Buy Piramal Pharma Ltd. For Target Rs.190 - Motilal Oswal Financial Services
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CDMO segment drives earnings
Ends FY24 with strong turnaround
* Piramal Pharma (PIRPHARM) delivered better-than-expected operational performance for the quarter. Compared to adj. loss of INR800m in FY23, PIRPHARM’s effort has led to adj. PAT of INR560m for FY24. This was largely driven by improved execution in Contract development and manufacturing organization (CDMO) business and India consumer health business. Operational constraints adversely impacted sale growth in the complex hospital generics (CHG) segment for FY24.
* We raise our EBITDA estimate by 11%/22% for FY25/FY26 to factor in a) robust order inflow in the CDMO segment, b) the expansion of on-patent commercial manufacturing within the CDMO segment, and c) the strategic initiatives to strengthen its presence in ROW markets and pursue backward integration in the CHG segment.
* However, we lower PAT estimate for FY25 by 17% to factor in higher tax rate. We value PIRPHARM on an SOTP basis (17x EV/EBITDA for CDMO business; 13x EV/EBITDA for CHG and India consumer health business) to arrive at a price target of INR190.
* PIRPHARM has demonstrated a strong turnaround in its business across segments, showcasing improved sales growth and profitability in FY24. Anticipating further momentum, particularly in the CDMO and CHG segments, along with enhanced operating leverage over the next 2-3 years, we maintain our BUY rating on the stock.
Strong operating leverage led margin expansion for the quarter
* PIRPHARM’s revenue grew 18% YoY to INR25.5 b (est: INR24.3b) in 4QFY24. The CDMO segment’s (65% of total sales) revenue grew 28% YoY to INR16.5b. The ICH (9% of total sales) revenue was up 16% YoY to INR2.4b. The CHG (27% of total sales) revenue declined 4% YoY to INR6.8b.
* Gross margin contracted 90bp YoY to 60.3% due to a change in product mix.
* However, EBITDA margin expanded 450bp YoY to 20.8% (our est: 14.6%), largely due to positive operating leverage. Employee expenses and other expenses declined 250bp/290bp as a % of sales.
* As a result, EBITDA grew 51% YoY to INR5.3b (our est: INR4.8b).
* Interest costs rose 9.6% YoY to INR1.1b in 4QFY24.
* After adjusting for the one-off write-off (INR310m), PIRPHARM posted a growth of 2.3x YoY to INR1.1b (our est. profit of INR2.3b).
* For FY24, revenue/EBITDA grew 15%/64% YoY to INR81.7b/INR11.9b. The company registered a profit of INR560m vs. a loss of INR798m in FY23.
Highlights from the management commentary
* PIRPHARM guided for low-teens YoY growth in revenue for FY25.
* PIRPHARM would incur one-time USD8-9m toward opex in the CHG segment.
* It would be launching four new injectable products in the US and Europe in the CHG segment
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