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Operating performance above est.; FY25 guidance intact

* Piramal Pharma (PIRPHARM) delivered better-than-expected operational performance in 2QFY25 fueled by superior traction in the CDMO segment (59% of sales). Following earnings deterioration in FY23/FY24, PIRPHARM is exhibiting healthy recovery in 1HFY25. Considering the advancement in clinical development of certain CDMO projects, the company is investing USD80m to double its sterile fill-finish capacities at the Lexington site.

* We trim our FY25/FY26/FY27 estimates by 6%/3%/4% to factor in: 1) higher financial leverage, and 2) ongoing supply-chain issues in the injectable pain management segment. Compared to 15%/37% YoY revenue/EBITDA growth for 1HFY25, we expect 11%/15% YoY growth in revenue/EBITDA to INR50b/INR9b in 2HFY25.

* We value PIRPHARM on an SOTP basis (20x EV/EBITDA for the CDMO business, 12x EV/EBITDA for the complex hospital generics (CHG) business, and 13x EV/EBITDA for the India consumer products (ICP) business) to arrive at our TP of INR310. With enhanced inquiries on the CDMO front at industry level in India, we believe PIRPHARM is well poised to benefit from its differentiated capabilities and capacities. Further, it is increasing its offerings in the CHG segment through an established global network. Accordingly, we expect its PAT to scale up to INR7b by FY26 from INR560m in FY24. Reiterate BUY.

Segmental mix impact more than offset by higher operating leverage

* PIRPHARM’s revenue rose 17% YoY to INR22.4b (our est.: INR22.1b) for the quarter. The CDMO segment’s (59% of total sales) revenue rose 24% YoY to INR13.2b. The CHG (29% of total sales) revenue rose 9% YoY to INR6.4b. The ICP (12% of total sales) revenue grew 8% YoY to INR2.8b.

* Gross margin contracted 220bp YoY to 64.5% due to product mix change.

* However, EBITDA margin expanded 130bp YoY to 15.2% (our est: 11.8%), due to lower staff costs/other expenses (down 200/150bp as a % of sales).

* EBITDA grew 28.6% YoY to INR3.4b (our est.: INR2.6b) for the quarter.

* Adj profit came in at 4.5x YoY to INR226m (our est: INR255m) for the quarter, fueled by improved EBITDA and higher other income.

* For 1HFY25, its revenue/EBITDA grew 15%/37% YoY to INR42b/INR5.5b, while adj. loss for 1HFY25 declined 29% YoY to INR662m.

Highlights from the management commentary

* The company has reiterated its full-year guidance of early-teen growth in revenue and EBITDA.

* The company expects 2H to be better than 1H. Having said this, 3QFY25 margins could get hit due to a one-off opex in CHG business.

* PIRPHARM is seeing a rise in order inquiries and site visits, driven by the Biosecure Act and supply chain diversification efforts. This is expected to help the company gradually secure more business over the medium term.

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