1Q; Uncertainty over use of cash remains

Piramal Healthcare reported weak Q1FY11 results with 2.5% increase in sales and 12% decline in EBITDA. We believe Q1FY11 results are not relevant as Piramal has sold businesses that contribute 61% of its sales. While we estimate an NPV of ~Rs500/share for both the deals, the larger issue of the end use of cash remains unaddressed. We re-iterate our Hold with TP of Rs540.

India formulations & CRAMS disappoint; Critical care on track

Piramal's India formulations (55% of sales) grew 5% growth (v/s our estimate of 18%) due to the change in the ownership. CMG (20% of sales) continues to be under pressure and declined 17% YoY. Critical care business improved by 49% YoY and 22% QoQ on the back of higher Sevoflurane sales.

Lower profitability in Q1; expect to improve further

Piramal's EBITDA margin has contracted by 276bps on lower sales in India and payment of performance bonus. Lower interest, depreciation and taxes led to a 1% growth in recurring earnings.

Key Call Takeaways

1) Cash from the deal with Abbott is expected to be received by the end of Sep'10, 2) Flat growth with higher profitability of CRAMS business in FY11 while 15-20% growth guidance for FY12, 3) Desflurane will be launched earliest in FY12 and 4) Profitability of Minrad is currently at the mid-teens levels and will improve to high teens in the coming quarters.

VALUATIONS AND RECOMMENDATION

We believe Piramal's CRAMS business will strong growth with higher profitability in FY12 as innovator pharma companies come out of the mode of inventory de-stocking. However, we retain 'HOLD' as we await further clarity on the use of cash. As of now we maintain our earlier estimates as we await greater details of the eventual impact on the profitability and balance sheet.

Source : Equity Bulls

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