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Pharma: A solid mix of services/products/distribution

* Piramal Enterprises (PIEL) has built a differentiated and robust business model in the Pharma space, with an established presence in Contract Development and Manufacturing Outsourcing (CDMO, 60% of Pharma sales), Complex Hospital Generics (CHG, 30% of Pharma sales), and India Consumer Products (ICP, 10% of Pharma sales).

* After some aberration in the recent past, it is back on the growth path in the Pharma space. Its order book has strengthened in the CDMO segment.

* The company re-strategized its business, subsequently introduced new products, and increased its distribution reach, thereby driving enhanced revenue growth in the ICP segment.

* We expect CHG segment to revive gradually as elective surgeries are yet to return to normalcy.

* We remain positive on PIEL on superior execution across Pharma segments and an increasing retail-focused lending book. Reiterate Buy.

Pharma – On a robust footing despite recent aberrations

PIEL has delivered consistent performance, with 15%/33% revenue/EBITDA CAGR in the Pharma space over FY11-20, led by strong traction/steady improvement in the CHG/CDMO segment. With the addition of high margin products and strong operating leverage, it has been able to grow EBITDA at a much higher rate than sales growth over past 10 years. However, the growth trajectory took a brief pause, particularly in CHG segment over the past six months. This is largely due to disruption on account of COVID-19. With demand factors being structurally intact and PIEL resilient in its performance, a revival in the growth trajectory is underway over the near to medium term.

CDMO – Integrated service offerings to drive growth

While COVID-19 has led the CHG segment to take a temporary back seat in terms of growth, it has aided increased order book in the CDMO segment. This has enabled PIEL to undertake better business in the CDMO segment, and paved the way to further showcase its capabilities to innovator Pharma companies. We expect 17% sales CAGR from the CDMO segment over FY20-23E v/s ~13% CAGR seen over FY11-20 on: a) strong order-book, and b) offerings spanning research as well as manufacturing.

Niche products/strong commercial skills key for CHG

The CHG segment comprises injectables, inhaled anesthetics, intrathecal spasticity and pain management, and selected anti-infective products. A strong distribution network in this segment puts PIEL in a sweet spot to maintain its growth momentum on a structural basis. The reduced numbers of elective surgeries had impacted performance of this segment over the recent past (14% YoY decline in 1HFY21). With vaccine development happening at a rapid pace to prevent COVID-19, we expect elective surgeries to pick-up over the medium term. Considering the impact of the pandemic on FY21, we expect ~5% revenue CAGR from this segment over FY20-23E.

Power brands/wide reach/e-commerce key for ICP

PIEL has put in considerable effort towards building its product portfolio and expanding its reach in the health-focused consumer products. It has over 20 brands in this segment. From its presence in 16 towns (24k outlets) in FY08, it is now present in over 1,500 cities (280k outlets) and has a strong field force of over 1,700 people driving growth in this segment. We expect 25% sales CAGR over FY20-23E on new product introductions, better traction in existing products, stronger distribution network, and greater use of e-commerce.

‘Retailization’ of the lending book; provisioning adequate

Over the past 1-2 years, the management focused on: a) running down large corporate exposures, b) infusing capital, and c) increasing share of long-term borrowings in the NBFC segment. Over the next 1-2 years, the key priority is to grow its recently launched Consumer Lending business. In addition to home loans, it looks to undertake LAP and small business loans. This business has been launched in 40 locations and has witnessed a healthy initial response. Over the next five years, this segment is likely to constitute ~50% of the consolidated loan book. On the asset quality front, while there could be a rise in delinquencies in the next few quarters, the same has been adequately provided for. Total provisions amount to 6% of loans, i.e. more than double outstanding GNPLs. Even with rising delinquencies, there should not be any P&L impact ahead.

Pharma stake sale provides a war chest for expansion

PIEL has received a fresh capital investment of ~USD490m from Carlyle for 20% equity stake in the Pharma business (Piramal Pharma). The deal values the business at an EV of ~USD2.8b, with an upside of up to USD360m depending on the company’s FY21 performance. Proceeds from the stake sale, along with leverage, would be deployed for capacity expansion at current facilities and to provide a war chest for inorganic growth opportunities. Usage of these funds would be for increased capacity and inorganic growth opportunities in products, brand acquisitions, and for adding new business lines. This would provide a further upside to our current estimates.

Valuation and view

Over the past year, the company has executed on all strategic priorities such as reducing Balance Sheet leverage, trimming large exposures, and curtailing loan growth. Going forward, loan growth would accrue from the Retail Lending business. With the team, analytics, infrastructure, etc. well in place, PIEL is poised to grow this business significantly over the medium-to-long term. Even on the Pharma side, we expect it to deliver 14% sales CAGR over FY20-23E on the back of 17%/25%/5% sales CAGR in the CDMO/ICP/CHG segment. We use SoTP to arrive at our TP of INR1,750 per share (FY22E-based). Maintain Buy.

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