Shares of pharma company Piramal Pharma, which waslisted on October 19 last year, have shed nearly 40 percent to ₹123 from its listing price of ₹200 in just a little over 2 months. However, global brokerage house Jefferies expects the stock to recover to ₹150 in the next 12 months, indicating a potential upside of 22 percent.
Piramal Pharma: Despite a 40% fall since listing in October; here's why Jefferies is bullish on this stock
The brokerage has initiated coverage on the stock with a buy call on the back of attractive valuations and as its CDMO (contract development and manufacturing organization) business outlook is expected to improve from 2HFY23 as challenges over the last 12 months are resolved.
It also likes the company's complex hospital generics business which is a steady cash cow for the company. Consumer health business will likely turn EBITDA positive in FY24 on the back of robust high-teen revenue growth and the operating leverage and lower base will help PPL to hit high-teens EBITDA CAGR in coming years, said Jefferies.
"Piramal Pharma’s (PPL) CDMO business is on the cusp of a turnaround as headwinds faced over the last 12-18 months are getting resolved. CDMO turnaround, steady growth for complex hospital generics and scale-up of consumer health should drive 12 percent/21 percent revenue/EBITDA CAGR over FY22-25E and allay leverage concerns," stated the brokerage.
The brokerage has a base case target price of ₹150 for the stock. In this case, it assumes 1) Revenue growth of 11 percent during FY22-25E, 2) EBITDA growth of 21 percent during FY22-25E and 3) Values Piramal Pharma (ex-Allergan JV) EV at 12.2x FY25E EBITDA with Target Price of ₹150.
Meanwhile, in the bull case, the brokerage has a target price of ₹207 for the stock, implying an upside of 67 percent. In this case, the brokerage assumes 1) Revenue growth of 15 percent during FY22-25E, 2) EBITDA growth of 28 percent during FY22-25E, and 3) Values Piramal Pharma (ex-Allergan JV) EV at 13.4x FY25E EBITDA with Target Price of ₹207.
Now, in the bear case scenario, the brokerage has a target of ₹101 for the stock, this indicated a downside of 18 percent. In this case, the brokerage assumes 1) Revenue growth of 10 percent during FY22-25E, 2) EBITDA growth of 14 percent during FY22-25E, and 3) Values Piramal Pharma (ex-Allergan JV) EV at 11x FY25E EBITDA with a Target Price of ₹101.
Piramal entered the pharma space through the acquisition of Nicholas Laboratories in 1988. Over the next two decades, PPL created business verticals like domestic formulations, diagnostics, OTC, pharma solutions and critical care. PPL divested its domestic formulations and diagnostics business in 2010/2011 and built a diversified financial services business over the decade.
In 2020, Carlyle invested $490 million in the pharma business for a 20 percent stake valuing the company at an EV of $2.7 billion vs the company's current EV of $2.2 billion. In Oct 2021, Piramal announced the de-merger of the financial services and pharma business and the pharma business was listed separately on the Indian stock exchanges in Nov 2022.
PPL has three business verticals 1) CDMO (Contract Drug Manufacturing Organization) which comprises drug discovery (4 percent), development (26 percent) and commercial manufacturing (70 percent), 2) CHG (Complex Hospital Generics) which includes inhalation anesthesia and injectables, and 3) ICH (India Consumer Healthcare) which has a portfolio of OTC products. It also has a JV with Allergan for ophthalmology-branded products for India for which it is the market leader.
CDMO growth prospects to improve starting 2HFY23: As per the brokerage, PPL's CDMO business (60 percent of FY22 revenue) faced execution challenges, high attrition at overseas sites and margin impact from higher raw material cost over the last 12-18 months. This has weighed on PPL stock price since the separate listing of the pharma business in Nov 2022. However, CDMO growth should turnaround soon, as raw material supplies have normalised, people have been rehired and trained, customer audits have resumed, and new capacities coming on stream from FY24, noted the brokerage.
Robust YoY revenue traction from 2HFY23 (which is anyway seasonally strong) should drive operating leverage benefit, predicted Jefferies. Over the longer run, PPL's niche capabilities and flexible manufacturing infrastructure should strengthen its pipeline of under-patent projects (currently 12 percent of CDMO sales) and improve growth visibility, it added.
CHG is a steady cash-generating business: Complex Hospital Generics (29 percent of FY22 revenue) comprising complex and differentiated inhalation and injectable products with high entry barriers is the most profitable division of PPL in its view. Stable growth in the US inhalation anesthesia market where PPL has a leadership position, addition of fresh capacities and new injectable launches in non-US markets should allow double-digit growth over the next few years with a stable margin profile, highlighted the brokerage.
Consumer health business growing well with turnaround expected in FY24: According to the brokerage, PPL's India consumer health (11 percent of FY22 revenue) has been registering high growth (30 percent CAGR over FY19-22) on the back of new product launches, acquisitions, and multi-channel marketing strategy. However, business is below EBITDA breakeven as PPL is investing aggressively in advertising and promotion, it noted. PPL has guided for a turnaround in profitability once the business reaches a revenue size of ₹1000 crore (1HFY23 was ₹440 crore) which Jefferies believes can be achieved sometime in FY24.
Valuations and Outlook
The brokerage estimates an 11 percent/21 percent revenue/EBITDA CAGR over FY22-25E with reduced leverage from FY24. PPL trades at an attractive valuation of 13.3x/10.6x FY24/FY25 EV-EBITDA which is at a steep discount to comparable Indian peers, it said.
Given the gap in margin profile vs peers, it values the CDMO/ICH business at a 20 percent/60 percent discount to peers whereas the CHG business is valued in line with peers to arrive at a SOTP-based price target of ₹150. The turnaround in CDMO operations starting H2FY23 is the key catalyst whereas delays in order inflows or execution issues are key risks, added the brokerage.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.