1 iias.in 25 September 2014 Institutional EYE IiAS Comment | 25 September Focus First Reaction Governance Spotlight Regulatory Overview Thematic Research Event Based Research General Related Research Panacea Biotech: AGM Report: 25-Sept-2014 Unlisted Subsidiaries: The New Cloaking Device 21-Aug-14 Panacea Biotec: Company needs a transfusion Earlier this week, IiAS advised investors to vote AGAINST the reappointment of Soshil Kumar Jain, the promoter family patriarch and Chairman of the company’s board. IiAS also recommended voting AGAINST the resolution to approve related party transactions with PanEra Biotec, an associate company. IiAS highlighted concerns over opaque investments and transactions, which are worrying. The recent decline in performance has highlighted the adverse impact of such transactions on the company’s financials. In 2011-12, Panacea Biotec’s “DTP-based combination vaccines” were delisted by the World Health Organization. Following that, its financial profile deteriorated to a point where the company has had to make a reference to BIFR. In 2013-14, the company began defaulting on debt repayments (both to external bankers as well as to group companies), and has been compelled to submit a proposal under the CDR program. While the liquidity is stressed on account of weak business performance, it has been compounded by increased exposure to group companies 1 . Table 1: The impact of group company exposure on Panacea Biotec’s Standalone Balance Sheet over the years Date Tangible Networth (Rs. Mn.) Gross Tangible Assets (Rs. Mn.) Gross Group co exposure (Rs. Mn) Group Exposure % TNW Group Exposure % Assets TOL/TN W (x) A B C C/A C/B (B-A)/A 31-Mar-14 1,364 14,606 4,572 335.3% 31.3% 9.71 31-Mar-13 1,372 12,558 3,478 253.5% 27.7% 8.15 31-Mar-12 3,502 13,890 3,203 91.5% 23.1% 2.97 31-Mar-11 6,257 17,067 3,093 49.4% 18.1% 1.73 31-Mar-10 6,904 16,550 3,225 46.7% 19.5% 1.40 31-Mar-09 6,078 16,800 3,269 53.8% 19.5% 1.76 31-Mar-08 6,897 12,768 2,057 29.8% 16.1% 0.85 TNW = Tangible Networth; calculated as Paid-up equity capital + Reported Reserves and Surplus – Revaluation Reserve – Misc Expenditure not written off – Intangible assets (not including patents and trademarks) Gross Tangible Assets = Reported Total Assets (including gross current assets) - Revaluation Reserve – Misc Expenditure not written off – Intangible assets (not including patents and trademarks) Gross Group Company Exposure = Equity and Preference Share Capital invested in + Loans given. Group companies includes subsidiaries, associate companies and joint ventures 1 The term ‘Group’, in this note, refers to direct and step-down subsidiaries, associate companies and joint ventures
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1 iias.in 25 September 2014
Institutional EYE IiAS Comment | 25 September
Focus
First Reaction
Governance Spotlight
Regulatory Overview
Thematic Research
Event Based Research
General
Related Research Panacea Biotech: AGM Report: 25-Sept-2014
Unlisted Subsidiaries: The New Cloaking Device 21-Aug-14
Panacea Biotec: Company needs a transfusion Earlier this week, IiAS advised investors to vote AGAINST the reappointment of Soshil Kumar Jain, the promoter family patriarch and Chairman of the company’s board. IiAS also recommended voting AGAINST the resolution to approve related party transactions with PanEra Biotec, an associate company. IiAS highlighted concerns over opaque investments and transactions, which are worrying. The recent decline in performance has highlighted the adverse impact of such transactions on the company’s financials. In 2011-12, Panacea Biotec’s “DTP-based combination vaccines” were delisted by the World Health Organization. Following that, its financial profile deteriorated to a point where the company has had to make a reference to BIFR. In 2013-14, the company began defaulting on debt repayments (both to external bankers as well as to group companies), and has been compelled to submit a proposal under the CDR program. While the liquidity is stressed on account of weak business performance, it has been compounded by increased exposure to group companies1.
Table 1: The impact of group company exposure on Panacea Biotec’s Standalone Balance Sheet over
TNW = Tangible Networth; calculated as Paid-up equity capital + Reported Reserves and Surplus – Revaluation Reserve – Misc Expenditure not written off – Intangible assets (not including patents and trademarks)
Gross Tangible Assets = Reported Total Assets (including gross current assets) - Revaluation Reserve – Misc Expenditure not written off – Intangible assets (not including patents and trademarks)
Gross Group Company Exposure = Equity and Preference Share Capital invested in + Loans given. Group companies includes
subsidiaries, associate companies and joint ventures
1 The term ‘Group’, in this note, refers to direct and step-down subsidiaries, associate companies and joint ventures
Over 20% of the tangible asset base is invested in group companies. With the erosion in networth, the investments in group companies have become unsustainable. Almost 90% of the Rs.4.5bn invested in group companies is towards diversification into largely two segments – real estate and healthcare. Both these diversifications are a drag on the company: together, these segments have generated aggregate revenues of Rs.10 mn and an aggregate loss (net) of Rs.22mn over the past five years (See Annex 1). Opaque structures and an opportunistic Management Panacea Biotec has a large number of unlisted subsidiaries2: on March 31, 2014, the company had 18 direct and indirect subsidiaries. This allows the company to undertake several related party transactions without needing shareholder approval (See IiAS Report: Unlisted Subsidiaries – The New Cloaking Device). This opacity has been compounded by changes in the names of the subsidiaries, which makes it difficult for shareholders to trace transaction history. Management’s opportunistic business plan is evident in the plethora of businesses that the company’s subsidiaries have been conducting. Beyond the obvious extensions of the company’s primary pharmaceuticals business, the company’s subsidiaries (direct and indirect) have been engaged in setting up a hospital, setting up an SEZ, real estate, infrastructure, trading in securities, running an NBFC, running an insurance business, agricultural farming, tourist resorts, setting up power plants, and several other small business lines. Given that these businesses have generated paltry returns over the years, there appears to be little thought put into having a longer term business plan before diversifying into a new business line.
Table 2: List of Subsidiaries that have changed names in the past
Current Name Previous Name Radhika Heights Limited Best On Health Limited
Poor decision making is reflected in the timing of the increase of
investments in NewRise Healthcare Private Limited (which is setting up a 224-bed hospital in Gurgaon). In 2013-14, at a time when liquidity was already stretched and the company was defaulting on debt repayments, the company invested Rs.11.4 mn to purchase 134,900 shares (average of Rs.84.51 per share) from NewRise’s minority shareholders. In May 2014 (current year), the company further increased its investments in NewRise by investing another Rs. 200.3 mn3 to purchase 3,394,915 shares at Rs.59 each (fresh equity issuance by NewRise). Leaving aside the sharp price differential (between Rs.84.5 per share and Rs.59 per share), the timing of this investment is not in the interest of minority shareholders. While the hospital project has been languishing, infusing it with funds to propel it will only increase the company’s liquidity stress: hospitals are long gestation businesses and will bleed cash for a few years before they achieve cash break-even. Possibility of funds leakages through foreign subsidiaries Panacea Biotec’s promoters seem to be cursed with the Sidam touch. Several subsidiaries set up outside India have been liquidated periodically, and the equity investments and loans to these entities have been written off or provided for. Based on available information, IiAS estimates that Panacea Biotec will have written off over Rs.200 mn4 towards exposure to liquidating group companies. The periodicity with which foreign business subsidiaries are liquidating suggests either that the promoters are unable to learn from previous mistakes, or that the liquidations are intentional. Possibility of funds leakages through associate companies Panacea Biotec’s associate company, PanEra Biotec, is a potential source for fund leakages. PanEra was set up in the early 2000s as a joint venture between Heber Biotech SA (Heber) and Panacea Biotec. Heber exited the joint venture in 2007 – Heber’s shares were acquired by the promoters in their individual capacity and not by Panacea Biotec. Accordingly, promoters have a right to the cash flows of PanEra Biotec.
Table 3: Subsidiaries and joint ventures that have been liquidated or are in the process of being liquidated between 2011 and 2014 Panacea Biotec GmbH, Germany Kelisia Investments Holdings SA, Switzerland Chiron Panacea Vaccines Private Limited, India Panacea Biotec FZE, UAE
Cambridge Biostability Limited, UK Panacea Biotec Inc, USA Panacea Biotec (Europe) AG, Switzerland
3 On March 31, 2014, Panacea Biotec showed share application money paid to NewRise (pending allotment) aggregating Rs.200.3 mn, which may have been converted to equity in May 2014. 4 Some of the companies being liquidated are step-down subsidiaries – write-off on account of these are not available in Panacea Biotec’s annual reports
Institutional EYE
Panacea Biotec: Company needs a transfusion
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At the AGM slated on September 25, 2014, Panacea Biotec presented
shareholders with a resolution to approve purchase and sale of goods and services aggregating Rs. 3.2bn. This omnibus approval is significantly higher than the value of the transactions that have taken place in the recent past. There is no clarity on why such a large approval is being sought. Therefore, IiAS recommended that shareholders vote AGAINST the resolution. Accounting shenanigans – misplaced innovation To couch the mounting losses, the company has revalued assets, changed its depreciation policy and changed the manner in which it accounts for gains or losses on account of foreign exchange differences (See Table 4). In IiAS’ experience, these accounting changes are typical of distressed companies. Despite the accounting changes, the company was unable to stem the reporting of losses. Panacea Biotec held optionally convertible preference shares aggregating Rs.2.16 bn in its wholly-owned subsidiary, Radhika Heights Limited. In 2013-14, Panacea Biotec exercised its right of conversion: the preference shares were converted at a premium of Rs.1.17bn into equity shares. Therefore, on March 31, 2014, Panacea Biotec held equity shares aggregating Rs.3.36bn in Radhika Heights Limited and its networth increased to the extent of the premium. If adjusted for this premium, Panacea Biotec’s tangible networth (standalone) would reduce from Rs. 1.3bn (See Table 1) to Rs.0.2bn. Additionally, it is unclear how Radhika Heights has accounted for this premium on redemption of share capital: Radhika Heights’ reported networth (capital + reserves) was Rs.2.56bn as on March 31, 2014, just marginally higher than its networth of Rs.2.54bn as on March 31, 2013. Time for a transfusion The company’s diversification appears impulsive, and has generated little returns. The company has five people from the family on it board and another five holding an “office of profit.” IiAS recommends that the promoters step down from their executive capacities and begin a conscious process of professionalizing the management.
Table 4: Accounting changes hide the actual losses at a standalone level
Parameter (Rs. Mn) FY14 FY13
Reported Profit (Loss) (4.2) (2506.3)
Exchange rate differences - 173.1
Gain on conversion of preference shares 1199.3 -
Surplus due to change in depreciation method 1770.9 -
Actual Profit/(Loss) (2974.4) (2679.4)
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EYE
Panacea Biotec: Company needs a transfusion
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Annex 1: Segmental Information at a consolidated level
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