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Event Update I Pharmaceutical

May 21, 2010

Please refer to im ortant disclosures at the end of this re ort Sebi Re istration No: INB 010996539

Investment Period -

Stock Info

Sector Pharmaceutical

Market Cap (Rs cr) 10,499

Beta 0.4

52 WK High / Low 600/ 250

Avg. Daily Volume 179083

Face Value (Rs) 2

BSE Sensex 16,446

Nifty 4,931

Reuters Code PIRA.BO

Bloomberg Code PIHC@IN

Shareh olding Pattern (%)

Promoters 49.2

MF/Banks/Indian FIs 14.4

FII/NRIs/OCBs 26.2

Indian Public 10.1

Abs. (%) 3m 1yr 3yr

Sensex 1.6 19.7 14.1

PHL 32.9 98.0 80.1

The highest unlocking of value in the Indian Pharma Industry

In the deal entered by Piramal Healthcare (PHL) with Abbott, USA, PHL hassold its Domestic Formulation business (52% of FY2010 Sales) for aconsideration of US $3.72bn, with an upfront payment of US $2.12bn and astaggered payment of US $400mn in the subsequent four years of closure ofthe deal, commencing FY2011. Post completion of the deal, Abbott wouldemerge 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 approximately350 brands and Trademarks. The sale will also involve transfer of around5,000 PHL employees from the Domestic Formulation Segment. Also, as perterm of the sale, Piramal and Piramal Enterprises/Associates have agreed thatfor a period of eight years following the deal closure, the company will neitherengage in the business of generic pharmaceutical products in finished form inIndia, nor will it engage in the manufacture or marketing of pharmaceuticalproducts in the Emerging markets. The deal is expected to be closed by2HFY2011.

Exhibit 1: Proceeds from the D ea l

Pa rticula rs Amo unt C om me nt

Upfront Payment (US $ mn) 2,120

NPV of Future Payments (US $ mn) 1,268 Discounted at 10%

PV of Total Receipt (US $ mn ) 3 ,3 8 8

Rs/USD 46.8

PV of Total Receip t( Rs cr) 1 5 ,8 5 6

Less: Payment of Non-Compete Fee (Rs cr) 350 Paid to Piramal Enterprise

Less: Long-term Capital Gain Tax at 21.5% (Rs cr) 3,377

PV of N et Receipt (Rs cr) 1 2 ,1 2 9 Source: Company, Angel Research

With this deal, PHL's Domestic Formulation business (PHL is the fourth largestplayer, 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 9xFY2010 EV/Sales and around 6.1x FY2012E EV/Sales. Pertinently, the dealhas been executed at much higher valuations than most of the earlier dealscarried out in the industry, which were closed at 2-4x EV/Sales. For instance,the recent concluded Ranbaxy - Daiichi Sankyo deal was executed at around4x EV/Sales 1- year forward.

This landmark deal signifies the growing interest of global MNCs in the IndianDomestic Formulation business and signals increasing likelihood of furtherconsolidation in the Industry going ahead and justifying premium valuationthat the sector enjoys.

Piramal HealthcareLandmark Deal

NEUTRALCMP R 502

Target Price -

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

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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 theCRAMs, Diagnostic, OTC and Inhalation Anesthetic (IA) Businesses, accounting forSales of around Rs1,750cr as on FY2010. Around 51% of the Residual businesswould be accounted by CRAMS and around 19% by IA. We have estimated theCRAMS and IA businesses to register a CAGR of 12% and 29% respectively, overFY2010-12E. Overall, the company is expected to register a CAGR of 13.8% inSales over the mentioned period. On the Operating Profit front, management hasindicated that the Residual business would record EBITDA Margins in the mid teensto 20% over the period. Thus, considering EBITDA Margins of 15% for the Residualbusiness, we estimate Net Profit of the Residual business to be in the range ofRs180-200cr 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 andincreased outsourcing to sustain high growth, and IA - through increase in marketshare in the US $1bn global Industry. While current EBITDA Margins are lower, ahigher Sales mix from Indian Assets in CRAMS and scale up in the IA business wouldaid improvement in Operating Margins. Currently, we have not factored in anyimprovement in the EBITDA Margins for the Residual business.

Uncertainty over usage of Proceeds to act as overhang, but downsidelimited

With sale of the Domestic Formulation business, the company's valuation woulddepend on the value of the Residual business and usage of the cash inflow. We havevalued the Residual business at 1.4x FY2012E EV/Sales (pending clarity regardsProfitability 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 $3.4bncash inflow. Apart from retiring the debt on the books of Rs1,300cr, the companyhas 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 agood track record in terms of its investments and acquisitions, which providescomfort. Assuming Special Dividend payout of 30% (in line with the historicaldividend payout) of the Net Cash flow available (after payment of Debt ofRs1,300cr) and conservatively valuing the Residual cash at 0.5x (pending clarityregards usage of funds in the near term), we have arrived at a SOTP Target Price ofRs477 for the stock. Even at a higher payout, upside in the stock would be limitedand much depends on the usage of the funds available. Hence, we remain Neutral

on the stock.

Exhibit 2: SO TP Valua tion

Per Share (Rs)

Core Business (1.4x EV/Sales FY2012E) 153

Dividend (30% payout assumed) 156

Residual Cash (0.5x) 168

Total 477

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Piramal Healthcare I Event Update

Research Team Tel: 022- 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com

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D isclosure of Interest Stateme nt Piram al He althcare

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock Yes

3. Angel and its Group companies Directors ownership of the stock No

4. Broking relationship with company covered No

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