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Geared to drive robust operating leverage across segments

We met Piramal Pharma (PIRPHARM) management to understand the company’s business outlook.

* PIRPHARM is well-positioned to offer differentiated services at the product development and commercial manufacturing stage in the CDMO segment. Industry tailwinds, such as the US Biosecure Act, should further boost business prospects in this segment.

* With its established presence in complex hospital generic (CHG) products (like Sevoflurane and baclofen), PIRPHARM can grow this business by adding more products, expanding into new markets and gaining market share in the existing markets.

* A focused approach to power brands and an enhanced distribution network should drive better profitability for its India consumer health (ICH) segment.

* We maintain our BUY rating on PIRPHARM with a TP of INR260, based on SOTP (17x EV/EBITDA for CDMO business; 13x EV/EBITDA for CHG and India consumer health business).

CDMO: Improved utilization, enhanced offerings to improve prospects

* PIRPHARMA has been increasingly focusing on (i) innovation-related work (50% of CDMO revenue), (ii) differentiated offerings with lower competition and higher margins, and (iii) securing more integrated orders with higher value proposition.

* The company has significantly invested in new differentiated capabilities, e.g., ADCs, HPAPI, on-patent API, mAbs and Peptides. It is also investing in capacity expansion and debottlenecking of the existing plant.

* Additionally, it has a strong pipeline of 151 molecules under various stages of development. PIRPHARMA has witnessed a 3x jump in the development pipeline since FY17.

* Revenue from the on-patent molecule doubled YoY to USD116m in FY24. With a large number of molecules in phase-3 development, PIRPHARMA should witness a rise in commercial CDMO contracts from these molecules going forward.

* Revenue from differentiated offerings clocked a CAGR of 22% over FY21-24 to USD253m and their revenue share in total CDMO revenue increased to 44% in FY24 from 27% in FY21.

* By 2030, the company targets USD1.2b of total CDMO revenues with ~25% EBITDA margins.

CHG: Efforts under way to build pipeline, expand reach

* PIRPHARMA reported a 10% CAGR over FY16-24 in CHG business, led by a strong brand recall and well-established infrastructure.

* Given the strong presence of Inhalation Anesthesia (IA), especially Sevoflurane in the developed markets like the US and EU, PIRPHARM plans to expand in the ROW market.

* For the expansion, the company is investing in additional lines at Digwal and Dahej facilities to manufacture Sevoflurane. These lines would be vertically integrated lines.

* Moreover, with a strong brand franchise in Intrathecal and Pain management, PIRPHARM is further investing in new differentiated products and has a pipeline of 24 drugs with a market size of USD2.2b.

* The company aims to deliver a 15% CAGR to USD600m and EBITDA margin of 25%+ over FY25-30.

ICP: Extensive marketing/distribution to better brand recall

* PIRPHARMA targets a CAGR of 26% in ICH revenue over FY24-FY30 to USD200m, driven by a scale-up in power brands, omni-channel expansion, new product launches in e-commerce, and leveraging automation.

* In the past three years, the company has launched 150+ new products and SKUs and has spent 13-16% of its ICH revenues on media and trade promotion, which resulted in a 29% CAGR in its power brands. However, it expects to reduce promotional expenses gradually.

* The company targets to build power brands with profitability of INR1b to INR5b (Little’s, Lacto Calamine, Polycrol, Tetmosol, i-range and CIR).

* The e-commerce channel (20% of ICH revenue) grew 58% over past three years. PIRPHARMA has a presence on 20 e-commerce platforms, has its own D2C platform and has a strong presence across retail and trade stores.

* The ICH business clocked a strong 19% CAGR over FY18-24 to USD118m, led by a strong brand recall, new launches and leveraging alternate channels.

* PIRPHARMA plans to utilize omni-channel expansion to increase footprints in rural markets, build coverage in top-weighted outlets in the existing towns and maximize distribution across modern trade outlets

Valuation and view

* We expect PIRPHARMA to deliver a CAGR of 16%/28%/74% in revenue/EBITDA/ PAT over FY25-27, aided by a healthy order inflow in CDMO, the expansion of its IA portfolio in the ROW market, and new launches and increasing reach of power brands. A decline in interest expenses could also improve profitability.

* We maintain our BUY rating on PIRPHARM with a TP of INR260, based on SOTP (17x EV/EBITDA for CDMO business; 13x EV/EBITDA for CHG and India consumer health business). We expect the performance to scale up further for all three segments with better operating leverage over the next 2-3 years.

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SEBI Registration number is INH000000412