Piramal Pharma Limited

Company Profile: The company has 17 manufacturing sites with presence in 100+ countries, 500 CDMO customers, 6000+ CHG hospitals and 180k ICH hospitals. As of FY24, the geographical revenue diversification is as follows: North America-41%, Europe-25%, India-20%, Japan-4%, Others-10%.

a) Q1 FY25 results: The company’s Q1 FY25 revenue from operations stood at Rs 1951 crores, up 12% YoY. EBITDA stood at Rs 224 crores, up 31% YoY, whereas EBITDA margins stood at 11% versus 10% YoY driven by operating leverage, cost optimization, and superior revenue mix… Net loss stood at Rs 89 crores versus 99 crores YoY. The company successfully closed the USFDA inspection at the Lexington facility with zero observations. As per CARE ratings, the company’s business intensity (revenue from operations divided by sum of net worth and debt) is expected to improve to 0.85x in FY26 versus 0.6-0.65x in the last three years.

B) Segmental Performance: Following is the detailed segmental performance overview of the company’s business:

CDMO Business (54% of revenues):

1. This segment’s revenues grew 18% YoY.

2. The business continues to witness steady order inflow momentum, particularly for on-patent commercial manufacturing. Management is also seeing early signs of a pick-up in biotech funding with increase in customer enquiries and visits, especially for differentiated offerings.

3. Profitability improved due to healthy revenue growth, better business mix and cost optimization initiatives. The company is also seeing YoY improvement in demand for its generic APIs.

4. Future investments will be geared towards differentiated offerings in ADC, peptides, and on-patent API development and manufacturing.

5. CDMO segment EBITDA margins have improved from 10% in FY23 to 15% in FY24. With around 34% of development revenue from phase III molecules, there is a high probability of these transitioning to product registration and commercial production. Also, 50% of the revenues came from innovation-related work and 64% revenues come from big pharma and emerging pharma. This provides visibility and stability on sales increasing by 10-15% in the near term and improvement in EBITDA margins by 100-200 bps.

6. In FY24, five of the company’s manufacturing facilities which contribute to over half of the CDMO revenues successfully cleared the USFDA inspection.

Complex Hospital Generics (32.3% of revenues):

1. This segment’s revenues grew 2% YoY.

2. The company saw robust demand for Sevoflurance (80% of the global IA market) and Isoflurane in emerging markets like Asia, Europe and RoW, which was partly offset by lower pricing in Sevoflurane in the US. 67% of FY24 CHG revenues came from inhalation anesthesia products and 51% came from the USA.

3. The company is undertaking capacity expansion in the inhalation anesthesia to meet the growing demand. The expected commercialization is in FY26.

4. The growth in the intrathecal portfolio (15% of FY24 CHG revenues) is led by new customer conversion. The company continues to command a 70% market share in intrathecal baclofen in the USA.

5. The company is also investing in portfolio expansion by developing specialty products and signing-in new licensing deals. It has a current pipeline of 24 new products which are at various stages of development and have an addressable market of $2 billion.

India Consumer Healthcare (13.5% of revenues):

1. This segment’s revenue grew 10% YoY.

2. The company added 7 new products and 10 new SKUs in its portfolio in Q1 FY25.

3. Power brands grew 19% YoY in Q1 FY25 and contributed 48% of ICH sales.

4. The company looks to widen its reach across general trade and is also strengthening its presence in alternate channels of distribution.

5. Profitability margins in this segment are in the low single digits. With the increase in sales, CARE ratings expect profitability margins to improve going forward.

C) Debt & Capex: The company’s capex plans for FY25 stand to the tune of Rs 650-750 crores, which would be majorly debt funded. The debt obligations for FY25 stand at Rs 900 crores and the company has prepaid Rs 200 crores worth of NCDs in Q1 FY25. The company has cash and liquid balances of Rs 500-600 crores as of FY24. The company’s net debt-to-EBITDA stood at 2.8x versus 2.9x QoQ.

D) Management Commentary: The following is the management commentary post its Q1 FY25 results:

1. With respect to the profitability in the CDMO business, the management intends to increase it over the medium term through increased capacity utilization and higher contribution from differentiated offerings and innovation-related work.

2. Recent changes in regulations, along with the needs of supply chain diversification are expected to provide medium- to long-term growth opportunities for the CDMO business.

3. In the CHG segment, the company is looking to build a pipeline of limited competition specialty products through investments in R&D and in-house product development capabilities.

4. For FY25, the management has guided for early teens increase in revenue and EBITDA with a meaningful improvement in PAT.

5. The management is seeing early signs of customer enquiries due to the effect of the US BioSecure Act, which aims to source low-cost generic medicines from companies maintaining high quality standards and also encourage R&D on new innovator drugs.

6. With regards to cashflows, the Indian Consumer Healthcare business funds itself, whereas investments in the CDMO and Complex Hospital Generics segment will be managed through internal accruals.

7. In the Complex Hospital Generics business, the company has 5 products approved and 17 are under various stages of approval.

E) Monitorable risks: Here are the key monitorable with respect to the company:

1. Although the company has a clear track record with respect to successfully clearing USFDA inspections, regulatory risk in this industry remains.

2. The company only hedges 45% of its net foreign currency exposures through forward contracts as a part of its hedging policy.

3. Raw material pricing remains a risk which was witnessed in FY22 and FY23 financials leading to moderation in operating margins.

4. The company’s revenues and EBITDA still remain skewed towards H2 of the year. In FY24, 55% of the revenue and 65% of the EBITDA for the full year was earned in H2 FY24.

5. In the CHG business, Sevoflurance constitutes 67% of the total segmental revenues. However, the company is working on reducing this dependence.