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Piramal Healthcare

Piramal Healthcare signed a definitive merger agreement to acquire Minrad for US$40mn, to enter into US market for Sevoflurane. In addition to acquisition cost, PHL will also provide US$12mn fund as working capital to Minrad. The acquisition to be funded largely through debt thereby leverage to increase to 1x of equity by FY09;
The management expect acquisition to be earning accretive (additional EPS Rs.1/share in FY10) with the revenue of US$65mn from Minrad in FY10E. Acquisition is to be completed by March 2009. We leave our financial estimates unchanged until conclusion of the deal.

Minrad has been facing extreme financial difficulties due problem in material sourcing, high raw material costs, high R&D costs, high debt and interest expenses and simultaneously very low capacity utilization. Minrad has reported revenue of
US$23mn and net loss of US$25.6mn in 9-month CY08 including US$4.7mn for front end discounting charges. As at the end of September 2008, it has reported net fixed assets of US$21.8mn and net working capital of US$15.4mn. Its net worth were completely eroded (US$-1.8mn) and it has net debt of US$41.8mn.

Expect 14.7% and 17.7% revenue and earning CAGR over FY08-10E. The company has reported EPS of Rs.6.8 in H1FY09. Going forward, we expect EPS of Rs.17.2 in FY09 and Rs.22.2 in FY10E.
At current market price Rs.230, the stock is trading at 13.5x FY09 and 10.5x
FY10 earning estimate, significantly below historical average PE of 18-20x;
PHL remains preferred pick in Indian CRAMS space. ACCUMULATE rating with a 6-9 month perspective with a DCF-based target price of Rs.313. At target price, the stock will be valued at 14x FY10 earning estimate.