Piramal Healthcare invests US $ 640 million for a 5.5% stake in Vodaphone Essar….looks suspiciously like a ready forward deal as Ajay Piramal explains the Exit Options !…whatever…. limited downside from CMP of Rs 380

Piramal Healthcare invests US $ 640 million for a 5.5% stake in Vodaphone Essar….looks suspiciously like a  ready forward deal as Ajay Piramal explains the Exit Options !

Stock Channels carried ‘live’ this afternoon Ajay Piramal’s Media Meet to announce the rationale of the above investment

Interesting Comments made by Ajay Piramal…..however he refused to answer directly a question posed to him whether the exit options have been documented with Vodaphone….in a subsequent interview when posed the same question he replied that the confidence comes from the discussions he has had !

Ofcourse they would be confident !…it would have been captured in a Shareholders Agreement

So what is this new Investment and the rationale given

Well,Piramal Healthcare is sitting on Rs 10000 crs cash and receivables …..This surplus was a result of selling out in 2010 their domestic generic formulations business to Abbott for Rs 17000 crs or US $ 3.8 billion !…at nine times sales and 30 times EBIDTA !…transferring as of September 8,201,the Baddi Plant Assets and 5000 employees and 350 brands to Abbott…Rs 10000 crs were received upfront while Rs 1750 crs will come in four annual tranches  

The monies received/receivable are @ Rs 17000 crs….tax was Rs @ Rs 3700 crs..Rs 2508 crs was used to buy back 20% of the equity => 4.18 crs at Rs 600/share…Apart from a normal dividend of 300% or Rs 6/share a special dividend of a similar amount was announced 

Ajay Piramal boasted today  that the rime objective was to increase shareholder wealth !…and  that he has distributed Rs 2700 crs to shareholders !….really !…How ?…actually the routine Dividend is Rs 6 per share => @ Rs 100 crs…a special dividend was announced of Rs 6 per share too….that’s another Rs 100 crs….so dividend was an aggregate of Rs 200 crs….and Rs 2508 crs of company monies were used to buy back shares as stated above…at Rs 600 per share !…this reduced the paid up equity capital base from Rs 41.80 crs to Rs 33.44 crs as at June 30,2011….now buyback is normally a strategy that should be EPS accretive to remaining shareholders  and is deployment of surplus company funds that cannot be reinvested or applied elsewhere to earn good returns !……what has happened is that the scrip price has drifted down below Rs 400 from above Rs 500….the buy back of 20% of the shares was not a good strategy at the high price of Rs 600 …..remaining shareholders have suffered badly…..company has lost Rs 2508 crs for this buyback with nothing to show for it ! 

In fact the quarterly shareholding pattern of the promoter holdings from June 30,2010 to June 30,2011 reveals this

Piramal Promoters holdings in Piramal Healthcare

So you can see that Piramals picked up 27.6 lakh shares in the Sept-Dec 2010 quarter when the share price was between Rs 450 and Rs 550…this would have cost Rs 138 crs assuming an average of Rs 500 per share….then a few months later in the Jan-March 2011 period offered 20% of their holding amounting to 2.19 cr shares in the buyback at Rs 600  and took home Rs 1315 crs !…so the buyback benefited Promoters the most !….normally a buy back is a firm and reassuring message send out by Promoters that the company is on sound footing….they also reconfirm this message by not participating in the buy back and thus their holding moves up strongly !….if it is some consolation then only 20% of the incremental new purchases would have been rendered at Rs 600 in the buyback…the rest are yet being held and the holding cost is above the current market price of Rs 380   

No wonder our Markets price Piramal Healthcare way below what it’s financials dictate !…corporate governance issues….

Now Ajay Piramal tells us that the strategy is to deploy this remaining company surplus to earn superior returns in the short to medium term….So Piramal Healthcare is investing Rs 2886 crs or US $ 640 million to pick up a 5.5 % stake in Vodaphone Essar,expecting returns of 17% to 20% pa with exit options at the time of IPO (12 to 24 months ) or selling back to Vodaphone in case IPO does not happen

Ajay Piramal states the risk to shareholders is miinimal…..This Vodaphone Stake is part of the 10.97% that Vodaphone bought out from ETHL Communications Holdings,a company of it’s earlier JV Partner,Ruias of Essar…This itself was part of the overall full 33% that Vodaphone agreed to buy out from Ruias earlier this year….this earlier deal will go through by Feb 2012…..Earlier Vodaphone had also sold a part of this 10.97% holding to IDFC and Analjit Singh to conform to FDI individual holding cap Stipulations

Ajay Piramal did boast today that Piramal Healthcare has returned one of the best CAGR of 41% over 21 years to shareholders…..point is how many,other than Promoters Piramals themselves who currently own 53.32% of the Equity,actually held Piramal Healthcare right from inception !

Methinks this Investment by Piramal Healthcare in Vodaphone is more a Placement of Funds for two years thereabouts with a committed  understanding of returns…..more like a Ready Forward Deal !….would be interesting if one could get access to the Shareholders Agreement on this Investment…dying to know how  Piramal’s legal pundits have structured this deal !

Now let’s have a look at Piramal Healthcare potential at CMP of Rs 380….to begin with the 52 week High is Rs 560 (Oct 2010) for this FV Rs 2 share while the low is Rs 354 (June 2011)…so we are getting it towards lows….it did jump today on this new investment news….. the latest Equity is Rs 33.44 crs giving a current market cap of under Rs 6400 crs….the latest standalone  EPS is @ Rs 15 and the latest standalone Book Value is Rs 700…consolidated is Rs 864…this thows up a P/E of 25 while the P/BV is interestingly at just 0.54..The networth at March 31,2011 was @ Rs 11700 crs with loans negligible at under Rs 300 crs….most of this capital is employed in Current Assets….so this is a cash rich company…..

Then how is the market valuing it so low at just a market cap of under Rs 6400 crs when it has Cash and Receivables of over Rs 10000 crs !…and virtually relatively debt free ! 

The answer lies in quite a few realities and perspectives really…..some objective, like the monies from Abbott coming in form of a strong upfront and four annual tranches for the remaining + the transfer of Rs 500 crs + additional debt to the books on the NCE Unit of Piramal Life Sciences being transfered to it…..and some subjective, like the corporate governance perceived as being muddled and that moving into a high gestation Real Estate Segment + entering a very competitive Financial Services sector being a cause of concern

The shareholding pattern at June 30,2011 in the Equity of Rs 33.44 crs (16.72 crs shares) reveals this structure

Promoters : Nine shareholders own 53.32%

FI/Banks : 20 shareholders own 0.08%

FIIs : 187 own 20.98%

Insurance Cos : 10 shareholders own 5.32%  

Mutual Funds/UTI : 20 shareholders own 0.59%

Non Institutional Non Promoters : 93620 shareholders own 19.71%  

The Piramal Group has now diversified into Real Estate (Indiareit Funds….acquired two entities at Rs 225 crs that manage the Funds) with a outlay of Rs 3800 crs and even Financial Services by setting up an NBFC….the committment of Piramal Healthcare remains to Pharmaceuticals in the three existing areas of Pharma Solutions,Critical Care and OTC (Lacto Calamine,Saridon brands are popular) and the new New Chemical Entity segment that has been demerged from Piramal Life Sciences to Piramal Healthcare….over Rs 7000 crs outlay over Five years is planned in Pharma

Last Bonus was way back in 1993 !

Whatever…..Piramal Healthcare has limited downside from the CMP of @ Rs 380