Piramal Pharma Shares Gain After Jefferies Initiates Coverage With 'Buy'

Shares of Piramal Pharma Ltd. gained after Jefferies initiated coverage on the stock with a 'buy' call.

Contract manufacturing turnaround, steady growth for complex hospital generics, and scale-up of consumer health should drive annualised growth of 12%/21% for revenue/Ebitda over FY22–25, allaying leverage concerns, the brokerage said in its Jan. 2 note.

The scrip is trading at "attractive" valuations of 13.3 times and 10.6 times FY24 and FY25 enterprise value-to-Ebitda, respectively, Jefferies said, calling it a "steep" discount to Indian peers.

Jefferies initiated coverage on the stock with a 'buy' rating and price target of Rs 150, implying an upside of 29%.

Piramal Pharma's contract development and manufacturing business, which contributed to 60% of the company's revenues in FY22, suffered a heavy blow over the last 12 to 18 months due to execution challenges, high attrition at overseas sites, and margin pressure due to high raw material costs, the brokerage said.

Now, as raw material prices have normalised, people have been rehired, customer audits have resumed, and while the company gears up for new capacities in FY24, the growth in CDMO is likely to bounce back, Jefferies said.

"Over the longer run, PPL's (Piramal Pharma's) niche capabilities and flexible manufacturing infrastructure should strengthen its pipeline of under-patent projects (currently 12% of CDMO sales) and improve growth visibility."

Turnaround in CDMO operations beginning in 2HFY23 is the key catalyst, while order inflow delays or execution issues are key risks, according to the brokerage.

According to Jefferies, Piramal Pharma's Complex Hospital Generics business is a "cash-generating business".

The business, which accounted for 29% of the drug maker's revenues in fiscal 2022, is its most profitable division, Jefferies believes. The business includes complex and differentiated inhalation and injectable products with high entry barriers.

The brokerage expects stable growth in the U.S. inhalation anaesthesia market, the addition of fresh capacities, and new injectable launches in the non-U.S. markets to enable the company to clock double-digit growth over the next few years with a stable margin profile.

Jefferies expects Piramal Pharma's consumer health business to turn around in fiscal 2024.

The segment, which contributed 11% of the FY22 revenue, has been posting "high" growth of 30% CAGR over FY19–22, according to the brokerage.

This growth was led by new product launches, acquisitions, and a multi-channel marketing strategy. However, the business lags Ebitda breakeven due to the drug maker's aggressive investments in advertising and promotion.

Piramal Pharma has guided for a turnaround in profitability once the business reaches a revenue size of Rs 1,000 crore, which the brokerage believes can be achieved sometime in FY24.

The company clocked revenues of Rs 440 crore in the first half of FY23.

The stock gained as much as 3.35% during early trade. It closed 1.14% higher, compared with a 0.19% gain in the benchmark Nifty 50.

All four analysts tracking the stock maintain a 'buy', according to Bloomberg data, and the average 12-month consensus implies an upside of 49.9%. The relative strength index is 44.