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How Piramal Almost Put Berkshire Hathaway out of Business

February 06, 2012 | About:
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 I've withdrawn the idea from the contest.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.

    About the author:

    batbeer2
    I define intrinsic value as the price I would gladly pay to own the business outright. With current management in place. For most stocks, that value is 0. As of September 2012, I'm the author of the monthly Buffett-Munger Best Bargains Newsletter. I can be reached at fvandenbroek AT gurufocus DOT com

    Visit batbeer2's Website


  • Rating: 3.7/5 (26 votes)

    Comments

    superguru
    Superguru - 2 years ago
    How does one buy its shares here in US? Is there an ADR?
    cdubey
    Cdubey premium member - 2 years ago
    A discussion of the shareholder return (dividends, buybacks, share price and historical price multiples) would be great. Have their investment been fruitful to the shareholders ?
    batbeer2
    Batbeer2 premium member - 2 years ago
    Hi, thanks for your questions.

    @ Superguru,

    No, AFAIK there is no ADR. Whether you can trade in the US depends on your broker. Your broker has to have access to the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE).

  • Some brokers may require you to put in a request by e-mail before you can trade.

  • There are brokers that simply don't "do" India... yet.

  • IB, says you need a PAN. It's required for tax reasons. That may change.

    http://www.pancardnri.com/what-is-a-pan-card.html

    @ Cdubey

    Yes, Piramal has made many investors rich.

  • They bough back 20% of the shares last year. They announced it and offered Rs 600. A premium ! That is as shareholder friendly as it gets ! Ten years ago shares sold for Rs 45 - Rs 90.

  • They do pay a regular dividend which they doubled last year with a one-time special dividend.

  • The company does not typically trade at a discount to NCAV.

    http://www.moneycontrol.com/stocks/stock_market/corp_notices.php?autono=431928

    http://www.moneycontrol.com/india/stockpricequote/pharmaceuticals/piramal-healthcare/PH05
  • batbeer2
    Batbeer2 premium member - 2 years ago
    Hi all,

    It seems many gurufocus members are unable to trade in India.

    Maybe your broker is still working on it. The news from India is still fresh. I'd appreciate it if you let me know if you get this to work.

    http://www.firstpost.com/economy/india-allows-foreign-individuals-to-invest-in-stock-markets-from-jan-15-169480.html

    @ Gurufocus

    As it is, I withdraw this idea from the contest. I guess it's not actionable for most members.

    gusto.duel
    Gusto.duel - 2 years ago
    Well, if you look at Piramal Glass you might have noticed their subsidiary in Sri Lanka is listed, too, it is a monopoly in Sri Lanka and could be an opportunity by itself. An there are no restrictions to investing in Sri Lanka if one can overcome the country risks questions. I liked Piramal's strategy of focusing on cosmetics and perfumery in India whilst focusing on food in Sri Lanka. If IB gives greenlight for non-PAN holders to invest in India I will let you know.
    sgokani
    Sgokani - 2 years ago
    Hi,

    My name is Sagar Gokani. I work with Piramal Healthcare - Investor Relations. I suggest two correction here: there are 2 tranches of receivables from Abbott, each of $ 400 mn (one was received in Sep 2011), so the total receivable is $ 1.2 bn. Secondly, the total number of shares outstanding is 176.2 mn.

    Piramal Healthcare has also forayed into financial services: -

    a.) Acquired IndiaReit a real estate focused investment trust, owned by promoter family for $ 45 mn. This is one of India's more successful real estate focused PE fund with AUM of $ 760 mn. They are current doing roadshows for raising $ 200 - $ 250 mn standing assets fund and Mumbai Redevelopment fund.

    b.) Started Non Banking Financial Company focused on lending to Real Estate, Education and Hospitals. The team is in place under leadership of Mr A K Purwar, ex-chairman of India's largest bank - State Bank of India. Lending has commenced the book right now is $ 25 mn. Average interest rate for this lending is 16-20% p.a. The Promoter has significant experience of real estate sector in India, just to give an example, the first mall of India - Crossroads in Mumbai was developed by Piramal family. Hence this foray.

    Regards,

    Sagar

    batbeer2
    Batbeer2 premium member - 2 years ago
    Dear mr. Gokani,

    Thank you for your comment ! IMHO you work for a wonderful company.

    Regarding the number of shares:

    1) From the chairman's letter (2011 annual report):

    .... Hence, during the year,we have bought back 41.8 million equity shares,representing 20% of equity share capital of PHL at a price of Rs. 600 per share.

    I took this to mean there are 5x 41.8m - 41.8m shares remaining.

    2) On page 68 of the annual report, the number is 168m shares "Issued & Subscribed".

    3) The Q3 FY 2012report doesn't show a meaningful increase in shares outstanding.


    Regarding IndiaReit:

    Yes, the Piramal group has a record of creating value for shareholders with Real Estate. I believe Crossroads was developed on the land of the former textile plant. I omitted IndiaReit as I considered this operation to be immaterial to the thesis. Nevertheless, anyone considering this as an investment should be aware of it. I'll update the article to reflect this.


    Regarding the remainder of the Abbott receivables:

    I must confess I am uncertain on this. I'll update the article to reflect this. On the December 2011 balance sheet, I find $ 2B (Rs 1m Lakhs) worth of "assets arising from the Sale of Domestic formulation business". I would be grateful if you could help me reconcile the numbers.

    Of course, the recent Vodafone acquisition changes these numbers. I use december 2011 as the base.
    sgokani
    Sgokani - 2 years ago
    On Shareholding:

    The total number of shares increased to 172.6 million due to the scheme of de-merger of NCE R&D division of Piramal Life into Piramal Healthcare. Under the scheme, each shareholder of Piramal life issued 1 fully paid up share of Rs. 2 each of Piramal Healthcare for every 4 shares held of Rs. 10 held in Piramal Life Sciences.

    On Abbott receivable:

    Apologies, my mistake in earlier post, 3 tranches of $ 400 mn each receivable from Abbott. December 2011 balance sheet as appearing on page 6 of analyst presentation for Q3FY12 i.e. for quarter ended 31st March 2011 has Rs. 6,373 crores ($ 1.2 bn) as receivable from Abbott. Source (http://www.piramalhealthcare.com/Investors/Financial-Reports.aspx) I am not still not sure where did the $ 2bn number come from.
    batbeer2
    Batbeer2 premium member - 2 years ago
    Hi mr. Gokani,

    Thanks for your response.

    I get the $ 2bn from page 3 of the q3 2012 financial report, december 2011: "Capital Employed" => "Assets Arising on sale of Domestic Formulations Business".

    That of course includes some other assets along with the receivables from Abbott.


    -EDIT-

    With the help of mr. Gokani, I've corrected the numbers. We now have a better estimate of NCAV.

    Find me a $ 1.5 B NCAV with Investor Relations (CFA, CA !) willing to communicate online about the assets !

    Chaim422
    Chaim422 - 2 years ago
    Thanks for the very interesting idea. What is the capital gains tax rate for an American selling stock in India? Is there tax both to India and to the IRS?
    batbeer2
    Batbeer2 premium member - 2 years ago
    Hi Chaim422,

    I may not be the one to ask. I've never paid a penny of capital gains tax in my life. In my neck of the woods, we pay what I would call "capital tax". It's not the gains that are taxed.

    For an American, I would expect taxes on dividends etc. to be withheld. Depending on the arrangements between the US and India you should be able to reclaim most of this. Your broker should be able to report to you the amount of taxes withheld.

    I don't expect your broker to deduct capital gains taxes from the proceeds of your sale. Just like you sell a US stock, the taxes are not withheld by your broker, are they ? You have to file with the IRS.

    Maybe some members can shed some light on this. The US tax code is foreign to me.
    Chaim422
    Chaim422 - 2 years ago
    Batbeer,

    thank you for the response. What is a "capital tax"? How much is it?
    batbeer2
    Batbeer2 premium member - 2 years ago
    In my neck of the woods, I pay taxes based on the value of my investments (capital). Let's say the net value of my investments is $ 10k at 31 dec. I will be taxed a percentage of $ 10k.

    In fact, I will be taxed 35% of 1.5% of $ 10k.

    1.5% is assumed to be the risk-free rate of return and you get taxed 35% of that.

    It does not matter if the stocks went up, down or sideways. You get taxed based on the value of the investments on 31 december.

    So...

    No capital gains tax (the gains are taxed).

    but a capital tax (the principal is taxed).
    Chaim422
    Chaim422 - 2 years ago
    Batbeer, thank you for your response. What about an American investing in India? Would he pay the same capital tax too?
    batbeer2
    Batbeer2 premium member - 2 years ago
    I would expect a US citizen investing in India to pay a capital gains tax on the sale of his/her holding.
    Chaim422
    Chaim422 - 2 years ago
    Thanks Batbeer.
    valueinvestinginpractice
    Valueinvestinginpractice - 2 years ago


    I think you have put up a strong case for PHL by highlighting right areas. One point that I would like to add is post the merger of research division with PHL, in my opinion there is significant value addition to PHL due to advance stage research pipeline that its research division has. In my opinion, piramal research gives an opportunity to get exposed to positive black swan for free! I have attempted to do a detailed analysis of PHL in my posts at

    http://www.valueinvestinginpractice.blogspot.in/2012/03/piramal-healthcare-in-territory-of.html

    http://www.valueinvestinginpractice.blogspot.in/2012/04/piramal-healthcare-gazing-through.html

    Best Regards

    Dhwanil Desai

    http://valueinvestinginpractice.blogspot.in
    batbeer2
    Batbeer2 premium member - 2 years ago
    .... post the merger of research division with PHL, in my opinion there is significant value addition to PHL due to advance stage research pipeline that its research division has.

    Yes. There is a lot of value there. The stock is absurdly cheap as it is without digging into the (potential) value of the operations. I did not bother. In the second article, you did, good !

    Thanks for sharing.
    batbeer2
    Batbeer2 premium member - 1 year ago
    Third Avenue (Amit Wadhwany) talks extensively about Piramal in their latest letter.

    http://www.thirdave.com/ta/documents/reports/TAF%203Q2012%20Shareholder%20Letters.pdf (p24)

    Also, mr. Gokani (above) has a new job title. Congratulations!

    Please leave your comment:


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