Event Update I Pharmaceutical

May 21, 2010

Piramal Healthcare
Landmark Deal
The highest unlocking of value in the Indian Pharma Industry
In the deal entered by Piramal Healthcare (PHL) with Abbott, USA, PHL has sold its Domestic Formulation business (52% of FY2010 Sales) for a consideration of US $3.72bn, with an upfront payment of US $2.12bn and a staggered payment of US $400mn in the subsequent four years of closure of the deal, commencing FY2011. Post completion of the deal, Abbott would emerge number 1 player in the Indian Formulation market with a market share of around 7%. The Assets to be transferred include PHL's manufacturing facilities at Baddi, Himachal Pradesh (Book Value of Rs160cr) and the rights of approximately 350 brands and Trademarks. The sale will also involve transfer of around 5,000 PHL employees from the Domestic Formulation Segment. Also, as per term of the sale, Piramal and Piramal Enterprises/Associates have agreed that for a period of eight years following the deal closure, the company will neither engage in the business of generic pharmaceutical products in finished form in India, nor will it engage in the manufacture or marketing of pharmaceutical products in the Emerging markets. The deal is expected to be closed by 2HFY2011. Exhibit 1: Proceeds from the Deal
Particulars Upfront Payment (US $ mn) NPV of Future Payments (US $ mn) PV of Total Receipt (US $mn) Rs/USD PV of Total Receipt( Rs cr) Less: Payment of Non-Compete Fee (Rs cr) Less: Long-term Capital Gain Tax at 21.5% (Rs cr) PV of Net Receipt (Rs cr)
Source: Company, Angel Research

NEUTRAL
CMP Target Price
Investment Period Stock Info Sector Market Cap (Rs cr) Beta 52 WK High / Low Avg. Daily Volume Face Value (Rs) BSE Sensex Nifty Reuters Code Bloomberg Code Shareholding Pattern (%) Promoters 49.2 14.4 26.2 10.1 3m 1.6 32.9 1yr 19.7 98.0 3yr 14.1 80.1 Pharmaceutical 10,499 0.4 600/ 250 179083 2 16,446 4,931 PIRA.BO PIHC@IN

Rs502 -

Amount 2,120 1,268 3,388 46.8 15,856

Comment Discounted at 10%

MF/Banks/Indian FIs FII/NRIs/OCBs Indian Public Abs. (%) Sensex PHL

350 Paid to Piramal Enterprise 3,377 12,129

With this deal, PHL's Domestic Formulation business (PHL is the fourth largest player, with a market share of 4.2 % - MAT ORG IMS March 2010) with Sales of around Rs1,876cr in FY2010, fetches good valuations of around 9x FY2010 EV/Sales and around 6.1x FY2012E EV/Sales. Pertinently, the deal has been executed at much higher valuations than most of the earlier deals carried out in the industry, which were closed at 2-4x EV/Sales. For instance, the recent concluded Ranbaxy - Daiichi Sankyo deal was executed at around 4x EV/Sales 1- year forward. This landmark deal signifies the growing interest of global MNCs in the Indian Domestic Formulation business and signals increasing likelihood of further consolidation in the Industry going ahead and justifying premium valuation that the sector enjoys.

Sarabjit Kour Nangra

Tel: 022 4040 3800 Ext: 343 E-mail: sarabjit@angeltrade.com

Sushant Dalmia
Tel: 022 4040 3800 Ext: 320 E-mail: sushant.dalmia@angeltrade.com
1

Please refer to important disclosures at the end of this report

Sebi Registration No: INB 010996539

Piramal Healthcare I Event Update

Outlook and Valuation

Residual Business - Potential to scale up
After the sale of the Domestic Formulation business, PHL would be left with the CRAMs, Diagnostic, OTC and Inhalation Anesthetic (IA) Businesses, accounting for Sales of around Rs1,750cr as on FY2010. Around 51% of the Residual business would be accounted by CRAMS and around 19% by IA. We have estimated the CRAMS and IA businesses to register a CAGR of 12% and 29% respectively, over FY2010-12E. Overall, the company is expected to register a CAGR of 13.8% in Sales over the mentioned period. On the Operating Profit front, management has indicated that the Residual business would record EBITDA Margins in the mid teens to 20% over the period. Thus, considering EBITDA Margins of 15% for the Residual business, we estimate Net Profit of the Residual business to be in the range of Rs180-200cr by FY2012E. Over the long term, the company has the potential to scale up its business in its key segments, viz. CRAMS - through shift towards low-cost destinations like India and increased outsourcing to sustain high growth, and IA - through increase in market share in the US $1bn global Industry. While current EBITDA Margins are lower, a higher Sales mix from Indian Assets in CRAMS and scale up in the IA business would aid improvement in Operating Margins. Currently, we have not factored in any improvement in the EBITDA Margins for the Residual business.

Uncertainty over usage of Proceeds to act as overhang, but downside limited

With sale of the Domestic Formulation business, the company's valuation would depend on the value of the Residual business and usage of the cash inflow. We have valued the Residual business at 1.4x FY2012E EV/Sales (pending clarity regards Profitability of the Residual business), translating into Rs3,200cr or Rs153/share. Thus, a major part of the value creation would hinge on usage of the US $3.4bn cash inflow. Apart from retiring the debt on the books of Rs1,300cr, the company has not firmed up its plans regards investments in the Non-Healthcare Segment, which could act as an overhang on the stock. Nonetheless, the company had a good track record in terms of its investments and acquisitions, which provides comfort. Assuming Special Dividend payout of 30% (in line with the historical dividend payout) of the Net Cash flow available (after payment of Debt of Rs1,300cr) and conservatively valuing the Residual cash at 0.5x (pending clarity regards usage of funds in the near term), we have arrived at a SOTP Target Price of Rs477 for the stock. Even at a higher payout, upside in the stock would be limited and much depends on the usage of the funds available. Hence, we remain Neutral on the stock. Exhibit 2: SOTP Valuation
Per Share (Rs) Core Business (1.4x EV/Sales FY2012E) Dividend (30% payout assumed) Residual Cash (0.5x) Total 153 156 168 477

May 21, 2010

Piramal Healthcare I Event Update

Research Team Tel: 022- 4040 3800

E-mail: research@angeltrade.com

Website: www.angeltrade.com

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Disclosure of Interest Statement 1. 2. 3. 4. Analyst ownership of the stock Angel and its Group companies ownership of the stock Angel and its Group companies Directors ownership of the stock Broking relationship with company covered

Piramal Healthcare No Yes No No

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May 21, 2010