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PIRHEALTH Q2 At 52.93 cr.

Piramal Healthcare announced Q2 results and they’ve made about Rs. 53 cr. in profits in the quarter.

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Click for a larger image. All amounts in Lakhs except EPS and Face Value.

I know, hardly anyone gives you eight or nine quarters but honestly that’s how you need to look at a business (quarterly) or longer term (yearly – many years).

The Cash

In Q2 last year they got a fantastic payout of 16,000 cr. for the business they sold to Abbott, so we can’t easily compare results.The operational profit was 51 cr, versus a 57 cr. loss last year. They have a net interest earning of 30 cr. and nearly 33% tax rate. Interest seems awfully small for a portfolio of over 10,000 cr. now – but it could be deployed in debt funds (rather than fixed deposits) which means they get it as a lumpsum if they exit. Of concern is the balance sheet though, which shows:

a) Investments: 3,917 cr.
b) Other current assets: 6110 cr.
c) Cash and bank: 735 cr.

This is scary because all that money needs to either be in Fixed Deposits (FDs) – which one might call “other current assets”. But in that case interest income should be huge: At 9% rates, the minimum they’ll earn in a quarter is Rs. 130 cr. – they earned just 50 cr. And if it’s in short term debt funds, the figure should show in “investments”. This needs further investigation.

Update: I was mistaken about 10,000 cr. in cash. They are getting about 1850 cr. per year, but they got an upfront amount of 10,000 cr. Since they’ve got one tranche, the amounts they have is:

Upfront: 10,000 cr.
1st Tranche: 1850 cr.
Vodafone deal: (2900 cr)
Buyback: (2500 cr.)
Taxes: (3700 cr.)
Indiareit buy + dividend payout : (400 cr.)

That should leave 2,500 cr. or whereabouts with them, for which the quarterly interest will be just Rs. 50 cr or so, at 9% an annum. So that bit has been clarified.

Thanks to sharp reader Jagadees for the heads up!

On the business front

They grew pharma solutions (CRAMS) to 305 cr. from 230 cr., (32%) the critical care business to 92 cr. from 64 cr. (64%), and OTC/Opth products to 57 cr from 36 (59%)  Overall

But most of the profit is from forex gains, which is a gain of Rs. 103 cr.in the quarter, due to receivables from Abbott. Abbott is paying them around 1,900 cr. per year (they’ve got one). That means the operational business is largely loss making to the extent of about 50 cr.

Taxes are 33% – the highest in 8 or 9 quarters. They’ll buy losses soon, so that will taper down. But they’ve taken on more debt (why?) scaling up to 1090 cr. from March’s 757 cr.

Prospects

They will soon merge the R&D division of Piramal Life Sciences, which is also loss making, but should improve prospects for deploying cash in the future. They’ve bought about 5% in Vodafone and are making forays into financial services, on which I don’t currently have an opinion. They have received approval to sell Sevoflurane (which is for general anaesthesia in surgeries) in Europe – note that this may not be a huge market.

With that they still have a EPS of 3.1 and a TTM EPS of about Rs. 20 – putting the share at Rs. 355 at a P/E of about 18. But remember they own cash of around 10,000 cr. which is more than Rs. 500 per share, apart from the business itself.

Disclosure: I own shares. The share’s at 350 (my purchase price is around 400) and I was hoping to buy more, but I’m not too impressed with these results. There are areas where I am concerned about transparency and figures don’t match between their own presentations and what they send to exchanges.

  • Jagadees says:

    Hi deepak,
    Few things,
    1. They have not got the entire deal amount from Abbott and hence the current assets might include the receivables of 5000 crores too. If we take this into account i guess then interest income reflects correctly.
    2. Abbott is paying them around 1,900 cr. per year. You mentioned it as per quarter.
    3. In the concall they clarified that they took some debt for working capital needs of overseas business which is available at cheap rates of 2-3%. As they earn 9% in fixed income here, the management wants to take advantage of the arbitrage available.
    My concerns are
    Management gave fully year guidance for pharma business at 20% growth. In the first half itself they grew by 30-32% and hence basically in the second half management expects the growth to be at 10-12% only. One reason could be they might have executed some bulk order in CRAMS in the first half which wont be there in the 2nd half. Still 10% growth will drag the EPS very much down.
    Regards

    • Let me see – the cash they have is lesser then? I must recalculate after the Vodafone payment, the buyback, taxes and the promoter co buys.
      You’re right, it’s per year! will fix.
      Pir health is a very long term play. This year won’t matter, even next year. Question is: what will do in five years?

  • Jagadees says:

    Yes, they have lesser cash with them. In total they received approx 12,000 crores (10,200 cr as upfront and 1800 as first tranche). They paid tax of 3700 cr, share buy back of 2500 cr, dividend of 200 cr, IndiaReit of 225 cr, vodafone investment of 2900 cr. All this adds upto around 9500 crores. Hence remaining cash should be around 2500 crores and if it earns 9% interest rate, the interest income should be in the range of 50-55 crores per quarter.
    Yes piramal health is a long term play. we need to wait and see his next move.
    Apart from interest income d rise in debt, what other discrepancy did you find?
    Regards

  • Hardik Shah says:

    To say that the stock is trading at a P/E of 18 + INR 10,000 crores of cash is a bit erroneous.
    Most of the EPS for the quarter was Interest Income (If you remove the INR 50 crores of interest income, your net profit of INR 52 crores would reduce by INR 35 crores, after accounting for the tax on the interest income). Business on its own only generated ~Re. 1 of EPS this quarter.
    That having been said, where this stock goes (or doesn’t go) is going to be driven by whats done with the cash. What happens with the remaining operating business will contribute much lesser to the stocks performance.

    • True – we have discussed in hte comments that cash is actually 6,500 cr (or Rs. 200 odd per share).
      Actually it’s far worse than you mentioend. If you remove forex gains and interest, you get a loss of around 80-90 cr. for the quarter. Which is what I would have thought, given that they’re only starting to gear up from the slump sale.
      I think the remaining business will start to be augmented with the cash over the next five years, but it will involve other healthcare stuff (like they’re getting molecule research from Piramal Life Sciences etc.). They might venture into financial services also, which according to me is a good thing now (prices of all entities are way low and good deals will come, but they have to choose well).