Buy Piramal Pharma Ltd for the Target Rs. 240 by Motilal Oswal Financial Services Ltd
2Q – A miss; higher opex drags earnings
Work in progress to enhance CDMO offerings/expand CHG portfolio
* Piramal Pharma (PIRPHARM) delivered in-line revenue for 2QFY62. However, it delivered a miss on EBITDA/PAT for the quarter. Higher operational costs impacted the quarter’s performance.
* While CDMO sales growth was impacted by the high base of the past year (a large contract from a customer in FY25), PIRPHARM is witnessing health improvement in biotech funding, driving order inflows.
* PIRPHARM witnessed a slowdown in complex hospital generics (CHG) till 1HFY26. That said, the company is taking initiatives to supply Sevoflurane to Ex-US markets and expand its offerings in this segment.
* We cut our EBITDA estimates by 21%/21%/17% for FY26/FY27/FY28, factoring in: a) a gradual scale-up of the CDMO business, b) supply challenges in the CHG segment, and c) higher operational costs. We value PIRPHARM on an SoTP basis (18x EV/EBITDA for CDMO business, 12x EV/EBITDA for CHG business, and 13x EV/EBITDA for consumer health (ICH) business) to arrive at a TP of INR240.
* While near-term headwinds have impacted business performance, stemming from inventory destocking in one CDMO project and supply constraints in the CHG segment, PIRPHARM continues to: a) enhance its customer base and secure additional contracts from existing customers in the CDMO segment and b) introduce new products in the CHG segment. With operational costs already being incurred, we expect operating leverage to drive earnings as revenue growth revives. Reiterate BUY.
Lower revenue/higher opex leads to operating deleverage YoY
* PIRPHARM's revenue declined 9% YoY to INR20.4b (in line) for the quarter.
* The CDMO segment’s (52% of total sales) revenue declined 21% YoY to INR10b.
* The Complex hospital generics segment’s (CHG; 32% of total sales) revenue was almost flat YoY at INR6.4b.
* The Indian consumer healthcare segment’s (ICH; 16% of total sales) revenue grew 15% YoY to INR3b.
* Gross margin expanded 110bp YoY to 65.6%.
* However, EBITDA margin contracted 740bp YoY to 7.8%, largely due to lower operating leverage (employee cost/other expenses up 500/370bp as a % of sales).
* EBITDA declined 54% YoY to INR1.6b (our est: INR2.2b).
* Adj. loss came in at INR1b (our est: PAT of INR40m) for the quarter vs PAT of INR226m in 2QFY25.
Highlights from the management commentary
* PIRPHARM expects revenue to remain flat YoY in FY26. EBITDA margin is expected to moderate to low teens (including other income) vs the earlier guidance of mid-teens in FY26. 2H is expected to deliver a meaningfully better performance compared to 1HFY26.
* FY30 guidance to achieve USD2b revenue and 25% EBITDA margin in FY30 remains intact.
* Net debt reduced by INR2.2b, led by tight control on WC requirements and capital expenditure.
* The company expects capacity utilization at its overseas facilities to pick up on the back of new contracts, which is also expected to enhance profitability at these sites.
* While there is increased competition in the Isoflurane market, PIRPHARM remains confident in retaining its market share, supported by robust manufacturing capabilities and strong supply chain management.
* PIRPHARM has planned a new commercial-scale suite for payload-linker development and manufacturing. Along with prior investments, total investment in the Riverview and Aurora facilities now amounts to USD60m, aimed at significantly increasing capacity for producing APIs, HPAPIs, and payload-linkers.
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