$2-b war chest to help Piramal tide over crisis

Mumbai: The series of divestments and equity raise from Piramal Enterprises that has seen the group raise around Rs 18,200 crore in FY20 alone from new institutional and existing investors will help mend its balance sheet that has been under severe pressure on account of its non-banking financial company (NBFC) arm’s exposure to weakened corporate lenders and realtors who borrowed from it. The latest value unlocking through a 20 per cent stake sale in the pharma business -- that will get subsidiarised and eventually listed -- to Carlyle for Rs 3700 crore ($490 million) will help provide liquidity and growth equity to the business for inorganic opportunities while simultaneously deleverage the standalone and consolidated balance sheet. The deal is expected to close by the end of the calendar year 2020.“This transaction is part of the process of boosting growth of the pharma business and listing it as a separate business over the medium term” Ajay Piramal, chairman of Piramal Enterprises told ET.TIME IS MONEYThe move is timely since the pandemic has brought the pharma sector back on investor radar for being more resilient and defensive compared to financial services which has emerged as the group’s mainstay in recent times. The move also helps retain the promoter control over the company's traditional business of pharmaceuticals even as its value is getting unlocked.The deal values the pharma business (consisting of contract manufacturing, hospital generics business in the US and Indian OTC business) at nearly four times of its FY20 sales. “Considering that for several regulated market contract research and manufacturing organisations (CDMO) businesses both strategic & financial investors have been willing to pay 15-17 (x) EV / EBITDA earlier ; the valuation appears a tad bit low & potentially reflects a more cautious view on regulated market CDMO businesses in the near term,” feels Navroz Mahudawala, founder, Candle Partners, a boutique investment bank.76682330India's best known CRAMs business Divi's Laboratories which has been consistently richly valued for a long period of time has been quoting on the stock markets in the 25-30 (x) EV / EBITDA & is always perceived as an outlier considering the commendable & consistent track record of the business. The Piramal pharma business has some distinct challenges - several earlier perceived positives could become "challenges" in today's environment. The business expanded through several smaller M&As in the earlier years & has a dispersed supply chain with 13 manufacturing sites across USA, Canada, UK & India. The potential benefit of having the contract manufacturing work from a low cost site like India somewhere gets lost in this process. Around 40 per cent revenues are from the USA wherein there is maximum pricing pressure & potentially some of this would translate into lower CDMO margins going forward, feel industry observers. The business potentially is perceived as "mature" and has limited scope to optimise on margins - the EBITDA margins have jumped sharply in the last 2 years from 18 per cent in FY 2018 to 26 per cent in FY 2020. The sustainability of the margins going forward would have also been a concern for financial investors. The management however disagrees that the acquisitions may have help grow inorganically but are yet to contribute significantly to the profitability of the business. “We have been acquiring facilities for our CDMO business but after plugging them into our sales ecosystem we have been growing them organically,” said Nandini Piramal, executive director of PEL. “The last acquisition has been in 2017. After acquiring Ash Stevens, we have doubled our EBITDA through a brownfield expansion. A second expansion is also underway.” For Carlyle, Piramal is the second pharma investment in as many months and underscores its growing focus on the space. “90 per cent of the business is dollar linked and has a truly global footprint with some of its businesses like anaesthetics having high entry barriers. Our expertise from owning several global CDMOs, contract research organizations and pharmaceutical ingredient manufacturers like Albany Molecular Research, PPD and Ambio, a global pharmaceutical ingredient manufacturer helps us to identify global trends and add value. We also will leverage our operating partners who have been former CEO of Pfizer or the former CFO of GSK to guide the business,” feels Neeraj Bharadwaj, managing director of Carlyle Asia Partners.Last week, the pharma solutions business of the company also acquired a solid oral dosage drug manufacturing facility in the US to beef up its on-shore presence in the US for its custom manufacturing business. “While the end demand is not changing, the focus now is on supply chain resilience and we see an uptick in manufacturing in the US and Canada,” said Nandini Piramal.Balance Sheet BluesApart from providing growth equity for the business and setting a third party valuation benchmark, PEL also will benefit from the equity infusion. “All this capital is not required in pharma. So the overall balance sheet will benefit as this business remains as a subsidiary of PEL. Some of the funding will indeed go to the parent as it retains 80 per cent of the business,” said Ajay Piramal. “It also attributes some value to the pharma business which investors were otherwise not giving.”On a standalone basis, the pharma business will use part of the proceeds to repaying the high-cost debt, which will reduce the interest outgo. “From the net debt of Rs 4,200 crore at the end of FY20 of the pharma business, we are looking to reduce it to Rs 2,500 crore at the end of FY21” added Nandini Piramal. The remainder of the funding is going to be invested in the business.The principal apprehension for investors have always been the non pharma piece, especially the lending book of PEL. With economic stagnation impacting corporates and realtors and the subsequent moratorium announced by the central bank pricing risk and asset quality assessments is becoming challenging. PEL’s consolidated net debt at the end of FY20 stood at Rs 37,283 crore.“We have ensured there is enough liquidity so that each of our businesses can get through this period. We have raised enough capital and have been bringing down our debt. Overall as a group, the debt equity of PEL was 1.4:1. Even in the financial services which people talk and worry more about, it is only 2.4:1,” emphasised Piramal Senior. The current stake sale will be the penultimate one in the ongoing divestment exercises. The residual stake in Shriram will end the ongoing reogranisation of PEL.Steps like taking an extra Rs 1,903 crore to cover the uncertainty in recovery of loans amid the global covid-19 pandemic are efforts to make the financial services business more resilient, said Piramal.“Our liquidity has been maintained even in these challenging times. We believe, we will emerge stronger. Real estate is not as bad as it was made out to be. Sales have started albeit at a lower velocity. Price has not been much affected. The NPVs are not down significantly either. The business still requires some restructuring of some of the loans which is already taking place with the moratorium. If you lend sensibly, the defaults will be less unlike the corporate sector.”

from Economic Times https://ift.tt/2NPWl7v