Stock update- Piramal Healthcare and Wipro

Piramal Healthcare
Cluster: Apple GreenRecommendation: BuyPrice target: Rs434
Current market price: Rs229

Minrad acquisition to be marginally earnings accretivePiramal Healthcare (Piramal) has announced the acquisition of US-based Minrad International, Inc. (Minrad) by way of a definitive merger agreement signed between the two companies. As per the terms of the agreement, the shareholders of Minrad will get $0.12 per share in cash; that is a 100% premium to the stock’s closing price of $0.06 on December 22, 2008.

In addition, Piramal will acquire Minrad's 8% senior secured convertible notes from the note holders. The total consideration for the acquisition of the debt and equity will be $40 million. Concurrently, with the signing of the merger agreement, Piramal has provided Minrad with a senior secured loan of $12 million for meeting the latter’s working capital needs during the period preceding the closing of the merger.

Wipro

Cluster: Apple GreenRecommendation: HoldPrice target: Under review
Current market price: Rs243Adds

Citigroup’s arm to its kitty
Key points
Wipro has announced that it has reached an agreement with Citi Inc to acquire Citi Technology Services Ltd (CTSL), an India-based captive provider of IT services and solutions to Citi Inc across the globe, for an all-cash consideration of around US$127 million. The acquisition is expected to complete in March 2009.

As a part of the acquisition, Wipro has bagged a deal aggregating to US$500 million spread over next six years with Citi Inc. Under the agreement, Wipro will provide technology infrastructure services (TIS) and application development & maintenance (ADM) services to Citi Inc through CTSL. The deal is likely to contribute average annual revenues of US$83.3 million to Wipro’s top line.

CTSL has around 1,650 employees and is expected to generate revenues of US$80 million in CY2008. At transaction value, CTSL acquisition is valued at 1.6x, which is slightly lower than the valuation at which Tata Consultancy Services (TCS) acquired Citigroup Global Services Ltd (CGSL) and Wipro’s earlier acquisition of Infocrossing Inc. In terms of earnings, the management has mentioned that the acquisition is going to be earnings per share (EPS) accretive as CTSL enjoys better operating profit margin (OPM) than Wipro’s IT business.

There are growing number of deals in which IT vendors have made upfront payment to get large deals, which involves employee transfers (earlier TCS made acquisition of CGSL at US$505 million). This indicates that volume growth is getting tough for IT vendors and hence they are using cash on their books to grow their business. On negative side, this is a precursor to decline in prices for Indian IT vendors.

We have not incorporated CTSL’s acquisition in our estimates and will do so after the completion of the acquisition. Given the muted outlook for Wipro’s key end-user industries such as semiconductor and telecom equipement manufacturer and huge unrecognised foreign exchange (forex) losses sitting on its balance sheet, we maintain our Hold recommendation on the stock despite compelling valuations. At the current market price, the stock is trading at valuation of 10.2x its FY2009 earnings estimate and 10.4x its FY010 earnings estimate.

Jaiprakash Associates

Cluster: Ugly DucklingRecommendation: HoldPrice target: Under reviewCurrent market price: Rs79Downgraded to Hold
Key points
· The board of directors of JP Associates Ltd (JAL) has approved the merger of four of its arms operating in hospitality, cement and other related business into JAL. The merger will be effective from April 01, 2008.

The share swap ratio for the merger will be:
One share of JAL (face value [FV] Rs2) for every ten shares of Jaypee Cement Ltd (FV Rs10). JCL is exploring opportunities to set/acquire cement plants in India.
One share of JAL for every 11 shares of Gujarat Anjan Cement Ltd (GACL; FV Rs10). GACL is setting up a 4 million tonne per annum cement plant in Gujarat by FY2010.
One share of JAL for every one share of Jaypee Hotels Ltd (JHL; FV Rs10). JHL owns Jaypee Palace Hotel (Agra), Jaypee Vasant Continental (New Delhi) and Jaypee Siddharth Hotel (New Delhi).

One share of JAL for every one share of Jaiprakash Enterprise Ltd (FV Rs10). JEL owns 15% stake in Jaypee Power Ventures. Jaypee Power Ventures in turn owns power assets of Vishnuprayag hydroelectric project, Siddhie and Karcham Wangtoo.
As per our calculation, the merger process will result in the issue of 14 crore new shares of JAL, which amounts to an equity dilution of 11.3% to 138.1 crore shares. However, if the company decides to extinguish the shares under cross holding (around 12.8 crore) then the dilution will be only to an extent of 1% and will have a marginal impact on the earning per share (EPS) estimates for FY2010.

Nonetheless, as per media reports and our interaction with the management, the company is likely to transfer the 12.8 crore shares under cross holdings to a trust and possibly use it to generate the required funds for its infrastructure and real estate businesses. In such a scenario, we expect an adverse impact of 8-8.5% on our EPS estimates for FY2010.
We have not factored in the merger into our estimates and will do so once more clarity emerges. At the current market price the stock is trading at 14x FY2009 earnings estimate and 10x FY2010 earnings estimate. We are downgrading the stock to Hold recommendation and would review the price target.