Analysts Hike Target Prices For Piramal Enterprises After Carlyle Deal

Analysts raised their target prices for Piramal Enterprises Ltd. after Carlyle Group agreed to pick up a stake in Ajay Piramal’s pharmaceutical business.

The private equity fund will pay about $490 million for a 20% stake in Piramal Pharma Ltd., according to an exchange filing. The final equity investment, however, will depend on net debt, exchange rate and performance against the pre-agreed conditions at the time of closing of the deal. The proposed transaction is expected to close this year, subject to regulatory approvals.

“This fresh investment will be used as growth capital for the pharma businesses to expand capacity across our sites as well as to tap attractive acquisition opportunities within and outside India,” Nandini Piramal, executive director at Piramal Enterprises, said in the filing. “In the interim, the proceeds from this capital-raise may also enable us to further strengthen our balance sheet through deleveraging in the near term.”

The transaction values the pharma business at an enterprise value of $2,775 million, with an upside component of up to $360 million depending on the company’s performance in the financial year ending March 2021.

The revenue of the pharma business stood at Rs 5,419 crore in 2019-20. That’s 41% of the parent’s total revenue. The pharma business’ operating income rose 41% to Rs 1,436 crore last fiscal, with a margin of 26%.

The proposed deal is part of the billionaire Piramal-backed company’s plan to simplify the group structure and reduce leverage. The company is transferring its contract development and manufacturing outsourcing business, critical care, consumer products and investment in the joint venture with Allergan India to Piramal Pharma. Last year, the company exited Shriram Transport Finance Co. by selling its entire stake in the asset financier. It raised Rs 1,750 crore through preferential allotment of CCDs to Canadian institutional investor CDPQ, along with Rs 3,650 crore worth of rights issue in October 2019 and $900 million worth of stake sale of its Decision Resources Group business to Clarivate Analytics.

Piramal Enterprises’ consolidated borrowings stood at Rs 28,256 crore as of March 2020 against Rs 42,612 crore a year ago.

Shares of Piramal Enterprises rose as much as 2%, compared with a 1.26% drop in the Nifty 50 Index. All the three analysts tracking Piramal Enterprises have a ‘buy’ rating. The average of 12-month Bloomberg price targets implies an upside of 11.5%.

Here’s what the brokerages have to say:

Motilal Oswal

• Maintains ‘buy’ rating and raised target price to Rs 1,600 apiece, implying an upside potential 19%.
• With increased traction in the pharma business, it is likely to be a key value driver in the near term.
• The company will have a simplified structure with two listed businesses — Piramal Pharma and Piramal Enterprises.
• Values the pharma division in line with the benchmark enterprise value of Rs 21,000 crore, leading to an EV-to-Ebitda multiple of about 12 times based on financial year 2022 estimates.
• This is largely in line with the recent re-rating of the sector based on reduced logistics issue, improving capacity utilisation, better patient-doctor connect and increased growth visibility for the U.S. generic segment.
• Expects 10-13% compounded annual growth rate in pharma sales or Ebitda over financial year 2022.
• This will be led by superior execution of projects under contract development and manufacturing outsourcing, increased market share in inhalation anesthesia portfolio, and enhanced marketing efforts in the consumer healthcare segment.

Citi Research

• Raised the target price from Rs 1,130 to Rs 1530 apiece, implying an upside of 14%.
• Better valuation of the pharma sector as well as non-bank lenders, relative defensiveness of pharma, and potential upside from Indian rupee weakness prompted the target price hike.
• The enterprise value, without the upside component, of Rs 21,000 crore is 9% ahead of its erstwhile one-year target value of the pharma business of Rs 19,200 crore.
• At a trailing Ebitda of Rs 1,440 crore, this implies an about 14 times EV-to-Ebitda multiple.
• The strategic investment, availability of full financials for the pharma business should add to the quality of disclosures and aid value discovery of this business.

ICICI Securities

• Maintains ‘add’ rating on the stock and upgrades the target price from Rs 1,050 to Rs 1,420 apiece, implying an upside of 6%.
• Remains positive on the company's unique positioning in the pharma business with its contract development and manufacturing outsourcing services and critical care products.
• Increases the target multiple on financial services business from 0.3 times to 0.8 times as it expects the company to derisk its financial services business by running down its wholesale exposure and accelerated sell-downs.