Since their listing in October last year, shares of Piramal Pharma have been on a downward spiral, falling nearly 53.65% from their listing price of ₹200 apiece. The shares, however, seem to be well-positioned for a solid turnaround due to a strong recovery in the company's CDMO business, normalisation of macro headwinds, capacity expansion, and cost rationalisation, said brokerage firm Nuvama Professional Clients Group.
In its latest research note, the brokerage has initiated coverage on the stock with a 'buy' rating and a target price of ₹130 apiece, which reflects an upside of 40% from the stock's current market price of ₹92.7.
Piramal Pharma Limited (PPL) is part of the Piramal Group of Companies, which demerged from Piramal Enterprises. The company offers a portfolio of differentiated products and services through its 17 global development and manufacturing facilities and a global distribution network in over 100 countries.
The company generated 57%, 32%, and 12% of revenue from contract development and manufacturing services (CDMO), complex hospital generics (CHG), and India consumer healthcare (ICH) businesses in FY23, respectively. Despite healthy growth in the CHG and ICH, the CDMO business was hit by higher attrition during the COVID-19 pandemic and macro headwinds.
However, there are positive signs emerging for the CDMO business, according to Nuvama. It stated that the company is experiencing a recovery in growth and margin as order inflows rise with the subsiding of macro headwinds and the normalisation of manufacturing operations after COVID-19 restrictions were lifted.
The revenue mix is also shifting favorably towards on-patent products and services, which, according to the brokerage, is expected to boost profitability. As per the brokerage's estimates, the on-patent products will contribute around 50% of segmental revenue by FY25, up from 45% in FY23.
The company has plans for capacity expansion at various facilities and the potential commercialisation of late-phase projects. These factors, along with a positive outlook for the CDMO business, are expected to drive a revenue CAGR of 12% over FY22–25, said the brokerage firm.
CHG business — strong product pipeline to drive growth: The company's CHG business consists of some market-leading brands in inhalation and injectable anaesthesia. This segment also has products related to pain management, intrathecal therapy, and other injectables mainly used in hospitals and critical care.
Its key products are backward-integrated and thus offer a healthy margin. As healthcare services witness a pickup in patient footfalls, the demand for critical care products is following suit, the brokerage pointed out.
The brokerage expects 6% revenue CAGR over FY23–25 from this segment, driven by launches from a pipeline of over 25 products, geographical expansion in inhalation anaesthesia and a recovery in demand for legacy products in core markets like the US.
ICH business to sustain a high growth momentum: The company's ICH business has a diversified portfolio of attractive brands, including power brands like Lacto Calamine, Little’s, Polycrol, Tetmosol, and the I-range.
In FY23, power brands constituted 43% of ICH revenue and grew 38% YoY. It is consistently adding products to its portfolio to attain better scale (26 products and 37 SKUs launched in FY23) and is expanding its distribution network, the brokerage added.
Nuvama expects the ICH business to sustain a 20% revenue CAGR over the next few years and the EBITDA margin to touch double digits over the next two years on better operating leverage.
Proposed right issue and strong OCF to de-stress the balance sheet: The company is planning a rights issue of ₹1,050 crore to repay its debt. The company's gross/net debt as of FY23-end stood at approximately ₹5,500 crore/ ₹4,800 crore, resulting in a net debt/equity ratio of 0.8x.
The rights shares, if issued at ₹75 per share, would lead to an equity dilution of around 12% and an approximately 11% increment in FY24 PAT, according to brokerage.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
