Analyst Corner: Maintain ‘buy’ on Piramal Enterprises; TP Rs 2,278

Piramal Enterprises’ (PEL) wholly owned pharma subsidiary Piramal Pharma (PPL) has announced the acquisition of Hemmo Pharma for an upfront cash consideration of Rs 7.75 billion and additional milestone linked payments. PPL believes that Hemmo’s forte in peptide API manufacturing will not only complement the existing CDMO business but also provide additional growth opportunity as well as provide vertical integration led benefits. In our assumption, the deal is valued at 7.0xFY21E sales and 20.0xFY21E EV/EBITDA.

We expect Hemmo to grow its revenue at a CAGR of 30.0% over FY21E-FY23E. We remain positive on PPL’s unique positioning in the pharma business with its CDMO services and critical care products. Maintain ‘buy’ with a revised target price of Rs 2,278/share (earlier: Rs 2,265).

Hemmo Pharma — PPL has acquired 100% of Hemmo Pharma for an upfront cash consideration of Rs 7.75 billion and additional milestone linked payments. This acquisition is expected to complete within next 4-6weeks subject to completion of necessary approvals. Hemmo is one of India’s largest manufacturers of synthetic peptides with a legacy of nearly four decades. It has a strong expertise in both solution and solid phase synthesis of peptides with a healthy commercialised product basket and pipeline of under development products.

Globally peptide API market has a size of $2 billion which is growing at 6-8% every year. Hemmo generates ~75% of sales from exports and ~67% is to the regulated market. It has an R&D facility in Thane and a world class GMP manufacturing facility at Turbhe that is deemed compliant by USFDA, EU and several Asian regulators.

Financial impact — PPL believes that Hemmo will bring another growth lever for its CDMO business by introducing integrated services with development and manufacturing of peptide drugs. Additionally, synergies from vertical integration between the two companies coupled with higher scale and reach for commercialised (and under development) drugs of Hemmo would result in higher growth and better profitability. We assume Hemmo sales for FY21E to be Rs 1.1 billion growing 30% over FY20 with a margin range of 30-35%. On this financial performance, valuation of the acquisition is pegged at 7.0xFY21E sales and 20.0xFY21E EV/EBITDA. PPL’s debt level will rise to Rs 33.8 billion ($450 million) post this acquisition.