When i walked into the PEL AGM it seemed like an ultra simple affair without much hoo-hah, until i looked at the Board. The best of the best were patiently sitting there. Ajay, Swati and Nandini Piramal, Keki Dadiseth, N.Vaghul, and Ramadorai amongst others i couldn’t recognise. Partly intimidating, but mostly gratifying. Despite the big wigs, the attendance was somewhat poor. PEL has gained a lot of negative publicity in the market due to the fact that despite the Rs 572 EPS in 2011, just about Rs 100 has been distributed as dividend till the end of 2014. While that is the public view, i greatly differ from them.
The company has changed drastically from 2011 and now seems to have its feet firmly in the ground in terms of direction. Profits, though will follow. Yes, have some faith. The biggest achievement this year, would probably be the clarity that the company will operate only in 3 verticals of Pharmaceuticals, Financial Services and Information Management.
None of the regular ratios used for analysis are applicable here, but these statements made by Ajay Piramal hold a lot more weight.
- The company will only borrow to lend as the company is able to borrow at about 10.25% and get about 16-17% return.
- Foreign loans that have been borrowed to fund DRG acquisition will not be retired as they cost the company between 5-6.5% only.
- Pharma businesses will turn cash positive this year.
- DRG investment has improved sales but will turn cash positive only in 2016 or later.
- Neuraceq and BST-CarGel will begin to bring in money this year.
- 1 molecule will be leased to a Global Pharma company for exploitation in 15-16.
- OTC will continue to acquire products as and when they are good fit at a good valuation.
- 14-15 will probably be the last year of pain and 15-16 should see a lot of triggers bringing in the money.
- Money will be pumped into research and only if no returns are achieved by 2016, the company will stop the research. There are no commitments in research and the plug can be pulled whenever the company wants to.
Recent other developments that one could have missed are as follows:
- Shriram Transport Finance as well as Shriram City Union Finance have doubled in the last one year.
- Due to the dollar appreciation the DRG investment is about 20% cheaper.
- Equal and Caladryl are excellent for the companies product portfolio.
- Alliances with CPPIB, IIFL will go a long way in the future.
- IndiaREIT has made some bad investments in the past and the company is on the job to get out of them a.s.a.p, however the funds under Khushru Jijina are performing well.
- Pharmaceutical business grew at 14%, Critical Care at 17%, OTC at 21%.
- SIG has been making investments and has already invested 925 cr.
While a Balance Sheet of a company that is in the process of metamorphosis is of little relevance, two fields particularly give me a sense of discomfort. The recognition and depreciation of Intagible assets and Goodwill on consolidation. I wish there was more clarity on this by the company in terms of its accounting policies an depreciation policies.
Neuraceq is a bankable trigger and this year will be exciting on account of this.
Understanding PEL is not easy as the most important ingredient to understand this company is faith. One can get a zillion doubts at the turn of every page in the AR. One has to judge this company based on spirit and not numbers for a little while longer. This company is a rough diamond in the hands of and expert polisher. No scientific explanation can guarantee that this too will be a stunning diamond.
I’m going to trust my gut on this one for a little longer.