Piramal Pharma Q3FY23 Notes

Fig: Technical Chart till 9th Feb 2023

I have tried to capture PPL’s Q3FY23 conference call updates on three buckets: Industry(encapsulating the recent trends in the geographic location & in the business domain .. here CDMO & Pharma space), Business Ops (specific updates regarding the business operations), & Capex (summarizing Capex related Informations).

Fig: PPL Q3FY23 Results

Industry:

· Inflation across EU — Fuel, Energy, & Manpower wage

· Delay in client’s decision making

· Soft demand for Generic CDMO

· This quarter also had the influence of the FX effect, weakening of Rupee

· CDMO Industry is cyclical, the next 6 months will be challenging. But underline demand is still strong [This is like the IT industry, slightly more cyclical]

· CDMO clients do come through till the end stage of production after initial trials else they may lose on Time to market

Business Ops:

· Rights issue approved, Size Rs 1050 Cr

· Revenue growth YoY: CDMO — 14%, CHG — 9%, & ICH — 19%

~ Revenue % for business: CDMO — 59% , CHG — 30%, & ICH — 11%.

· Rights issue to support Capex & Debt Reduction

· Lower revenue caused lower absorption of our fixed overhead

· ICH has higher sales cost this quarter, CDMO clients delayed making payments

· Strategy to counter lower Revenue

· Net Debt — 4800 Cr (not Gross)

· Spent and budget 100 Mn USD / Rs. 800 Cr in last 9 Months already

· Net Debt/EBITDA < 4, Target. Currently, it's at 5.28 (Gross Debt/EBITDA)

· US Plants are loss-making… Any plan to sell off some units?
— It's a game of capacity, Once the market turns they will turn OPM positive. We don’t plan to sell off any of the units.
— Indian plants don’t face these challenges

· By Q2FY24, Debt will be reduced using raised capital using Rights Issue

· CDMO Customer split: Big Pharma 1/3rd, Biologics 1/3rd & 1/3rd for generics (…safe case to assume revenue split 60% Generics & 40% Innovator/non-generics)

· Company focuses on improving the Innovator percentage, but it will take time

· Q4 Numbers are the highest across the year, hence the inventory is currently high

Capex Updates:

· 3 debottlenecking facilities Capex went live

· No FDA observations in the last 12 years

· Ahmedabad Capex went live just yesterday. (9th Feb 2023)

· CDMO & CHG had a bottleneck issue, it has been resolved (expecting higher revenue numbers)

· Asset turn for the 2 new Capex would be around 2–2.5x (My Understanding — USD 42 Mn Capex done here. Hence, 500 Cr Revenue per year after 2 years)

· Many of the Global CDMO Production sites don’t have the fungible capacity, hence PPL’s CDMO will have slightly lesser turnover in comparison to other local CDMO Player

*************************************************************

My Take: (Biased as I already own it)

I agree with the management that the Inflation & slow growth across the Developed market has been the reality last quarter. Currently, the employees hired are still under training to operate the new Capex, Hence the low revenue turnover resulting in poor capturing of fixed cost is a fair statement in this Con-call.

Fig: PPL’s 4 Business verticals (~JV with Allergan fetched 400 Cr revenue in FY22 with 30% OPM)

Management has hinted at the higher Q4 Numbers. With the Capexs having recently gone live, it will at least take until Q1 FY24 to show in numbers. Hence, 6 more months of pain for the current investor with the Rights issue being an interesting event to look for adding more to this losing trade. (especially if this brilliant business is available at 1.67x of Sales)