Demerger could fetch higher valuations for Piramal Pharma

The company is focussing on growth and is scouting for more acquisitions

The demerger and consolidation of the pharma business of Piramal Enterprises under Piramal Pharma (PPL) is a positive move for shareholders both from the valuation and growth perspectives. Given the holding company structure, analysts were valuing the pharma segment at a 20 per cent discount.

With a separate listed entity, the estimated enterprise value of PPL could move up from the Rs 31,500 crore that analysts at Motilal Oswal Research had pegged for the pharma business. A year ago the Carlyle Group had picked up a 20 per cent stake in the pharma business valuing the company at $2.8 billion or just under Rs 21,000 crore.

Going ahead, gains for investors will depend on the growth trajectory and expansion of the four verticals- the contract development and manufacturing business or CDMO, complex hospital generics, India consumer healthcare and ophthalmology. 62 per cent of the company’s revenues of Rs 5,776 crore comes from the CDMO business.

A $55-70 billion addressable market size for the 13th largest CDMO player in the world offers enough opportunities. The company’s CDMO business grew at 13 per cent annually over the last decade with growth continuing to be strong at 17 per cent in the June quarter.  The company has been using the inorganic route to grow the CDMO business acquiring three companies/assets over the last one year.

The company indicated that the inorganic strategy will continue going ahead as there is a leeway in terms of debt to equity ratio (0.47 times) and debt to operating profit of 2 times. While the company is evaluating options including entry into domestic formulation business, it has refrained so far given high valuations. The focus for Piramal Pharma, according to Ajay Piramal, chairman of Piramal Group, will be on growth and higher returns from investments, rather than reduction of the Rs 3,200 crore of debt.

Piramal Enterprises’ pharma business is currently being valued at 19 times its FY23 enterprise value (EV) to operating profit broadly in line with those of large generic players. However, if it can scale up its CDMO business and grow the niche products in the hospital products, valuations could see a rerating. CDMO players Divi’s and Gland Pharma are valued at an EV to operating profit  over 30 times their FY23 earnings estimates.