As Piramal Pharma prepares to list, understand the demerger story

The exchanges have reported that Piramal Pharma Ltd would be listed on the bourses on Wednesday, the 19th of October. It may be recollected that recently Piramal Pharma had bene demerged from Piramal Enterprises Ltd (PEL). Piramal Enterprises always had two major segments; both of them almost equal. The first was Piramal Finance which was the NBFC business which was largely into lending and which had recently taken over the Dewan Housing business. The other was the pharmaceutical business spearheaded by Swati Piramal. To simplify the structure, the company has opted to separate the 2 businesses.

As per the announcement made by the Bombay Stock Exchange (BSE), the equity shares of Piramal Pharma Limited would be listed and admitted to dealings on the stock exchange under the T Group of Securities. Piramal Pharma will have a face value of Rs10 per share. It remains to be seen how the pharma business of the Piramal group gets valued but it likely to see a sum of parts valuation that is larger than the whole. That should be value to the shareholders of the larger PEL and of Piramal Pharma. It also provides an opportunity for investors to invest in a clear sectoral story rather than a diversified amalgam of businesses.

Piramal Pharma Ltd was demerged from Piramal Enterprises (PEL) in August with the clear intent to simplify the company's corporate structure. The demerger does not entail any cash flow and will be entirely executed through a stock swap. The demerger plan has already been approved by the National Company Law Tribunal (NCLT) on the 12th of August. According to a statement issued by the company, the demerger would empower Piramal Pharma to be globally competitive and it was a much better idea than making it a subservient business of an NBFC business. It would also help in carving valuations in future. 

How has the deal been structured? As mentioned earlier, the entire demerger would be effected by way of a stock swap consideration. For instance, the existing shareholders of Piramal Enterprises have been allotted 4 shares of Piramal Pharma for every 1 share in PEL. Thus a person holding 100 shares of PEL, will now hold 100 shares of PEL and 400 shares of Piramal Pharma post the demerger. However, it must be remembered that with the pharma business going out, there is value depletion to that extent for the shareholders of PEL, which gets compensated with equivalent shares of Piramal Pharma allocated due to demerger.

Piramal Pharma Ltd itself is an amalgam of 3 distinct business. The first is Piramal Pharma Solutions (PPS) and the second is Piramal Critical Care (PCC). The Piramal Pharma would be a combination of the traditional pharma business as well as high end molecules and healthcare franchise. In addition, this will also include the India Consumer Healthcare business of PEL, which sells over-the-counter products. It is expected that the sum of parts in this case would be more than the whole and pharma industry will get its own distinct valuations. That is also a business where private equity funds have shown lot of interest.