Stock Review: PIRAMAL HEALTHCARE

Piramal Healthcare's plans to enter the financial services segment and funding of real estate and infrastructure through two nonbanking financial firms may not be value-accretive for investors in the near term.

The company now has myriad unrelated businesses such as contract manufacturing in pharma, over-the-counter consumer products, innovative pharma R&D, a real estate venture capital fund and two NBFCs. From a pure defensive sector company, it has now diversified into many unrelated areas, thereby raising the risk profile of the company.

There are many investors who don't fancy such diversified companies. That is because valuation can be difficult, given the various businesses. And if the businesses are complex and risky like innovative R&D, lending and private equity, assessing the true value of the company's stock becomes difficult. Piramal Health has said that is promoting NBFCs with a capital base of . 1,000 crore to fund real estate, and infrastructure.

However, the foray into financial services comes at a time when the outlook for NBFCs is hazy. Rising interest rates, tightening of regulations by the RBI and intense competition has meant that the sector is no longer as attractive a draw as it was earlier. All these only serve to highlight the wisdom of utilising the funds received from the sale of drug formulations business to the business of lending and financing.
Even the company's strategy for R&D towards developing new molecules seems to be unclear. Piramal Healthcare had earlier divested its innovative R&D division under a separate company Piramal Life Sciences. In less than four years, the parent company has remerged the new chemical entities division back in its fold quoting the NCE business.

With cash on its books aggregating . 3,000 crore and receivables of . 7,000 crore, Piramal Healthcare has drawn up a plan to invest . 24,000 crore in financing after leveraging its equity once. The NCE business and the financial services, which hold the potential for growth, have a low success ratio. The payback from these business may be reflected over the medium and long term — in the next 5-10 years. What would be critical is the execution abilities of the company. Piramal Health's stock is also likely to be rerated due tochanged risk profile.