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Corporate May 7, 2011

Piramal Healthcare: Please take note of displeasure

By Kelkar

Stock market sends subtle signals to companies on corporate actions.

On a day when the BSE sensex rose 1.7% and the BSE healthcare index gained just under 1% in value, Piramal Healthcare shares closed flat. This is despite announcing a special dividend of Rs 6 per share.

Are investors bearing the cost of stake sales? Michaela Rehle/ Reuters

Piramal Life Sciences, which was hived off into a separate company four years ago, fell 4%. This followed an announcement on Friday that Piramal Healthcare has decided to buy the new chemical entity (NCE) discovery business of Piramal Life Sciences by using equity as the currency.

Piramal Healthcare also announced a foray into financial services space. It bought out two entities owned by promoters, Indiareit Fund Advisors and Indiareit Investment Management Company, Mauritius, for Rs 225 crore.

Promoters of Piramal Healthcare have sold their privately-owned businesses to a listed entity in case of the financial services space. As majority owners in Piramal Healthcare, they can get resolutions passed. However, it would be interesting to look at the postal ballot or shareholder voting, whenever it happens, to get a sense of the dissent expressed by minority shareholders.

According to VCcircle, the Piramal move is similar to that of Malvinder Singh and Shivinder Singh, former owners of Ranbaxy and now controlling Fortis Healthcare. They sold 86% stake in Super Religare Laboratories to the listed Fortis Healthcare. This means owners continue to exercise control but make others pay for it too.

What lies ahead?

Ajay Piramal set expectations to a new high when he sold his formulations business (Indian drug brands) to US-based Abbott for$3.7billion. The valuation of 9 times revenue for the business was a record of sorts. Indian promoters of formulations businesses used that as a benchmark while negotiating with private equity investors for minority stake sales. The Paras Pharmaceuticals sale was a case in point.

Common sense suggests that Piramal will exit the bulk drug business eventually. Bulk drugs is a contract manufacturing facility that scores of Indian companies have. However, very few plants in India are compliant with stiff US Food and Drug Administration dictated regulatory standards. Piramals could strengthen this business and extract more money later.

Hence, shareholders of Piramal Healthcare can expect more cash to flow into the company. This is perhaps one reason why the share price is not falling. The fact remains that foreign companies are looking to get a foothold in the lucrative Indian drug market. They are sitting on a cash pile that has to be put to sensible use.

Piramal Healthcare has to make up its mind on the future of the business. If being a conglomerate is the objective, it should be stated. This will allow investors to take a specific investment call. Conglomerates get a relatively lower valuation in comparison to focus-oriented companies.

by Kelkar

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