The Q3 con call looked very dismal. Management’s most frequent answer was, “We do not want to make a forward-looking statement”. I think the investor community bruises them on call as well on the stock market. I think they were shielded from investors/analysts under PEL inefficacies, and they were free to say whatever they could as there was nothing else to challenge them.
PPL has three business lines- CDMO, India Business, and Complex Hospital Generic. Indian business consists of JV with Allergen, which gives me approx 100 cr PAT per annum. So if PPL report losses on a consolidated basis, that means their core business is not only reporting their profit but also taking profit from JV.
Complex Hospital Generic- It had a good problem (problem, nevertheless). They had some supply chain issues as a result, they could not fulfil the demand. This shall revert in Q4, which is good for the business. So this business shall report good numbers in Q4./ But PPL does not share separate profitability for their different segment, so we will not know the true state until management chooses to say so. But this part of the business seems to be going well.
India’s business is also growing, and they are investing heavily in it. It shall hit 900 cr revenue in FY23 and 1000cr+ revenue in FY24. Management indicated that they would keep investing until the business crosses the 1000cr run rate. It means Fy24- if one wants to trust and believe what management is saying- this segment shall report some tiny profit (currently, it is EBITA positive).
The biggest drain in CDMO. The US’s slow decision-making and funding issue due to the stock market rout is taking a toll. A good portion of PPL CDMO business is contributed from venture-backed start-ups (emerging biopharma), and they are facing increased security from their investor due to market corrections. This, in turn, shall be affecting what they are working on, indirectly impacting players like PPL.
Management commentary looks like the situation will take time to be corrected. When asked, management expects this situation to improve in the next 2 quarters; until then, CDMO will be impacted. It looks like CDMO is taking PPL downhill at the moment.
An additional $42 million Capex has gone live in Q4, which means it’s interest and other expenses, as well as depreciation, will hit Q4. As this is a new Capex, they are unlikely to have a corresponding increase in revenue. So the net effect will be negative on the P&L for Q4 unless PPL perform a miracle.
Although PPL is reporting P&L losses, they would have a good operating cash flow as they report huge amortisation due to their expensive acquisitions. So FY23 depreciation and amortisation amount will be around 650 cr. A good chunk of it will be towards amortisation, which means they will have 400-500 cr (my wild guess) operating cash available toward repayment even though they are reporting losses. Maybe that is the reason PPL is not too concerned about debt (or does not seems to be concerned to me). Management wants to raise money from rights issues for growth Capex as well as for debt repayment, but it may take Q2 to complete (by Sept end).
Overall, stock pricing (CMP 90) is at an attractive level, but the business is at a difficult position or going through a rough patch. One who understands the business well & high conviction may be rewarded well from this position, but there is some inherent risk. Many investors would prefer to look at one/two stable quarters before committing capital; until then, PPL may well trade in this choppy water.
Note: Invested for some time.
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