On March 28, 2023, Piramal Pharma announced a proposal to raise capital of up to ₹1,050 crore through rights issue. At that time, considering the negatives already priced into the stock price, we recommended investors hold on to the stock till the record date announcement. The stock has gained 58 per cent since then owing to a revival in business prospects.

Considering that it is fairly priced currently, investors now can continue to hold the stock but need not add to their positions by subscribing to the rights. Thus, investors can sell the rights entitlement in the secondary market. At 26 times FY25 earnings, the stock is priced optimistically in our view, based on the improved asset utilisation and lower finance costs.

The stock can be held for anticipated recovery in operations at the current valuation. Further accumulation of stock through rights issue can be avoided.

What to do with rights entitlement?

The rights issue record date was August 02. Eligible investors can purchase five shares at a price of ₹81 - for every 46 shares held by them as on the record date. The stock is trading at ₹99 per share, implying the rights issue is at about 17 per cent discount to the current share price. But given the issue ratio of 5:46, the yield narrows to 2 per cent.

The rights entitlement (RE) would have been credited to eligible shareholder accounts following the record date.

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  Investors need to renounce their RE by August 10 to trade it in the secondary market through their demat accounts post that. Currently, the REs are trading in line with the discount, i.e, the option to purchase the stock trading at ₹98 by paying ₹81, is trading at ₹15-16 per RE, implying only a marginal discount.

Rebound in operations

The company reported a 6 per cent revenue CAGR in FY21-23 and margins declined from 23 per cent earlier to 12 per cent during this period. The company reported an underutilisation of capacities as clients delayed decision making in an uncertain period following Covid. The increased headcount and operating expenses added negatively to operating leverage further impacting performance.

However, the financials saw improvement in Q1 FY24. Piramal reported 18 per cent YoY growth in Q1 FY24 as the three segments reported recovery. CDMO - contract development and manufacturing outsourcing (50 per cent revenue contribution in the quarter), CHG - complex hospital generics (35 per cent) and Indian branded market (15 per cent), recovered.

The company reported a strong order flow for its CDMO operations. The company has 35 projects in Phase-III, indicating a higher level of revenue visibility even if a portion of the clients projects cross the commercialisation threshold.

The company is expanding ADC (anti-body dug conjugate compounds) capacity at its Grangemouth facility which should open in H2 FY24. ADCs addressing immunology and oncology have only a few players with such CDMO capabilities. In CHG segment, inhalation anesthesia asset sevoflurane, has strong demand and capacity expansion is also on track. The company is also developing 27 injectables in the segment.

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Overall, the company added 40-50 per cent to overall capacity in the last two years in products/segments where there was strong demand visibility. As the company improves asset turnover from its asset base, currently at 0.8x, the scope for margin expansion can improve.

The company has added significant leverage of 5.7 times net debt to EBITDA by Mach 31, 2023 and has an outstanding net debt of ₹4,700 crore in Q1 FY24. The rights issue proceeds will primarily be used to clear debt which should improve finance cost marginally.

The stock trading at 26 times FY25 earnings, is fairly valued considering the scope for growth and execution risks.

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