BUY
CMP: Rs194 Target Price: Rs261
In a bid to improve operating performance of its Pharma Solution (CMG) business, Piramal Healthcare is re-aligning its CMG assets by closing down its Huddersfield facility. Company will take one time hit of Sterling pound 10.1mn in FY09 itself. Company will be shifting these contracts to Digwal (India) and Morpeth (UK) facilities. Management has indicated that this restructuring will enable them to improve the operating margins of its Pharma Solution business by 6 to 8 ppt from FY10E itself. The improvement in the margins is driven by a) Close down of Huddersfield facility, b) Increase in early phase pipeline, c) Cost improvement & clinical packaging offerings at Morpeth and d) Strong commercial projects pipeline at Digwal. However, because of shifting of contracts and temporary slowdown in CMG space because of inventory rationalization and de-stocking at customers end (may last till H1FY10E), company has indicated that its revenue from Pharma Solution business will be lowered by 5% in FY10E over FY09.
We view the restructuring of its Pharma Solution business as long term positive for the company. We have revised our revenue and earning estimates downward because of these restructuring. We have downward our revenue estimates by 11% and 11% and earnings estimates by 9% and 8% for FY10E and FY11E respectively. On the back of downward revision in earnings, our target price has been revised downward by 13% to Rs261. At CMP of Rs194, the stock is trading at 8.6x FY10E EPS of Rs22.6.
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