Buy Piramal Pharma for Target Price of Rs 200 (42% Upside): ICICI Securities

Expect stronger H2 driven by CDMO

Piramal Pharma’s (PPL) Q2FY23 performance was driven by growth across its business segments. Revenue grew 9.0% YoY (+16% QoQ) to Rs17.2bn. CDMO grew 6.1% YoY, complex hospital generics (CHG) was up 12.4% YoY and consumer healthcare (OTC) 18.2% YoY. EBITDA margin was low at 10.0% due to low sales from CDMO, revenues from which are concentrated more in H2 of every year. We remain positive on Piramal Pharma considering the growing requirement for development services, especially with complex regulatory processes for newer drugs, high entry barriers, limited competition for the complex hospital generics (provides sustainable growth over the longer term) and the rising contribution from the fast growing consumer segment. We initiate coverage post demerger with a BUY rating and an SoTP-based target price of Rs200/share.

 Business review: Revenue grew 16.1% QoQ despite a modest 9.0% YoY growth. This was driven by 22.1% QoQ rise in the CDMO segment to Rs9.4bn. Historically, PPL has onboarded and initiated projects in CDMO in H2 of any given fiscal. Thus, the revenue is highly concentrated towards the latter half of each year. We expected CDMO revenue CAGR at 14.9% over FY22-FY25E (including the recent Hemmo acquisition) driven by rising order contracts and expanding capacities (US$157mn capex for next 12-18 months). CHG grew 12.4% YoY and 10.8% QoQ to Rs5.6bn with increasing demand for complex surgeries as the environment normalises. We expect CHG revenue to CAGR at 10.0% over FY22-FY25E led by new launches and gradual market share gains. OTC segment posted healthy growth of 18.2% YoY to Rs2.3bn led by consistent traction in key products. EBITDA margin declined 250bps YoY to 10.0% due to elevated spend towards marketing in the OTC segment and lower sales in CDMO.

► Concall highlights: 1) Guidance: i) Expect 15% revenue growth in the next 3-5 years; ii) target is to reach EBITDA margins of ~25-26% over the next few years across all the businesses of the company; iii) debt levels to be ~4-4.5x EBITDA over FY23 and FY24. 2) Capex: i) Company has committed growth-oriented capex of ~US$157mn, expected to be completed in the next 18-24 months (the spend will be largely towards the ongoing expansion at Riverview, Michigan, and Grangemouth, UK, facilities).

► Outlook: We expect revenue, EBITDA and PAT CAGRs at 14.5%, 21.1% and 30.0% over FY22-FY25E with margins expanding 260bps to ~17% led by growth in CDMO and reducing expenses in OTC segment. PPL will generate FCF of ~Rs10bn over FY23EFY25E, which will be used to gradually pare down the debt-equity ratio to ~0.4 by FY25E.

► Valuations and risks: We initiate coverage on PPL post demerger with a BUY rating and an SoTP-based target price of Rs200/share, implying 19.7x FY24E EV/EBITDA. Key downside risks: Slowdown in orders in the CDMO segment, decline in complex surgeries, and forex volatility.