Piramal Enterprises

Pharma demerger to drive focus; long term positive

Diversified | Company Update | August 29, 2022

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In our management meeting, Piramal Pharma (PPL) highlighted that its demerger from
: 1,935 PEL is on track (record date 1st Sep’22) and expects to get listed by Q3FY23. Financials
in recent past have been hurt by execution challenges – attrition, higher costs, supply
: 2,500 (no chg)
chain issues etc. – but company is addressing this through senior hires, capex, etc. and
: 29%
expects recovery from H2FY23. While PPL has largely scaled up through inorganic
initiatives, competitive position in three scalable segments with high entry barriers
lends a long runway for growth. Our PPL equity value is Rs 227 bn (~USD 2.9 bn) on 14x
: 239 mn FY24E EV/EBITDA with post demerger value of Rs 190/share.

Free Float : 57%

Market Cap (USD) : 5,775 mn
Piramal Pharma (PPL) at a glance
After selling its domestic business (55% of FY10 sales: Rs 36.7 bn) to Abbott (for USD 3.8
52-week High/ Low (Rs) : 3,013/ 1,561
bn) in 2010, PPL has rebuilt its pharma sales to Rs 67 bn in FY22 (~4.4x FY11) led by
Avg. Daily Volume (6M) : 0.91 mn
organic/ inorganic initiatives (spent USD 500-600 mn in the last 7+ years for M&A). It now
Avg. Daily Value (6M;USD) : 21.83 mn operates in 3 segments – (1) CDMO (Contract Development & Manufacturing, ~59% of
Bloomberg Code : PIEL IB sales), (2) Complex Hospital Generics (CHG, ~30%) and (3) Consumer OTC (ICH, 11%).
Promoters Holding : 43%
FII / DII : 35% / 8% Near-term challenges remain but long-term outlook positive
PPL’s financials in recent past have been weak amid challenges in CDMO (attrition, RM
Price Performance availability, logistic delays and customer led delivery schedule changes) and CHG (third
party CMO supply constraints). EBITDA margin was impacted by (1) lower growth in high
(%) 1M 3M 12M
margin CDMO and (2) higher packaging/ RM/ logistic and operating costs. While near term
Absolute 9.2 17.6 (24.7)
challenges remain, we expect recovery in H2’23 led by (1) CDMO recovery on new hires
Relative 8.5 12.0 (28.0) including COO (Mr Herve Berdou, ex-Lonza), capacity addition (USD 157 mn organic
Source: Bloomberg capex) and increasing customer audits (55 in Q1’23), implying potentially better order
book from Nov’22, (2) scale-up in inhaled anesthesia portfolio, (3) growth in ICH (brand
extensions, new launches) leveraging strong distribution network. We expect EBITDA
margin to recover to ~19/ 21% by FY23/ 24 (18% in FY22) on operating leverage.

Valuation and outlook

While recent execution challenges in CDMO and supply chain challenges in CHG remain
in near term, we expect demerger to improve focus on CDMO (integrated offering across
locations), CHG (high entry barrier business) and OTC (fast growing underpenetrated
market). Carlyle PE had invested USD 490 mn for a 20% stake in PPL in Oct’20 at an EV of
USD 2.78 bn (equity value of ~USD 2.45 bn). Our PPL equity value is Rs 227 bn (~USD 2.9
bn) on 14x FY24E EV/ EBITDA. We value PEL’s 80% stake in PPL at Rs 760/share (SoTP)
and post-demerger PPL value/share (incl. Carlyle) of Rs 190 (refer exhibit 27).

Financial Summary (Consolidated)

Y/E March FY21 FY22 FY23E FY24E FY25E
Revenue (Rs mn) 1,28,094 1,39,933 1,61,296 1,85,008 2,09,618
EBIDTA (Rs mn) 36,413 26,692 35,986 46,640 54,114
Prakash Agarwal PAT (Rs mn) 14,129 19,988 27,386 35,398 41,117
prakash.agarwal@axiscap.in EPS (Rs.) 63 84 115 148 172
Praveen Agarwal EPS Change (%) - 33.7 37.0 29.3 16.2
praveen.agarwal@axiscap.in Book Value (Rs) 1,508 1,487 1,562 1,658 1,770
Mehul Sheth EBIDTA Margin (%) 28.4 19.1 22.3 25.2 25.8
mehul.sheth@axiscap.in PAT Margin (%) 11.0 14.3 17.0 19.1 19.6
RoAA 1.9 2.3 2.6 3.1 3.2
Sudarshan Agarwal
RoAE 4.4 5.8 7.5 9.2 10.1
sudarshan.agarwal@axiscap.in
Source: Company, Axis Capital; Note: We have factored in DHFL’s financials in financial services from FY22
Shreya Khandelwal
shreya.khandelwal@axiscap.in

Download Axis Capital is also available on Bloomberg (AXCP<GO>), Reuters.com, Firstcall.com and Factset.com.
1
FOR IMPORTANT DISCLOSURES AND DISCLAIMERS, REFER TO THE END OF THIS MATERIAL
 Piramal Enterprises
Company Update

Piramal Pharma – a three-pronged business model

After selling its domestic formulations business (~55% of FY10 sales of Rs 36.7 bn) to Abbott
(for USD 3.8 bn; 9x FY10 sales, 29x FY10 EBITDA) in 2010, Piramal has rebuilt its pharma
segment to Rs 67 bn in sales in FY22 (~4.4x of FY11 sales). It currently operates in three key
segments – (1) Piramal Pharma Solutions (CDMO business) – integrated solutions across drug
life cycle, (2) Piramal Critical Care/ Complex Hospital Generics (CHG) – presence in high entry
barrier complex hospital generics and (3) India Consumer Healthcare/ OTC (ICH) – well-
recognized brands with large distribution network. Additionally, it has 49% stake in Allergan
India (JV) with ophthalmology player (Allergan) since 1996 wherein it is the exclusive
manufacturer for ophthalmic products (supplied through Pithampur facility) for the JV.

Exhibit 1: Pharma business then and now

Acquisitions

FY10 Acquired DRG (healthcare insights & FY22

analytics business) in 2012
revenue: Rs 36.7 bn revenue: Rs 67.0 bn
Acquired molecular imaging development
Piramal Healthcare portfolio of Bayer Pharma in 2012 Piramal Pharma Ltd

Acquired 5 injectable anesthesia/pain

Domestic formulations
(54% of sales)
products from Janssen in 2016
Piramal Pharma Solutions
Acquired intrathecal spasticity portfolio + (59% of sales)
2 under development pain products from
Mallinckrodt in 2017

Acquired Hemmo Pharma – one of largest

Pharma Solutions peptide API manufacturers in 2021
(24% of sales) Piramal Critical Care
(30% of sales)
Exits
Piramal Critical Care
(9% of sales) Sold domestic formulations
(Rs 20 bn sales in FY10) to Abbott
India Consumer Products
division/ OTC (11% of sales)
Piramal Diagnostics Sold diagnostic business to SRL in 2010
Services Ltd
(6% of sales) Shut down NCE research unit in 2014

Sold the imaging business to Alliance JV with Allergan

Others including OTC Medical Group in 2018
(49% stake)

Sold the DRG business to

Clarivate in 2020

Source: Company, Axis Capital

August 29, 2022 2

 Piramal Enterprises
Company Update

Exhibit 2: PPL has competitive position in scalable segments with high entry barriers providing it a long growth runway
Business Segment
Geography
Target market (USD bn)
Market position
FY22 revenue (USD mn)
Structural growth
drivers and high
barriers to entry
Source: Company, Axis Capital; Note: Target market size for ophthalmology as per Piramal Pharma Day presentation in Feb’21. ^Opthal sales not part of reported topline as it
is a JV
CDMO
Global
60-70+
13th largest CDMO globally
531
# Growing pharma R&D and
outsourcing, especially by
emerging pharma
# Emergence of high growth
areas such as HPAPI, ADCs,
sterile injectables
# High switching costs and
need to reduce time to
market for customers
Complex hospital
generics
Global
~54
4th largest inhaled
anaesthesia player globally
268
# Concentrated markets
with fewer competitors than
other generic markets
# Better pricing
environment due to market
dynamics and challenges
around supply
# Long term contracts with
customers and GPOs
Indian Consumer Ophthalmology branded
Healthcare products - Allergan India
India India
~7 0.35
Ranked 10th in OTC #1 in ophthalmology
segment segment in India
99 54^
# Fast growing base of # Rising number of people
young, urban consumers with Glaucoma or retinal
with increasing health disease as they age
consciousness # Strong untapped potential
# Highly underpenetrated with India accounting for
consumer healthcare 25% of world's blind
market in India
# Evolving retail landscape
and emergence of e-
commerce channel

Exhibit 3: Margin impacted by Covid led higher costs (input, freight) and execution and supply related challenges
% of sales FY15 FY16 FY17 FY18 FY19 FY20 FY15-20 CAGR FY21 FY22 FY20-22 CAGR
CDMO 59 20,080 23,290 24,540 25,470 27,830 31,540 9% 36,160 39,600 12%
CHG 30 7,570 8,780 10,640 14,290 16,690 18,530 20% 16,690 20,020 4%
ICH 11 2,430 2,610 3,750 3,460 3,340 4,180 11% 5,010 7,410 33%
Total Revenue 100 30,080 34,670 38,930 43,220 47,860 54,190 12% 57,759 67,006 11%
EBITDA 4,270 5,130 6,600 7,940 10,190 14,360 27% 12,830 12,064 -8%
EBITDA margin % 14.2 14.8 17.0 18.4 21.3 26.5 1230 bps 22.2 18.0 -850 bps
Source: Company, Axis Capital; as % of FY22 sales

While growth momentum in recent quarters has moderated amid continued challenges in
 CDMO – execution challenges amid overseas talent attrition, logistics/ input material
availability and changes in delivery schedules by customers
 Complex Hospital generics – supply constraints from third party CMOs

EBITDA decline in recent quarters was led by

 Lower CDMO growth, higher third party CMO cost (for order fulfilment) and higher staff
cost for new hires
 Reinvestment of profits in India consumer business to grow focus brands and
 higher packaging/ RM/ logistic costs and operating costs

Exhibit 4: Recent quarterly performance impacted by challenges in CDMO/ CHG segment, ICH maintains robust growth momentum
(Rs mn) Q1'21 Q2'21 Q3'21 Q4'21 Q1'22 Q2'22 Q3'22 Q4'22 Q1'23
CDMO 6,140 8,660 8,460 12,900 7,190 9,250 9,220 13,940 7,730
Complex Hospital Generics 3,240 4,380 3,990 5,080 4,620 5,000 4,920 5,480 5,080
India Consumer Healthcare 1,040 1,400 1,300 1,270 1,810 1,970 1,670 1,960 2,110
Total Pharma 10,379 14,411 13,736 19,234 13,620 16,214 15,781 21,392 14,854
EBITDA 1,093 3,271 2,960 5,505 1,700 2,097 3,483 4,784 1,576
EBITDA margin (%) 10.5 22.7 21.5 28.6 12.5 12.9 22.1 22.4 10.6
Source: Company, Axis Capital

August 29, 2022 3

 Piramal Enterprises
Company Update

Exhibit 5: PPL has spent USD 500-600 mn over last 7+ years for inorganic growth
Year Companies Assets/ Product portfolio Acquisition value Comments
Acquisitions in CDMO segment
CDMO which is specialized
This deal enhanced company's existing capabilities in
Coldstream in manufacturing of
Jan'15 USD 30.65 mn developing sterile products and antibody-drug conjugates
Laboratories Inc cytotoxic injectable
with Coldstream’s know-how.
products
Acquisition was synergistic with Piramal's antibody drug
conjugates and injectable business.
Ash Stevens facility at
Aug'16 Ash Stevens USD 44.8 mn PEL invested USD 14 mn towards expansion and increased
Michigan, US
revenue from USD 20 mn to 39 mn in FY20, EBITDA margin
increased by 16%.
Solid oral dosage This acquisition helped expand offering of Piramal Pharma
Jun'20 G&W Laboratories manufacturing facility, USD 17.5 mn Solutions (PPS) by adding solid oral dosage from capabilities
Pennsylvania, USA in North America.
one of the largest USD 106 mn (Rs 7.75 bn) +
Mar'21 Hemmo Pharma manufacturers of peptide earn-outs linked to PPS will gain access to the growing peptide API market.
APIs achievement of milestones
Yapan's FY21/ H1FY22 sales was Rs 124/118 mn. The
India based CDMO for USD 16 mn (Rs 1.2 bn) for
Dec'21 Yapan Bio investment allows it to broaden its service offerings in the
biologics/ vaccines 33.3% stake
biologics CDMO space.
Acquisitions in CHG segment
Portfolio of five branded
products in the injectable
USD 161.2 mn; additional This acquisition provided Piramal with marketing
anesthesia and pain
Oct'16 Janssen consideration may go up to authorization in over 50 countries. The acquired products
management- Sublimaze,
USD 20 mn had high entry barriers and enhanced company's profitability.
Sufenta, Rapifen, Dipidolor
and Hypnomidate
Initial consideration of
Portfolio of intrathecal USD 171 mn; additional In the 12 month ended September 30, 2016, the acquired
spasticity and two pain USD 32 mn payable portfolio generated revenue of USD 45 mn.
Mar'17 Mallinckrodt LLC
management products depending on financial EBITDA margin increased by 10% in FY20 vs. at the time of
under development performance of acquired acquisition.
assets over next 3 years
Jun'18 Edenbridge Miglustat Undisclosed Medication used to treat type I Gaucher disease.
completely acquired it by
Convergence The company develops and manufactures raw materials for
Oct'20 buying 49% stake from USD 9 mn
Chemicals inhalation anaesthesia products.
Navin Fluorine
Acquisitions in ICH segment
Little’s is country's oldest baby care product brand and is
present across a wide range of products including feeding
Baby care brand - entire
bottles, skin- care, grooming accessories, apparels and toys
Nov'15 Little's India product range across size USD 10 mn (Rs 750 mn)
for babies.
categories
Revenue increased from Rs 210 mn in FY16 to Rs 500 mn in
FY21.
Five brands including The deal helped PEL in expanding its presence in
MSD BV &
Dec'15 Naturolax, Lactobacil and USD 14 mn gastrointestinal segment through OTC route. Helped
Organon
Farizym improve profitability and ranking in OTC market.
Four consumer product Acquisition included brands namely, Ferradol, Neko, Sloan's
brands namely, Ferradol, and Waterbury's Compound and additionally, trademark
May'16 Pfizer USD 18 mn (Rs 1,208 mn)
Neko, Sloan's and rights for Ferradol and Waterbury's Compound for
Waterbury's compound Bangladesh and Sri Lanka.
The deal helped the company in strengthening its position in
Shreya Digeplex and associated
Nov'17 Undisclosed gastrointestinal segment and was complementary to its
Lifesciences brands
existing portfolio – Polycrol and Naturolax – in GI segment.
USD 500-600 mn +
Total undisclosed and milestone
payments
Source: Company, Axis Capital

August 29, 2022 4

 Piramal Enterprises
Company Update

Exhibit 6: Revenue/ EBITDA has grown at 14%/ 24% CAGR over FY11-22 led by organic/ inorganic initiatives

Revenue EBITDA EBITDA margin (%)

20.2 7.2 7.3 10.8 13.7 14.2 14.8 17.0 18.4 21.3 26.5 22.2 18.0
80
67
58
60 54
48
43
(Rs bn)

37 39
40 35
27 30
23
19
20 15 14 13
10 12
7 5 7 8
1 1 3 4 4
0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
Source: Company, Axis Capital

Contract Development and Manufacturing Organization (CDMO)

Piramal Pharma Solutions provides an integrated model of services spanning across early stage
(clinical phase I/II trials and discovery services) and late-stage services (clinical phase 3 trials,
development and manufacturing). It caters to the needs of its diversified customer base – global
big pharma, emerging biopharma and generic pharma companies across the product lifecycle
from discovery to commercial launch. As of FY22, it had undertaken 170+ successful integrated
programs, with some turning into strategic partnerships.

Piramal’s capabilities spanning both formulations as well as APIs included niche, complex areas
such as Highly Potent APIs (HP-APIs), Antibody Drug Conjugates (ADCs), Peptide APIs, Oral
Solid Dosage formulations, Potent sterile injectables, and Biologics and vaccines.

Exhibit 7: CDMO sales grew at 11% CAGR over FY12-22

50
39.6
40 36.2
31.5
27.8
(Rs bn)

30 25.5
23.3 24.5
20.1
20 17.9
15.5
13.5
8.8 10.2
10

0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
Source: Company, Axis Capital

August 29, 2022 5

 Piramal Enterprises
Company Update

Exhibit 8: CDMO FY22 revenue mix Exhibit 9: ~75% sales from developed markets
Nutrition, Discovery Others
etc. services 6%
6% 4%
India
19%
North
Development America
services 41%
26% Japan
3%
Commercial
CMO &
Generic
APIs
Europe
64%
31%
Source: Company, Axis Capital Source: Company, Axis Capital; Data as per FY22 sales

Exhibit 10: CDMO: Offering integrated solutions from discovery to commercialization

Off-
Discovery Preclinical Phase 1 Phase 2 Phase 3 Launch On-patent
patent

CRO Development Commercial manufacturing

(~4% of revenue) (~26% of revenue) (~70% of revenue)
India - Ahmedabad | Ennore | Digwal Late Phase Formulations I (OSDs*, injectables,
Discovery North America - Aurora (Canada) | Lexington (USA) | Ointments & Creams)
India - Ahmedabad Riverview (USA) | Sellersville (USA) India- Pithampur | Ennore | Mahad | Digwal | Turbhe
UK- Grangemouth | Morpeth USA - Sellersville | Lexington | Aurora | Riverview
UK - Grangemouth | Morpeth

>90% repeat
business Pipeline of 172 molecules in phase I,II & III
50+ APIs and 65+ FDFs across therapeutic areas
NA, EU account for 46% of development revenue from phase III
95% of revenue

Source: Company, Axis Capital; * Oral solid dosage formulations

August 29, 2022 6

 Piramal Enterprises
Company Update

Exhibit 11: Phase 3 accounts for 46% of development revenue Exhibit 12: Strengthened molecule development pipeline
Pre-clinical Pre-Clinical Phase 1 Phase 2 Phase 3
16%
200 188
34
160
Phase 3 54
46% 120
Phase 1
22% 80 52
84
40 10
21
18 3 16
0
Phase 2
FY17 FY22
16%
Source: Company, Axis Capital; Data as per FY22 sales Source: Company, Axis Capital

Recent challenges: Growth over the last few quarters has been impacted by execution
challenges related to raw material availability, manpower shortage (overseas talent attrition of
30-40 staff), logistics and changes in delivery schedules by customers. Both raw material and
manpower shortage was attributable to higher vaccine manufacturing (especially in developed
countries) as better profitability and government mandates led to shifting of RM supplies for
vaccine manufacturing and double-digit attrition rate was led by overseas quality control talent
being recruited by vaccine manufacturers. These factors led to execution challenges and
impacted EBITDA margin in the segment as the company shifted to higher-cost third party
CMOs for order fulfilment.

On manpower issue, it has nearly completed the recruitment process and candidates are
undergoing training. The company is also taking price hikes to help offset cost pressures by
quoting higher prices to new customers and renegotiating contracts with existing ones.

Outlook: It continues to invest in CDMO capacity expansion for niche capabilities (USD 157 mn
growth capex underway). During Q1FY23, it also appointed a new Chief Operating Officer for
CDMO division, Mr. Herve Berdou, who was earlier Global Head of Operations, Cell and Gene
Technologies at Lonza. While delayed customer decision making is leading to near-term
volatility, demand in the segment remains strong, and the company expects order book
improvement from Nov’22. We expect 14% revenue CAGR over FY22-24 driven by:
 Strong demand environment: Pharma companies are looking to de-risk their R&D efforts
and increase speed to market their drugs while reducing development and manufacturing
costs. This is leading to higher demand for CDMO players, with market expected to grow at
~7% over 2020 to 2026. Demand for Indian CDMOs has received an additional boost as
companies look to diversify from China. Despite global challenges in Biotech funding, it is
witnessing high RFP (Request For Proposals) activity from existing and new clients. Recent
pick-up in customer audits (55 in Q1FY23) is also a good indicator of improving order book
visibility.
 Capacity expansion: it is incurring capex of USD 157 mn for brownfield expansions at
multiple sites – (1) Aurora (operations commenced post API expansion), (2) Pithampur
(upgraded OSD capability with new block), (3) Digwal (expanded API capabilities through
operational efficiency), (4) Riverview (expanding for drug substance including HP-APIs) and
(5) Grangemouth and Morpeth (expanding for ADCs and APIs). Overall capacity utilization
across facilities is at 60%+.

August 29, 2022 7

 Piramal Enterprises
Company Update

 Order book visibility: It has 34 molecules in phase III, of which 15+ are expected to be
commercialized leading to near- to mid-term growth. Growth in under patent products
(10 to 18 in last two years), increase in order book of integrated projects (1.5x from FY19
to FY22) and higher share of revenue from commercial products under patent (3x to
USD 56 mn over last three years) to drive growth.
 Differentiated offerings: Piramal’s expertise in niche, differentiated areas such as highly
potent APIs, antibody drug conjugates, sterile injectable, hormonal OSDs etc. will help
attract clients leading to higher organic growth and higher margin due to complex nature of
services.
 Continues to add capabilities through M&A: It continues to look for M&A opportunities
(albeit with a smaller ticket size now) to add capabilities. Recent acquisitions of Hemmo
Pharmaceuticals (Mar’21) and Yapan Bio (Dec’21) added new technologies and capabilities
in peptides and large molecules, including vaccines and gene therapy.
 Leveraging diversified manufacturing presence: It has 13 CDMO manufacturing facilities
across North America, Europe and India. The widespread manufacturing presence allows
its customers (75% from developed markets) to choose (a) lower cost manufacturing in
India or (b) manufacturing which is closer to them albeit at a premium. Contribution to
CDMO sales from India and overseas facilities are evenly split.
 Strong quality and regulatory track record: Company employees ~1,000 personnel in its
quality department across sites and starting FY12 has cleared 285 regulatory (16 in Q1’23),
36 USFDA inspections and 1,432 customer audits (55 in Q1’23). It has never received an
Official Action Indicated (OAI) status for any of its manufacturing facilities from USFDA.

Complex Hospital Generics (CHG)

Critical Care segment is a portfolio (40 products) of differentiated, limited competition products
across inhalation anesthesia, injectable pain, intrathecal spasticity, antibiotics and other
medications. PEL has strong presence in global inhalation anesthetics market
(~USD 880 mn market size; limited players) and is the only company to have entire generation
of inhalation anesthesia (Desflurane, Sevoflurane, Isoflurane, Halothane).

Exhibit 13: CHG sales grew at 17% CAGR over FY12-22 led by market share gains in inhaled anaesthesia and therapy diversification

25
20.0
20 18.5
16.7 16.7
14.3
15
(Rs bn)

10.6
10 8.8
7.2 7.6
6.2
3.9 4.1
5 3.3

0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
Source: Company, Axis Capital

August 29, 2022 8

 Piramal Enterprises
Company Update

Exhibit 14: 4th largest inhaled anaesthesia player globally Exhibit 15: 75%+ revenue from regulated markets
Others
9% Others
22%

Intrathecal
16%
India
2%
Inhalation North
Anaesthesia Japan America
58% 7% 53%
Injectable
pain
17%
Europe
16%

Source: Company, Axis Capital; Data as per FY22 sales Source: Company, Axis Capital; Data as per FY22 sales

Exhibit 16: Diversified product portfolio

Acquired from Acquired from Mallinckrodt Acquired in Jun Acquired in Jun

Janssen in 2016 LLC in 2017 2018 2018

Injectable Capsule for

Inhalation Plasma Intrathecal Injectable for
anesthesia/ type I Gaucher Selected
anesthesia Volume Spasticity Pain Myxedema
Pain & Niemann- Anti-infectives
(58% of sales) Expander management Coma
management Pick disease

Sojourn Sublimaze ^ Haemaccel # Gablofen Levothyroxine Yargesa Ampicillin-

Sevoflurane USP Fentanyl citrate Polygeline Baclofen Sodium Miglustat Sulbactam #

Sufenta ^
Terrell Mitigo ^
Sufentanil Cafepime #
Isoflurane USP Morphione sulfate
citrate

Fluothane Rapifen ^
Alfentanil Ceftriaxone #
Halothane USP
hydrochloride

Torrane Dipidolor ^
Oxacillin #
Desflurane USP # Piritramide

Developed Acquired
Hypnomidate Ampicillin
through an distribution
Etomidate Sodium #
affiliate license in 2020

Muscarinic Muscle Piperazilin

Anticholinergic Relaxant Tazobactam #

Glycopyrrolate Rocuronium
Linezolid bag #
injection Bromide

Source: Company, Axis Capital; Note: # In select markets, ^ Controlled substance

Recent challenges: The company has been facing supply chain related challenges over the last
two quarters led by change of API/ formulation supplies (for Jannsen injectable anesthesia
portfolio acquired in 2016) from Jannsen to a third party CMO on the expiration of its 5-year
contract with Jannsen. It expects the situation to be sorted by H2FY23.

Outlook: The segment recovered significantly in FY22, growing by 20% YoY (vs -10% in FY21
due to lower inhalation sales), despite supply-related challenges (high input/logistic costs) and
constraints from third party CMOs (which it is in the process of remediating) driven by strong

August 29, 2022 9

 Piramal Enterprises
Company Update

sales of inhalation anesthesia (Sevoflurane and Isoflurane) and continued market share
leadership in intrathecal portfolio in the US. While generic competition in the segment is on the
rise, PPL’s multiple contract extensions with major GPOs in the US bode well to maintain its
market share. We expect 15% revenue CAGR over FY22-24 driven by:
 High entry barriers: Intrathecal/ inhalation capabilities require high initial investments for
supplying drug/ device combinations and sustaining medical devices such as vaporisers as
well as dedicated production facilities for difficult-to-manufacture products. Moreover,
high share of tender-based or institutional Group Purchasing Organisations (GPOs) driven
orders also creates hurdles for new entrants. PPL recently won multiple tenders for
Sevoflurane in EU and other geographies.
 Strong presence in inhalation portfolio (contributes ~58% to CHG revenue): Inhaled
anaesthesia sales are sticky in nature as it requires vaporiser which once installed work only
with that particular company’s product (liquid anaesthesia gas). Piramal is the largest
Sevoflurane supplier in the US (market share of ~40%), UK, Mexico, South Africa and Brazil
and ranks 4 in inhalation anaesthesia globally. While Desflurane approval in US has been
delayed (submitted response to queries awaiting FDA response) and likely to come in FY24
now (vs CY22 earlier), its global rollout in other markets, market share ramp-up
Sevoflurane in the US along with Sevoflurane line extensions in other markets will help
growth in the coming years. It is adding Sevoflurane capacities at Digwal to cater to RoW
market demand.
 Strong pipeline: As of Q1FY23, it has 40 SKU’s at various stages of development & approval
with an addressable market size of ~USD 7 bn. Out of these 40, 13 have already been
approved but pending launch, 11 are under approval and 16 are under development. During
Q1FY23, it launched 2 SKUs (injectable) of first to market generic opportunity in US and
launched pre-filled syringe (PFS) in Italy.
 Steady base business growth: Company is present across 3 forms of drug administration in
hospital i.e inhalation, intrathecal (spine) and intravenous (injectable). While it continues to
add new products through its strong pipeline, base business is also expected to maintain a
good growth momentum led by single digit growth in inhaled anesthesia market and low
double-digit growth in both intravenous and intrathecal markets.
 Leveraging global distribution reach: PEL has a wide distribution network with (a) direct
sales force in the US, Europe (UK, Italy and Germany) which allows it to launch new products
(developed in-house/acquired/in-licensed) at a lower cost and (b) strong local marketing
partnerships in other markets including Japan and South Africa which enable larger
geographical presence.

Exhibit 17: 4th largest player in global inhalation anaesthetics with overall market share of 14%
Market size
Product Major players (Ex-China) Comments
(USD mn)
Latest generation, Piramal does not have approval in US market but present in other
Desflurane 158 Sandoz, Baxter, Piramal
markets; US approval delayed and likely to come in FY24 now (vs CY22 earlier)
Most widely used because of its low cost and lower risk of respiratory irritation; ~40%
Sevoflurane 700 Abbvie, Baxter, Piramal, Novartis
market share in US
Isoflurane 17 Piramal, Baxter Older generation; not preferred due to more incidence of hyper reactivity
Halothane 1 Piramal Only used in third world countries
Total 875 Holds 14% market share in global (ex-China) inhalation anesthesia market
Source: Company estimates (IQVIA), Axis Capital

August 29, 2022 10

 Piramal Enterprises
Company Update

India Consumer Healthcare (ICH)

PPL is one of the leading players (10th largest) in the Indian consumer healthcare space with
established brands (such as Little’s, Lacto Calamine, I-Pill, Saridon and Supradyn) across OTC
categories (such as baby care, skin care, women care, allergy management, gastro, VMN, and
pain) marketed through its country-wide robust distribution network.

It started the OTC segment with acquisition of Saridon from Roche Holding and Lacto Calamine
from Duphar Interfran Ltd in the early 1990s. It was only in 2007 that the company decided to
establish its own consumer products division and focused on its growth.

More recently, it has developed a range of Covid care products to maintain growth momentum
during the pandemic such as disinfectant range under Triactiv (sprays, wipes, sanitizers, face
masks), Covifind and VMS range under Ourdaily, and pulse oximeters.

Exhibit 18: ICH grew at 18% CAGR over FY12-22 led by power brands, product portfolio expansions through development/M&A

8 7.4

6
5.0
4.2
(Rs bn)

3.8
4 3.5 3.3
2.4 2.6
2.1
2 1.7
1.3 1.4

-
0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
Source: Company, Axis Capital

Exhibit 19: FY22 revenue by category Exhibit 20: FY22 revenue by channel
Covid Modern
Others Institution
Women's protect 1% trade 2%
Health 4% 7%
Analgesics
8% 23% E-
commerce
Gastro
15%
10%

Kids
wellness
12%
Skin care
22% General
trade
VMN
76%
20%
Source: Company, Axis Capital Source: Company, Axis Capital

August 29, 2022 11

 Piramal Enterprises
Company Update

Exhibit 21: Increasing media and trade spends… Exhibit 22: …driving growth in power brands (28% CAGR)

Media and trade spends % of sales

1,600 17% 18% 19% 5,000

4,240
1,290
4,000
1,200
3,100
910
(Rs mn)

3,000 2,600

(Rs mn)
800 730
2,000

400
1,000

0 0
FY20 FY21 FY22 FY20 FY21 FY22
Source: Company, Axis Capital Source: Company, Axis Capital

Outlook: The ICH segment continues to be driven by strong performance in power brands (57%
of FY22 segment sales) as the company continues to reinvest profits with focus on growing these
brands through investment for brand promotion, media spends and increasing presence in
modern trade channels. We expect 22% revenue CAGR over FY22-24 driven by
 Strong brand equity with focus on power brands: Marquee brands include Little’s, Lacto
Calamine, I-Pill, Polycrol, Tetmosol, Saridon and Supradyn which contributed ~57% to FY22
revenue at Rs 4.24 bn (+34% YoY). Piramal continues to invest in promotion of these core
brands to increase their market share along with launching multiple brand extensions to
leverage their brand equity. Strong investments in brand promotions is visible through its
choice of brand ambassadors such as Kareena Kapoor for Little’s, Ajay Devgan for
Tetmosol, etc.
 Strong nation-wide reach for scale-up of new launches: It launched 40 products and 18
new SKUs during FY22 (7 launched in Q1’23 itself) with share of revenue from new
launches since April 2020 at 15% as of FY22. This coupled with a strong distribution
network of ~2,00,000 chemists and cosmetics stores and 10,000+ kids, toys and gift shops
will support the growth momentum in the near to medium term.
 Emergence of e-commerce and modern trade channels
 Multi-channel distribution strategy – it is increasing presence in alternative channels
i.e., currently at 24 e-commerce platforms and 8,700+ modern trade stores. It has also
launched its own D2C e-commerce website, wellify.in.
 Continued focus on e-commerce which contributed ~15% to FY22 revenue. Revenue
share of alternate channels has more than doubled from 10% in FY20 to 22% in FY22.
 Using analytics and technology to improve productivity and decision.

Exhibit 23: Continued new product launches and investment in distribution channel
FY08 FY12 FY20 FY22
Number of brands <5 6 20+ 28
Number of towns present 16 481 1500+ 1500+
Total outlet presence 24,000 2,00,000 280,000+ 290,000+
Chemist outlet presence 16,000 1,00,000 160,000+ ~200,000
Field force 80 800 1700+ 1200+
Source: Company, Axis Capital

August 29, 2022 12

 Piramal Enterprises
Company Update

Outlook and valuation

Managing near-term challenges: The company has been able to partly offset rise in input costs
through price hikes (with some inventory led lag effect). On the supply side, it is widening its
vendor base and securing alternative suppliers for ~2 years, to mitigate future disruptions. On
the manpower shortage in CDMO segment led by higher overseas talent attrition during Covid,
recruitment and training of replacement staff is underway.

Guidance in Q1FY23 call: Refrained from FY23 guidance citing volatility in CDMO business
witnessed in Q1’23 (vs high teen FY23 sales growth guidance earlier). Reiterated long-term
guidance of 15% sales growth and aims to improve margin to 25-28% in the next 3-5 years.
Expects stronger performance in H2FY23 vs H1 (H2FY22 comprised ~70% of FY22 EBITDA).
Pharma demerger and listing expected by Q3FY23 is on track. It has an internal debt ceiling of
4x EBITDA of business (~3.3x as of FY22, current net debt of ~Rs 40 bn).

Capex: Capex spend of USD 350-400 mn over the next two years to increase capacity/ add
capabilities across (1) antibody drug conjugates at Grangemouth, (2) HP-API (high potent) at
Riverview, (3) API capacity in India, (4) potent sterile injectable capacity at Lexington and (5)
maintenance capex.

Exhibit 24: Steady mid-teens growth expected with margin recovery as current execution/supply related challenges moderate
% of FY22 CAGR
(Rs mn) FY18 FY19 FY20 FY21 FY22 FY23E FY24E
sales FY22-24E
CDMO 59 25,470 27,830 31,540 36,160 39,600 44,748 51,908 14
YoY growth (%) 4 9 13 15 10 13 16
CHG 30 14,290 16,690 18,530 16,690 20,020 22,823 26,474 15
YoY growth (%) 34 17 11 -10 20 14 16
ICH 11 3,460 3,340 4,180 5,010 7,410 9,263 11,115 22
YoY growth (%) -8 -3 25 20 48 25 20
Pharma Total 100 43,220 47,860 54,190 57,759 67,006 76,833 89,497 16
YoY growth (%) 11 11 13 7 16 15 16
EBITDA 7,940 10,190 14,360 12,830 12,064 14,280 18,667 24
EBITDA margin (%) 18 21 26 22 18 19 21
Source: Company, Axis Capital

Exhibit 25: Piramal Pharma Valuation

EBITDA EBITDA Avg
EV
FY24E margin EV/EBITDA
CDMO 11,108 21 16 1,80,252
Complex Hospital Generics 7,201 27 11 80,083
India Consumer Healthcare 358 3 19 6,665
Total Pharma 18,667 21 2,67,001
Implied EV/EBITDA for total pharma business 14

EV (in mn) 2,67,001

Debt 40,204
Equity value 2,26,797
Piramal share (80% stake) 1,81,438
Number of shares 239
Value per share for pharma business 950
Value per share for Piramal (80% share) 760
Source: Company, Axis Capital

 We assign EV/EBITDA multiple for CDMO at 12% discount to average of peers given weak
operational performance amid continued execution challenges and lower return ratios.
Multiple for CHG is at par with peers given high margin and 10% discount given to consumer
business due to lower ratios as business is still in scale-up phase.

August 29, 2022 13

 Piramal Enterprises
Company Update

 We value CDMO business at EV/EBITDA of 16x FY24E, CHG at EV/EBITDA of 11x FY24E
and ICH at EV/EBITDA of 19x FY24E to arrive at total valuation of the pharma business.
 Our PPL equity value is Rs 227 bn (~USD 2.9 bn) based on implied 14x FY24E EV/ EBITDA.
We maintain our estimates and continue to value 80% of pharma business at Rs 760/share
(14x FY24E).

Carlyle investment: For reference, Carlyle Group in Oct’20 had invested equity capital of USD
490 mn for a 20% stake in Piramal Pharma, valuing the business at an enterprise value of USD
2,775 mn (equity valuation of ~USD 2.45 bn) with an upside component of USD 360 mn
depending on company’s FY21 performance. The transaction was completed in Oct’20. Apart
from capital infusion in the company that was utilized for reducing debt (at Rs 26 bn in Dec’20
from Rs 40 bn in Mar’20), the deal also added Carlyle’s global healthcare experience in terms of
operational expertise and business acumen.

Demerger details: Announced in Oct’21, pharma demerger from Piramal Enterprises Limited
(PEL) to Piramal Pharma Limited (PPL) is in final stages on recent NCLT approval (12 Aug’22)
with record date for demerger set at September1, 2022.

Exhibit 26: Demerger milestones

Key milestone Status/timeline
Board Approval ✓
Filing of Application with Stock Exchanges ✓
RBI Consent (on Scheme of Arrangement) ✓
Consent from the Financial creditors ✓
Consent from SEBI / Stock Exchanges ✓
Approval from shareholders ✓
RBI Approval (for NBFC license to PEL) ✓
NCLT Approval ✓
Demerger record date 1st Sep'22
Listing of PPL on Stock Exchanges expected by Q3FY23
Source: Company

After the demerger, the NBFC business will continue to be housed in PEL whereas the pharma
business will be hived off into PPL. PEL’s shareholders will receive 4 PPL shares for every share
of PEL, in addition to their existing holding in PEL. Subsequent listing of PPL on bourses is
expected by Q3FY23.

Exhibit 27: Post demerger PPL’s value comes to Rs 190/share

Particulars No. of shares (mn) Rs mn USD mn
EV of Pharma at 14x implied FY24E EV/EBITDA 2,67,001 3,410
Less: Debt (FY22) 40,204 513
Equity value 2,26,797 2,897
Total no. of PEL shares 239
No of shares in PPL shares ex-Carlyle on demerger
955
- 4 shares of PPL for every share of PEL
No. of PPL shares held by Carlyle 239
Total no. of PPL shares 1,193
Value/share of PPL incl. Carlyle stake (in Rs) 190
Source: Axis Capital; Note: USD/INR conversion at 78.3/USD

August 29, 2022 14

 Piramal Enterprises
Company Update

Exhibit 28: Peer valuation

Mcap Net Debt Current EV EBITDA margin (%) EV/EBITDA (x) RoE (x) RoCE (x)
(USD mn) (USD mn) (USD mn) FY22 FY23E FY24E FY22 FY23E FY24E FY20 FY21 FY22 FY21 FY22
Divi's Labs 11,934 -371 11,563 44 39 40 22 26 23 19 24 28 23 28
Solara Active Pharma 200 NA 331 6 10 14 NA 18 11 11 17 NA 28 NA
Jubilant Life Sciences 673 25 697 17 16 18 6 6 5 17 16 13 17 14
Laurus Labs 3,819 224 4,044 29 30 32 21 16 14 15 45 28 43 26
Gland Pharma 4,912 (426) 4,485 34 33 35 22 24 19 24 21 19 21 19
Suven Pharma 1,424 (55) 1,367 44 44 44 18 17 15 NA 33 43 41 39
Lonza Group 42,321 (477) 42,366 24 31 32 30 21 18 10 13 36 20 127
CDMO 65,283 (1080) 64,855 27 31 32 27 21 18 16 24 28 28 42
Zydus Wellness 1,281 25 1,306 17 18 19 28 26 21 4 3 7 NA NA
GSK 3,108 (372) 2,735 24 24 25 27 25 22 6 21 81 26 96
Emami 2,699 17 2,716 33 28 30 19 22 19 16 25 44 42 NA
Consumer 12,773 (330) 12,362 25 25 26 24 24 21 17 30 57 53 107
Baxter 30,176 15,359 45,524 21 23 24 17 13 12 13 13 14 NA 13
Hikma 3,520 420 3,954 28 28 29 5 6 5 26 20 18 28 23
Abbvie 2,46,349 67,745 3,09,355 47 56 51 12 9 11 NA NA NA NA NA
Critical care 2,80,045 83,524 3,58,833 42 49 45 12 10 11 19 17 16 28 18
Source: Bloomberg, updated as per 26 Aug 2022 closing price

Exhibit 29: SoTP valuation of combined entity – Piramal Enterprises

Valuation Stake Total value Value Value/sh Discount Value/sh
basis (%) (Rs bn) (Rs bn) (Rs) (%) (Rs)
Financial Services Business 1.4x FY24E BV 100 282 282 1,182 - 1,182
Pharma Business 14x FY24 EV/EBIDTA 80 227 181 760 - 760
Shriram City Union Based on TP 10 139 14 58 20 47
Shriram Capital (SHTF + SCUF) TP 20 298 60 250 - 250
Unallocated NW 1x invested value 100 63 63 262 - 262
2,500
Source: Company, Axis Capital

August 29, 2022 15

 Piramal Enterprises
Company Update

Financial summary (Consolidated)

Profit & Loss (Rs mn) Key Ratios
Y/E March FY21 FY22 FY23E FY24E FY25E Y/E March FY21 FY22 FY23E FY24E FY25E
Revenue 1,28,094 1,39,933 1,61,296 1,85,008 2,09,618 Per Share Data
- Healthcare 57,759 67,006 76,833 89,497 1,03,477 EPS (Rs) 63 84 115 148 172
- Financials 70,334 72,927 84,462 95,511 1,06,140 BVPS (Rs) 1,508 1,487 1,562 1,658 1,770
- Others 0 0 0 0 0 DPS (Rs) 35 33 40 52 60
EBIDTA 36,413 26,692 35,986 46,640 54,114 Dividend Payout (%) 56 39 35 35 35
- Healthcare 12,409 11,913 14,280 18,667 21,684 Efficiency (%)
- Financials 24,004 14,779 21,707 27,973 32,429 EBIDTA Margin 28.4 19.1 22.3 25.2 25.8
- Others 0 0 0 0 0 EBIT Margin 24.0 14.3 17.8 21.0 21.8
Depreciation 5,609 6,658 7,257 7,838 8,386 PAT Margin 11.0 14.3 17.0 19.1 19.6
- Healthcare 5,066 6,108 6,200 6,500 6,800 RoAA 1.9 2.3 2.6 3.1 3.2
- Financials 318 550 1,057 1,338 1,586 RoAE 4.4 5.8 7.5 9.2 10.1
- Others 225 0 0 0 0 Growth (%)
EBIT 30,804 20,035 28,729 38,802 45,727 Revenue (2.0) 9.2 15.3 14.7 13.3
- Healthcare 7,343 5,805 8,080 12,167 14,884 EBIDTA 103.6 (26.7) 34.8 29.6 16.0
- Financials 23,685 14,229 20,650 26,635 30,843 EBIT 142.8 (35.0) 57.9 35.1 17.8
- Others -225 0 0 0 0 PAT 6,583.3 41.5 47.8 29.3 16.2
Unallocated Cost 1,207 1,939 1,984 2,026 2,066 Networth 11.3 4.3 5.0 6.2 6.8
Unallocated Income 1,577 472 448 426 404 Total Assets 3.0 29.5 10.7 9.9 8.9
Exceptional Item 589 0 0 0 0
PBT 31,173 18,567 27,193 37,202 44,066
Tax 20,429 5,108 6,989 9,561 11,325
PAT before MI 10,744 13,459 20,205 27,641 32,741
Share of net profit of
3,384 6,529 7,182 7,756 8,377
Associates & JVs
PAT from continuing
14,129 19,988 27,386 35,398 41,117
operation
Profit/(Loss) from
0 0 0 0 0
discontinued Op. Post Tax
Reported PAT 14,129 19,988 27,386 35,398 41,117

Balance Sheet (Rs mn)

Y/E March FY21 FY22 FY23E FY24E FY25E
Cash & bank
70,247 71,848 64,663 59,490 54,731
balances
Fixed and
60,841 76,915 77,376 77,841 78,308
Intangible Assets
Goodwill 11,143 12,947 12,947 12,947 12,947
Advances +
5,44,625 7,41,745 8,47,696 9,54,269 10,59,157
Investments
- NBFC Advances 4,46,680 6,00,330 6,96,383 7,93,876 8,89,142
- Investments 97,945 1,41,415 1,51,314 1,60,392 1,70,016
Other Assets 84,332 95,275 1,02,897 1,10,100 1,17,807
Total Assets 7,71,189 9,98,729 11,05,580 12,14,646 13,22,950

Networth 3,40,180 3,54,891 3,72,693 3,95,701 4,22,427

- Equity Capital 451 477 477 477 477
- Reserve &
3,39,729 3,54,414 3,72,215 3,95,224 4,21,950
Surplus
Borrowings 3,93,692 5,54,510 6,10,996 6,84,812 7,77,622
- NBFC Borrowing 3,91,314 5,44,162 5,98,578 6,70,408 7,60,913
- Other Borrowing 2,378 10,348 12,418 14,404 16,709
Other Liabilities 37,317 89,328 1,21,891 1,34,133 1,22,901
Total Liabilities 7,71,189 9,98,729 11,05,580 12,14,646 13,22,950
Source: Company, Axis Capital; Note: We have factored in DHFL financials in Financial
services from FY22

August 29, 2022 16

 Piramal Enterprises
Company Update

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August 29, 2022 17

 Piramal Enterprises
Company Update

Research Disclosure - NOTICE TO US INVESTORS:

This report was prepared, approved, published and distributed by Axis Capital Limited, a company located outside of the United States (a “non-US
Company”). This report is distributed in the U.S. by Axis Capital USA LLC, a U.S. registered broker dealer, which assumes responsibility for the research
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Neither the report nor any analyst who prepared or approved the report is subject to U.S. legal requirements or the Financial Industry Regulatory Authority,
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August 29, 2022 18

 Piramal Enterprises
Company Update

Axis Capital Limited

Axis House, C2, Wadia International Centre, P.B Marg, Worli, Mumbai 400 025, India.
Tel:- Board +91-22 4325 2525; Dealing +91-22 2438 8861-69;
Fax:- Research +91-22 4325 1100; Dealing +91-22 4325 3500

DEFINITION OF RATINGS
Ratings Expected absolute returns over 12 months
BUY More than 15%
ADD Between 5% to 15%
REDUCE Between 5% to -10 %
SELL More than -10%

Piramal Enterprises (PIRA.BO, PIEL IB) Price and Recommendation History

CMP Buy Add Hold Reduce Sell UR

3,500 (Rs)
3,000
2,500
2,000
1,500
1,000
500
0
Jun-20

Jun-21

Jun-22
Jan-20

Aug-20

Jan-21

Aug-21

Jan-22

Aug-22
Mar-20

May-20

Jul-20

Mar-21

Jul-21

Sep-21

Mar-22

Jul-22
Sep-19

Sep-20

May-21

May-22
Feb-20

Apr-20

Feb-21

Apr-21

Feb-22

Apr-22
Oct-19

Oct-20

Oct-21
Nov-19
Dec-19

Nov-20
Dec-20

Nov-21
Dec-21

Date Target Reco Date Target Reco Date Target Reco Date Target Reco
Price Price Price Price
30-Mar-21 2,300 Buy
14-May-21 2,340 Buy
07-Aug-21 3,100 Buy
11-Nov-21 3,050 Add
11-Feb-22 2,925 Buy
26-May-22 2,560 Buy
31-Jul-22 2,500 Buy

Source: Axis Capital

August 29, 2022 19