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Building scalable differentiated Pharma business

We attended PIEL’s Pharma day to understand the outlook of each Pharma subsegment in greater detail.

* With a robust base in each segment – CDMO (58% of sales), Complex Hospital Generics (CHG; 34% of sales), and India Consumer Products (ICP; 8% of sales), PIEL has built multiple levers to drive growth over the next 4-5 years.

* Closure of the INR35b fund infusion by the Carlyle Group for a 20% stake in the Pharma business has provided ammunition for inorganic growth.

* We remain positive on PIEL on the back of: a) niche portfolio and global reach in CHG, b) service offering across the value chain in the CDMO segment, c) strong operating leverage in the ICP segment, and d) increasing retail focused lending book. Reiterate Buy.

CDMO: Differentiated and integrated offerings provide ample prospects

On the back of its expertise in complex technologies in high potent APIs/sterile injectables/anti-body drug conjugates/hormonal oral solid dosages (OSDs)/complex OSDs, PIEL now has 42% of its order book from integrated projects (2.5x increase in projects over FY17-9MFY21). It provides service on 30 molecules that are under Phase III clinical trials. We expect 15% sales CAGR over FY21-23E, given its diversified customer base, broad range of service offerings, and scale-up from development to commercial manufacturing.

CHG – Niche portfolio and global reach to aid healthy growth trajectory

PIEL has implemented a comprehensive strategy using internal/external R&D, acquisitions, licensing partnerships, and direct sales force aided by partnered distributions. This has enabled it to build a strong Hospital Generics franchise. While COVID-led disruptions impacted CHG performance in FY21, we expect new launches, higher market share in existing products, and deeper penetration in regulated markets to revive sales. We expect 17% sales CAGR to INR19b over FY21-23E.

ICP – Diversified portfolio and pan-India footprint to create a large consumer healthcare platform

With 21 brands, direct reach to over 200k outlets (more than 1,500 towns), and ongoing marketing activities, PIEL is well-placed to further scale-up this business over the next 4-5 years. We expect 23% sales CAGR in this segment over FY21- 23E. There is scope for inorganic growth via acquiring brands and/or build its prescription field force to re-enter the domestic Formulation business.

Valuation and view

Over the last 1-2 years, PIEL has curtailed disbursements in Wholesale Lending and reduced exposure to its top 10 clients by over 25%. This cautious stance is likely to continue for the next few quarters too, while the company looks to ramp up its Retail Lending business. The DHFL acquisition is value-accretive and will offer it a ready platform to expand its Retail Lending products. While it is still early days, the initial asset quality outcome, post lifting of the moratorium on term loan EMIs, has been positive. As the economic scenario gets better, asset quality is likely to improve – this will have a second-order impact on availability and cost of debt capital. The company is well-placed to deliver consistent mid-teens sales CAGR over FY21-23E in the Pharma segment. Strategic inorganic acquisitions would boost sales growth further as and when it is executed, subject to appropriate valuations. We value PIEL on a SoTP basis (Exhibit 12) to arrive at our TP of INR2,170. Reiterate Buy.

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