Piramal Healthcare Inc. (PIRHEALTH) trades at a meaningful discount to the value of its current assets alone, net of all liabilities. The company is led by one of the best capital allocators on the planet.
Until recently, this information was of no use to individual, foreign investors. As of 2012 though, the stock market in India is open to all.
-EDIT- Some of you have let me know this doesn't work (yet). I've withdrawn the idea from the contest.
Business & History
Summary: from struggling textile mill to multi-billion conglomerate at 30% CAGR.
In 400 BC, Herodotus wrote:
“There are trees growing wild, which produce a kind of wool better than sheep’s wool in beauty and quality, which the Indians use for making their clothes.”
Now who would have guessed the old greek was fluent in English ?
In any case, India subsequently became the greatest exporter of textiles the world had ever seen. The trade reached its height in the 18th century.
By then Eli Whitney and Edmund Cartwright had managed to upset the global state of affairs. They invented the cotton gin and power loom respectively. For the next century or so, Britain dominated global textile production. Under British rule, India had no hope of mechanizing textile production. They picked cotton for the Brits.
In 1931, the Indian National Congress, at the suggestion of Ghandi, adopted a new flag. That flag sported a Charka (spinning wheel). By law, even today, the flag of India is made from home-grown cotton. It now sports a Chakra (spoked wheel).
Knowing his countries history, in 1933, Gopalkrishna Piramal founded Piramal enterprise, a textile manufacturer. We know what this did to British textile manufacturers. Cotton doesn't grow in the UK.
In 1947 India finally gained its independence, Piramal was one of the many "nameless" low-cost producers. Berkshire Hathaway, entering the fifties with headquarters in New Bedford, 15 plants, 12000 employees and revenue of over 120 million dollars was in deep trouble. The US held out a little longer than the UK. They didn't have to import cotton. Neither did India.
1984, Ajay Piramal takes control of the struggling family business after the untimely death of his elder brother Ashok.
1984 acquisition of Gujarat Glass.
1988 acquisition of Nicholas Laboratories. - Name changed to Nicholas Piramal India Ltd.
2004 The company is split. Ajay now controls Nicholas Piramal and Gujarat glass. His late brother's wife, Urvi Piramal, gets the rest (Piramal holdings).
2003-2008 Piramal Glass is demerged and listed. This is a wonderful company worthy of its own writeup !
2010 Abbott acquires Piramals generics division.
2010 The company sells the diagnostics division to Super Religare Laboratories Ltd.
2011 Piramal acquires 11% (2x 5.5%) of Vodafone India.
2011 Acquires IndiaReit a real estate focused investment trust with AUM of $ 760 mn.
2012 We are left with:
3x $ 400m of receivables (from Abott)
11% of Vodafone India and the rest of the healthcare business
Drug Manufacturing (Outsourcing)
Critical Care (Anaesthesia gases)
Consumer products (Nutritional supplements, Skin care etc.)
IndiaReit
Please note I did start with a summary. You could have skipped to here but then you would have missed the bit about Berkshire.
Balance Sheet & Profitability
The earnings statement is a mess. Nevertheless, its clear the company still grows revenue at double-digit rates. In the last nine months they earned 150 Cr => $ 30 million.
Anything before that is messed up by the divestitures and huge one-time taxes.
The 31 Dec 2011 balance sheet is a goldmine:
$750 million of investments; that’s 5.5% of Vodafone Essar. (Today that’s $1.4 billion for 11%.)
$1.5 billion of receivables, this includes three tranches (3x 400m) Abbott labs owes Piramal.
$500 million of total liabilities.
There’s some cash lying around and I’ll simply ignore the fixed assets.
Management
We need to know if management is 1) shareholder friendly and 2) smart.
Is management smart?
When Ajay Piramal bought Nicholas Laboratories from its foreign parent in 1988, the company’s market value was Rs 6 crores. In 2010, Ajay Piramal sold the diagnostics division to Super Religare for Rs 600 crores. That’s a 100-bagger.
The 100-bagger was a mediocre idea. That’s why it was announced after Piramal sold another division to Abbott for 17,140 crores ($3.8 billion).
I leave it an exercise for the reader to calculate the rate of return of Ajay Piramal’s other idea (Piramal Glass). It’s now demerged and publicly traded.
In short, yes, management is smart. In case you come across a feeble attempt to prove Charlie Munger is the investor of the decade, just point out Ajay Piramal is younger and has a better record.
Is management shareholder friendly?
Piramal and the other executive directors, as a group, own 90m (55%) shares and are paid Rs 200m => $ 4m. When your stake in the company is worth many times your annual salary, your interest is clearly aligned with the interest of shareholders.
Among many other positions, Ajay Piramal is a member of the Board of Dean's Advisors at Harvard Business School.
When Buffett went to India, he spoke with Ajay Piramal.
When Barack Obama went to India, he met with Ajay Piramal.
Ajay Piramal was at one time a director of the state bank of India.
Foreign pharmaceutical companies that outsource their production want to know who they're doing business with. They go to Piramal.
Vodafone had to sell part of Vodafone Essar. It's the law. They too chose to do business with Piramal.
Like Buffett, Ajay Piramal gets business no one else has access to and like Buffett, his net worth is tied up in the business. Unsurprisingly, Ajay Piramal can often be found at Berkshire’s annual meeting.
Value & Price
Price
Today, the company has 173 million shares outstanding. Shares trade on The Bombay Stock Exchange (BSE Code: 500302) and the National Stock Exchange of India (NSE Ticker: PIRHEALTH). Shares currently trade at Rs 430 for a market cap of Rs 75B ($1.5 billion).
Value
We take this from an owner's perspective:
1) This year we collect $400 million of cash from Abbott plus another $400 million next year. With that $800 million we extinguish ALL liabilities and then some.
2) We're sitting on 11% of Vodafone India worth $1.5 billion. That takes care of the market cap.
So, as an owner, we are paid at least $ 400 million (one more Abbott tranche) to own:
The global (US - RxElite) critical care business (anaesthetic gasses).
The OTC business in India (skin care and food supplements).
The drug production (contract) business, the remainder of the diagnostics business and the R&D division.
IndiaReit with Assets under Management of about $ 750m.
With a hat tip to mr. Gokani from Piramal Healthcare for his help in correcting my numbers. Since December, the share count has risen as a result of the acquisition of the R&D division of Piramal life. Using 11% of Vodafone instead of 5.5.% and also counting 4 tranches of Abbott receivables would be double counting.
Catalysts
IPO of Vodafone India. Ajay Piramal, chairman of Piramal Healthcare, said the investment in Vodafone India was not a strategic one and the company would look at selling its stake through the IPO.
Vodafone, which holds 64% in its India unit, has the first right to buy Piramal’s stake in the cellphone operator if an IPO does not happen within 18 months.
Better analyst coverage. With India’s markets now open to foreign investors, India will probably get some of the attention now reserved for Chinese stocks.
Specific Risk
Profit Transfer. Investors fear that profit could be transferred to companies in which the Piramal family has even more control.
Family matters. Piramals wife and children are involved in the company. This is a risk. For the better part of a century now, the Piramal family has managed to solve their share of family problems without hurting minority shareholders.
India just opened its stock market to individual foreign investors. This of course could be reversed. You would be forced out at the worst possible time.
Why Is This Cheap?
This is a stock only value investors like. As a group, they tend not to drive up prices. (Index) funds and healthcare investors are probably scratching their heads. Telecom investors are not piling in either. As for American day traders, Piramal’s shares change hands at night.
Read more:
Sanjay Bakshi's article on Piramal: http://fundooprofessor.wordpress.com/2011/03/26/the-grand-strategy-of-ajay-piramal/
Recent analyst presentation: http://piramalhealthcare.com/fckeditor/editor/filemanager/connectors/aspx/fckeditor/userfiles/file/PHL%20-%20Q3FY2012%20Analyst%20Presentation.pdf
Shareholders: http://piramalhealthcare.com/fckeditor/editor/filemanager/connectors/aspx/fckeditor/userfiles/file/Shareholding%20Pattern%20as%20on%2031-March,%202011.pdf
Dealcurry: http://dealcurry.com/20110811-Piramal-Healthcare-Buys-5-5-Stake-In-Vodafone-Essar.htm
Annual report: http://piramalhealthcare.com/fckeditor/editor/filemanager/connectors/aspx/fckeditor/userfiles/file/Annual%20Report%20FY2011.pdf
Ajay Piramal's network: http://en.inforapid.org/index.php?search=Ajay%20Piramal
Disclosure
This is not a recommendation to buy or sell anything. I own shares of Piramal Healthcare. Any and all questions welcome as usual.
Until recently, this information was of no use to individual, foreign investors. As of 2012 though, the stock market in India is open to all.
-EDIT- Some of you have let me know this doesn't work (yet). I've withdrawn the idea from the contest.
Business & History
Summary: from struggling textile mill to multi-billion conglomerate at 30% CAGR.
In 400 BC, Herodotus wrote:
“There are trees growing wild, which produce a kind of wool better than sheep’s wool in beauty and quality, which the Indians use for making their clothes.”
Now who would have guessed the old greek was fluent in English ?
In any case, India subsequently became the greatest exporter of textiles the world had ever seen. The trade reached its height in the 18th century.
By then Eli Whitney and Edmund Cartwright had managed to upset the global state of affairs. They invented the cotton gin and power loom respectively. For the next century or so, Britain dominated global textile production. Under British rule, India had no hope of mechanizing textile production. They picked cotton for the Brits.
In 1931, the Indian National Congress, at the suggestion of Ghandi, adopted a new flag. That flag sported a Charka (spinning wheel). By law, even today, the flag of India is made from home-grown cotton. It now sports a Chakra (spoked wheel).
Knowing his countries history, in 1933, Gopalkrishna Piramal founded Piramal enterprise, a textile manufacturer. We know what this did to British textile manufacturers. Cotton doesn't grow in the UK.
In 1947 India finally gained its independence, Piramal was one of the many "nameless" low-cost producers. Berkshire Hathaway, entering the fifties with headquarters in New Bedford, 15 plants, 12000 employees and revenue of over 120 million dollars was in deep trouble. The US held out a little longer than the UK. They didn't have to import cotton. Neither did India.
1984, Ajay Piramal takes control of the struggling family business after the untimely death of his elder brother Ashok.
1984 acquisition of Gujarat Glass.
1988 acquisition of Nicholas Laboratories. - Name changed to Nicholas Piramal India Ltd.
2004 The company is split. Ajay now controls Nicholas Piramal and Gujarat glass. His late brother's wife, Urvi Piramal, gets the rest (Piramal holdings).
2003-2008 Piramal Glass is demerged and listed. This is a wonderful company worthy of its own writeup !
2010 Abbott acquires Piramals generics division.
2010 The company sells the diagnostics division to Super Religare Laboratories Ltd.
2011 Piramal acquires 11% (2x 5.5%) of Vodafone India.
2011 Acquires IndiaReit a real estate focused investment trust with AUM of $ 760 mn.
2012 We are left with:
3x $ 400m of receivables (from Abott)
11% of Vodafone India and the rest of the healthcare business
Drug Manufacturing (Outsourcing)
Critical Care (Anaesthesia gases)
Consumer products (Nutritional supplements, Skin care etc.)
IndiaReit
Please note I did start with a summary. You could have skipped to here but then you would have missed the bit about Berkshire.
Balance Sheet & Profitability
The earnings statement is a mess. Nevertheless, its clear the company still grows revenue at double-digit rates. In the last nine months they earned 150 Cr => $ 30 million.
Anything before that is messed up by the divestitures and huge one-time taxes.
The 31 Dec 2011 balance sheet is a goldmine:
$750 million of investments; that’s 5.5% of Vodafone Essar. (Today that’s $1.4 billion for 11%.)
$1.5 billion of receivables, this includes three tranches (3x 400m) Abbott labs owes Piramal.
$500 million of total liabilities.
There’s some cash lying around and I’ll simply ignore the fixed assets.
Management
We need to know if management is 1) shareholder friendly and 2) smart.
Is management smart?
When Ajay Piramal bought Nicholas Laboratories from its foreign parent in 1988, the company’s market value was Rs 6 crores. In 2010, Ajay Piramal sold the diagnostics division to Super Religare for Rs 600 crores. That’s a 100-bagger.
The 100-bagger was a mediocre idea. That’s why it was announced after Piramal sold another division to Abbott for 17,140 crores ($3.8 billion).
I leave it an exercise for the reader to calculate the rate of return of Ajay Piramal’s other idea (Piramal Glass). It’s now demerged and publicly traded.
In short, yes, management is smart. In case you come across a feeble attempt to prove Charlie Munger is the investor of the decade, just point out Ajay Piramal is younger and has a better record.
Is management shareholder friendly?
Piramal and the other executive directors, as a group, own 90m (55%) shares and are paid Rs 200m => $ 4m. When your stake in the company is worth many times your annual salary, your interest is clearly aligned with the interest of shareholders.
Among many other positions, Ajay Piramal is a member of the Board of Dean's Advisors at Harvard Business School.
When Buffett went to India, he spoke with Ajay Piramal.
When Barack Obama went to India, he met with Ajay Piramal.
Ajay Piramal was at one time a director of the state bank of India.
Foreign pharmaceutical companies that outsource their production want to know who they're doing business with. They go to Piramal.
Vodafone had to sell part of Vodafone Essar. It's the law. They too chose to do business with Piramal.
Like Buffett, Ajay Piramal gets business no one else has access to and like Buffett, his net worth is tied up in the business. Unsurprisingly, Ajay Piramal can often be found at Berkshire’s annual meeting.
Value & Price
Price
Today, the company has 173 million shares outstanding. Shares trade on The Bombay Stock Exchange (BSE Code: 500302) and the National Stock Exchange of India (NSE Ticker: PIRHEALTH). Shares currently trade at Rs 430 for a market cap of Rs 75B ($1.5 billion).
Value
We take this from an owner's perspective:
1) This year we collect $400 million of cash from Abbott plus another $400 million next year. With that $800 million we extinguish ALL liabilities and then some.
2) We're sitting on 11% of Vodafone India worth $1.5 billion. That takes care of the market cap.
So, as an owner, we are paid at least $ 400 million (one more Abbott tranche) to own:
The global (US - RxElite) critical care business (anaesthetic gasses).
The OTC business in India (skin care and food supplements).
The drug production (contract) business, the remainder of the diagnostics business and the R&D division.
IndiaReit with Assets under Management of about $ 750m.
With a hat tip to mr. Gokani from Piramal Healthcare for his help in correcting my numbers. Since December, the share count has risen as a result of the acquisition of the R&D division of Piramal life. Using 11% of Vodafone instead of 5.5.% and also counting 4 tranches of Abbott receivables would be double counting.
Catalysts
IPO of Vodafone India. Ajay Piramal, chairman of Piramal Healthcare, said the investment in Vodafone India was not a strategic one and the company would look at selling its stake through the IPO.
Vodafone, which holds 64% in its India unit, has the first right to buy Piramal’s stake in the cellphone operator if an IPO does not happen within 18 months.
Better analyst coverage. With India’s markets now open to foreign investors, India will probably get some of the attention now reserved for Chinese stocks.
Specific Risk
Profit Transfer. Investors fear that profit could be transferred to companies in which the Piramal family has even more control.
Family matters. Piramals wife and children are involved in the company. This is a risk. For the better part of a century now, the Piramal family has managed to solve their share of family problems without hurting minority shareholders.
India just opened its stock market to individual foreign investors. This of course could be reversed. You would be forced out at the worst possible time.
Why Is This Cheap?
This is a stock only value investors like. As a group, they tend not to drive up prices. (Index) funds and healthcare investors are probably scratching their heads. Telecom investors are not piling in either. As for American day traders, Piramal’s shares change hands at night.
Read more:
Sanjay Bakshi's article on Piramal: http://fundooprofessor.wordpress.com/2011/03/26/the-grand-strategy-of-ajay-piramal/
Recent analyst presentation: http://piramalhealthcare.com/fckeditor/editor/filemanager/connectors/aspx/fckeditor/userfiles/file/PHL%20-%20Q3FY2012%20Analyst%20Presentation.pdf
Shareholders: http://piramalhealthcare.com/fckeditor/editor/filemanager/connectors/aspx/fckeditor/userfiles/file/Shareholding%20Pattern%20as%20on%2031-March,%202011.pdf
Dealcurry: http://dealcurry.com/20110811-Piramal-Healthcare-Buys-5-5-Stake-In-Vodafone-Essar.htm
Annual report: http://piramalhealthcare.com/fckeditor/editor/filemanager/connectors/aspx/fckeditor/userfiles/file/Annual%20Report%20FY2011.pdf
Ajay Piramal's network: http://en.inforapid.org/index.php?search=Ajay%20Piramal
Disclosure
This is not a recommendation to buy or sell anything. I own shares of Piramal Healthcare. Any and all questions welcome as usual.
