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.

Analysis of Navin Flourine International Ltd

A company giving Rs66.5 per share dividend in form of (final + special) dividend always attracts attention. Since its announcement it has risen from 330 to 430 and post ex-date, it now trades at 305. Its P/E multiple shows 1.xx and it reported a fantastic result as follows:

Navin Fluorine International Limited, a part of reputed industrial house of Arvind Mafatlal Group, today reported a consolidated net profit of Rs. 217.58 crore for the year ended March 31, 2012 as against Rs. 71.34 crore in corresponding period of last fiscal year, registering an increase of 205 %.
Net Revenue for the year stood at Rs. 7.24bn, registering a growth of 68.23 % as compared to Rs. 4.30bn posted the last fiscal year. Earnings per share (EPS) increased by 214 % to Rs. 222.91 as compared to Rs. 70.81  of the last fiscal year.
(source: http://www.indiainfoline.com/Markets/News/Navin-Fluorine-FY12-net-profit-jumps-68-percent/5407635849)

The big question coming to my mind is: “Why then is this stock not catching the imagination of the prudent investors?” The answer becomes apparent on looking at its annual report.

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 Biocon Ltd Results

When I first saw the FY11 Q1 results of Biocon, I was really disappointed. But on taking a closer look, there were some positives as well. Although the standalone net profit was down from Rs 72.3 crores to Rs 60.4 crores, their consolidated net profit from continuing operations (their subsidiary had sold its subsidiary) was marginally up by 7% from Rs 65.22 crore to Rs 70.05 crore. These figures indicate two important things:

1)    The domestic profitability has taken a hit
2)    The subsidiaries, many of whom are foreign, have turned profitable

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.

Analysis of Lanco Infratech Ltd

Introduction

[From Company Website]
Lanco Infratech has subsidiaries and divisions across a synergistic span of verticals. These include Construction, Power, EPC, Infrastructure, Property Development, and Renewables. Lanco Infratech’s projects, operational and underway, are spread across India.

A member of the UN Global Compact, Lanco Infratech is recognized for its Good Corporate Governance and Corporate Social Responsibility initiatives led by the Lanco Foundation.

[Analysed]
Lanco Power
Lanco has 2092 MW of operational Power Plants. A further 7148 MW plants are under construction at various locations, out of which around 650 MW is of renewable energy including Hydro Power and Solar Power. They are also engaged in Power Trading.

The increasing Power requirement of a developing India augurs well for the company.

Analysis of Parabolic Drugs Ltd

Introduction

[Based upon Company Website]
Parabolic Drugs Limited is one of the fast growing API (Active Pharmaceutical Ingredients) and API intermediate manufacturing and marketing company in the SME segment, with increasing international presence and a strong R&D foundation, based at Chandigarh, India.

Commissioned in 1998, PDL has two fully functional, state of the art manufacturing units, a WHO-GMP certified Unit based in Derabassi (Punjab) and a world class Semi Synthetic Penicillin manufacturing plant at Panchkula, (Haryana) with one of its products been approved for sales to USA, respectively. With Presence in over 45 countries, Parabolic Drugs Ltd emerges as one of the fastest growing Pharma Company.

PDL has a dedicated Custom Synthesis and Research & development Centre at Barwala (Haryana), fully equipped with latest analytical facilities and backed up with cGMP pilot plant for scale up of technologies and filing of DMFs.

Financial

PDL registered a modest growth of sales in Q2 FY11, as against that in the previous fiscal. Sales grew from Rs 128.84 Cr to Rs 147.45 Cr. On the other hand, the Net profit registered a tremendous growth from Rs 5.42 Cr to Rs 14.29 Cr. Operating profit margins have increased in this period. Equity capital has changed in the same period from Rs 10.75 Cr to Rs 61.89 Cr, thereby, direct comparison of EPS is not logical.

Analysis of Ind-Swift Ltd

Introduction

Ind-Swift Ltd is the formulations division of the Ind-Swift group which was incorporated in the year 1986. The company, over and above the local formulations business is also engaged in CRAMS (Contract Research And Maufacturing Services), a very lucrative outsourcing business for pharma companies in India. It also indulges in R&D to supplement the CRAMS as well as its own aspirations.

Financials

The Q2FY11 sales for the company stood at Rs 214.94 Cr against Rs 161.86 Cr in Q2FY10. Net profit is up from Rs 9.52 Cr to Rs 9.57 Cr, owing to pressure on profit margins. For H1FY11, the sales stood at Rs 393.34 Cr up from Rs 320.81 Cr for H1FY10. Net profit in the same period was up from Rs 18.17 Cr to Rs 20.58 Cr.

Analysis of Lupin Ltd

Introduction

Lupin Ltd is among the top 5 pharmaceutical companies in India, with a market capitalisation of Rs 20,000 Cr. What differentiates it from the other Indian pharma giants is its foray into the US market with a branded paediatric drug Suprax. With, the branded drug, they can boast of a bigger profit margin as compared to its Indian peers. In the coming year or two, Lupin is going to launch few more branded drugs, which increases its potential of growth in US.

With small acquisitions across the globe, viz Kyowa Pharma - Japan, Pharma Dynamics - South Africa, Multicare Pharma - Phillipines and Generic Health - Australia, they have obtained a toe hold in both emerging as well as developed markets, which they can leverage to their advantage.

Financials

Standalone sales for Q2FY11 stand at Rs 1073.09 Cr as against Rs 1009.36 Cr. This discounts the growth caused by the acquiations, which saw the consolidated sales growing from Rs 1114.69 Cr in Q2FY10 to Rs 1405.05, a growth of 26%.

At the same time consolidated PAT grew from  Rs 164.62 Cr to Rs 220.69, a growth of 34%, which shows an increasing margin.

Analysis of Compact Discs India Ltd.

About the company:

Compact Discs India Ltd is a leading player in the South Asian Animation Industry. Their major source of revenue comes from animation outsourcing projects. These animation projects (related to movies) are contractual and hence are not risky, but lack of any Intellectual Property Rights over it also reduces the scope for prolonged revenues.

In order to tackle that, they are coming up with two animation feature films "Eternal Love" and "Futebol with Pele". In the latter movie, Pele has been roped in as an executive producer. In March this year. Compact Discs has also inked a deal with BBC to co-produce a film "Blame It On The Bhangra". They have also reported having struck a deal worth $82 mn with a british production house to make an animation movie on Adolf Hitler.

The company also plans to come up with five animation degree awarding institutes, thereby foraying into the Education business.

Financials:

Q2 FY11: Sales at Rs 78.4 Cr, up from Rs 61.67 Cr in Q2 FY10
PAT Rs 16.87 Cr vs Rs 12.84 Cr in Q2 FY10

EPS for Q2 FY11 stands at Rs 17.62 vs Rs 13.42 for Q2 FY10

For the first half (H1) of FY10, sales were Rs 129.17 Cr vs Rs 105.88 Cr for H1 FY10
and PAT was Rs 26.96 Cr vs Rs 22.01 Cr in the same half last year.