Neutral on Piramal Healthcare - Motilal Oswal

Piramal Healthcare (PIHC IN, Mkt Cap US$1.9b, CMP Rs420, Neutral)

This was the first full quarter of reporting excluding the domestic formulations & pathlabs businesses. The CRAMS business grew 11.6% to Rs2.3b with India CRAMS recording 15.7% growth to Rs1.3b while international CRAMS grew 6.7% to Rs1b. EBITDA loss at Rs326m was mainly due to inadequate revenues resulting in suboptimal cost absorption. Adj PAT at Rs604m was mainly driven by Rs1.3b of treasury income earned on the proceeds of divested businesses and Rs145m of forex gains.

The Abbott transaction closed on 08-Sep-10 resulting in a cash inflow of US$2.2b for PIHC. Divestment of its diagnostic business also fetched Rs3b cash taking total available cash to ~Rs60b. In addition, the company will be receiving US$400m/yr for the next four years from Abbott. However, the uncertainty on deployment of this surplus cash continuesIdentifying new business opportunities will have execution risks, especially if it is a totally unrelated business.

PIHC had announced buyback of 20% of equity at Rs600/share as a step in rewarding shareholders (from the proceeds of the divestments) instead of announcing a one-time special dividend. We view this positively as buyback is a more tax-efficient method of rewarding long-term shareholders. The buyback is expected to close by Mar-2011.

Management has, in the past, indicated that part of the cash flow from Abbott deal may be utilized for exploring new emerging opportunities. This raises uncertainties on cash deployment, since as of now we are unclear on the nature of these opportunities. Maintain Neutral.

Source : Equity Bulls

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