Jefferies repeats ‘night is darkest before dawn’, for Piramal Pharma this time

Piramal Pharma was demerged from Piramal Enterprises and got listed on the bourses in October last year. Though the following performance has not been anything to write about.

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Jefferies feels Piramal Pharma is trading “at a steep discount to comparable Indian peers” and hence it makes a case for buying the stock. It feels that the company’s business is at an inflection point now.

Piramal Pharma was demerged from Piramal Enterprises and got listed on the bourses in October last year. Though the performance has not been anything to write about. After listing at around Rs 201, it fell down to Rs 113 last week.

“Night is darkest before dawn,” said Alok Dalal, Equity Strategist at Jefferies, suggesting that investors should not read too much into the selloff.

However, Dalal’s comment – repeated verbatim from another report for a different stock from his colleagues – has a history.

Last year, when Zomato was in a free fall following the IPO lock-in expiry, brokerage firm Jefferies came out with a report titled night is darkest before dawn with target price that was about double of the prevailing prices. However, it did not take much time for analysts at the firm to throw Zomato out of its India Model Portfolio citing “a potential rise in competitive activity in the sector.”

Cusp of turnaround 

“Piramal Pharma’s contract development and manufacturing (CDMO) business is on the cusp of a turnaround as headwinds faced over the last 12-18 months are getting resolved,” Dalal said. “CDMO turnaround, steady growth for complex hospital generics and scaleup of consumer health should drive 12 percent and 21 percent revenue and Ebitda CAGR over FY22-25 and allay leverage concerns.”

According to the analyst, the CDMO business of the company has faced execution challenges, high attrition at overseas sites and margin impact from higher raw material cost over the last 12-18 months, which has weighed on the stock price.

The turnaround will be a key catalyst for the stock from hereon, according to Jefferies.

Complex Hospital Generics, which has 29 percent of FY22 revenue, is the most profitable division of Piramal Pharma. Dalal said the outlook is very positive for this cash generating segment. “Stable growth in the US inhalation anesthesia market where PPL has leadership position, addition of fresh capacities and new injectable launches in non-US markets should allow double-digit growth over the next few years with a stable margin profile,” he added.

Piramal Pharma trades at 13.3x and 10.6x FY24 and FY25 EV-EBITDA, respectively.

Jefferies has set a 12-month target of Rs 150 on the stock. As of 11.20 am on January 3, the stock traded up nearly 3 percent at Rs 126.

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