When I decided to value Piramal Healthcare (PHL), a question came to my mind: "How do you value a company that is sitting on a cash pile of Rs 596 per share, when it is trading at Rs 403 per share?"
With such a strong cash position and the current EPS (of the business remaining after the Abbott sale) being 39.2 (4xEPS of Q4), the current P/E ratio of the company is 10.3. Such a P/E ratio for a company, with a proven track record is significantly lower than its peers (with equivalent track record). Such a low P/E multiple indicates that the 'market' does not expect the company to grow significantly in the future, which is unlikely considering their management track record.
Moreover, they are also not considering the large cash pile. A 10.3x PE multiple is understandable, but the Rs 596 cash that is lying around in the coffers of the company is definitely being neglected. The potential of the utility of the cash definitely being forgotten.
If the company in the future (maybe a year or two down the line, when it utilizes the above mentioned cash in some venture) is able to get an ROCE of 10%, that means, an additional earnings per share of Rs 59.6. We are not considering the potential of the financial leverage here. Moreover, we are also not considering the past performance given by the same management team: a minimum of 20% ROCE (upto 29%) in the past 5 years.
The book value per share of the company is also currently Rs 723. This is over 75% higher than the last traded price of the share. Piramal Healthcare has already entered the Financial Services business with the takeover of IndiaReit. With the merger of the New Chemical entity division into PHL, the new drug discovery front also looks promising as the risk profile of the R&D activity has also decreased a lot since the original demerger in 2007 (Owing to the molecules being higher up in the clinical trial process).
The potential for PHL seems great from my point of view.
P.S. There is a dividend of Rs 12 per share coming up this august. The dividend yield is almost 3%, tax free.
With such a strong cash position and the current EPS (of the business remaining after the Abbott sale) being 39.2 (4xEPS of Q4), the current P/E ratio of the company is 10.3. Such a P/E ratio for a company, with a proven track record is significantly lower than its peers (with equivalent track record). Such a low P/E multiple indicates that the 'market' does not expect the company to grow significantly in the future, which is unlikely considering their management track record.
Moreover, they are also not considering the large cash pile. A 10.3x PE multiple is understandable, but the Rs 596 cash that is lying around in the coffers of the company is definitely being neglected. The potential of the utility of the cash definitely being forgotten.
If the company in the future (maybe a year or two down the line, when it utilizes the above mentioned cash in some venture) is able to get an ROCE of 10%, that means, an additional earnings per share of Rs 59.6. We are not considering the potential of the financial leverage here. Moreover, we are also not considering the past performance given by the same management team: a minimum of 20% ROCE (upto 29%) in the past 5 years.
The book value per share of the company is also currently Rs 723. This is over 75% higher than the last traded price of the share. Piramal Healthcare has already entered the Financial Services business with the takeover of IndiaReit. With the merger of the New Chemical entity division into PHL, the new drug discovery front also looks promising as the risk profile of the R&D activity has also decreased a lot since the original demerger in 2007 (Owing to the molecules being higher up in the clinical trial process).
The potential for PHL seems great from my point of view.
P.S. There is a dividend of Rs 12 per share coming up this august. The dividend yield is almost 3%, tax free.
I think the Abbot deal had cash coming in milestones, so not very sure about the entire cash coming upfront viz Rs 596/share. And the book value can be underpriced if market expected ROCE<cost of capital for the remaining business since the high growht business was hived off. Anyways, I'll write an analysis of this soon on my blog updating for the Vodafone deal, and suggest you do the same!
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