Piramal Healthcare acquisition of Decision Resources Group - An attempt to value DRG

With Piramal Healthcare stock slowly and steadily marching northwards (Disclaimer: It has been my favorite stock for almost a year, so this post may be a little biased ) following a slew of acquisitions (and a Rs17.5 dividend per share coming up), I once again pause to take a look at the latest acquisition – Decision Resources Group for a sum of approximately $635 million. All the reasons given in their investor presentation indicate the attractiveness of holding this company in the portfolio. But again the question arises (as earlier with Vodafone India’s stake), have they paid an appropriate value for this? So, I make an attempt to value DRG, but the same being a privately held company a lot of assumptions need to be made.

Piramal Healthcare’s 11% Vodafone Stake – Is it worth it?

Piramal Healthcare on Friday added 5.5% stake to Vodafone India to take its total shareholding in the telecom major to 11%. Now, Piramal’s total investment in Vodafone i.e. telecom business stands at Rs5870 crore. Considering this to be almost equivalent to a third of the sale proceeds to Abbot, I wanted to estimate how much is Vodafone actually worth (Neglecting the effect Supreme court ruling cancelling 2G licenses issued in 2008 could have on its value). 

Data used for the relative valuation is taken from Vodafone Plc’s half yearly numbers, wherein Sales and EBITDA of India operations was given. As for comparison, MarketCapitalization/Sales and EV/EBITDA are considered. The comparable companies which have been taken for this are Airtel, Idea, RComm and Tata Teleservices (TTML). The values for the multiples as on 25^th Jan 2012 were:

	EV/EBITDA	Mkt Cap/Sales
Airtel	11.13	3.57
Idea	10.79	1.45
Rcomm	31.54	1.67
Tata Tele	6.78	1.44
Average	9.57*	2.03

Analysis of Piramal Healthcare Ltd

Piramal Healthcare, in their Analyst presentation came out with their future strategy of utilizing their cash. As mentioned in my earlier post, they are sitting on almost Rs 10,000 crore cash/cash equivalent. With the sale of the Domestic Formulations business, there was some anxiety as to which business would Mr Piramal decide to invest the money in.

The major focus of the investments lies in four areas as follows:

1) Pharma Solutions
Investment: Rs 2,700 Crore
Current Sales: Rs 1020 Crore
Sales Target: Rs 5,000 Crore by 2016 (CAGR of 37%)

They aim to be among the top-3 contract manufacturing organizations globally.

Analysis of Piramal Healthcare Ltd

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.