Piramal Enterprises Ltd

Why are some investors using price to sales metric for a

Predictable revenue growth, stable margins, capex heavy, high cashflows, low operating leverage, asset heavy, dividend giving pharmaceutical business?

I think P/S is more applicable for high operating leverage, high sustainable sales growth, asset light, soon to be profitable tech businesses.

Given a choice, I would never want to apply P/S metric at all for any kind of business. DCF is a much better metric for stable, high cash flows, dividend giving businesses like consumer & pharmaceutical. Even a simple P/E ratio or EV/EBIDTA would do.

Well, valuation metric is highly subjective but still there should be strong rationale for using a particular metric.
P/S is a vanity metric in a bull market.

11 Likes

I think for a company like PPL, EV/EBITDA and P/S have to be seen together to get the full picture.

I am not sure why you think PPL is a low op-lev business. If you check 5Y growth in revenues vs 5Y growth in EBITDA, EBITDA growth is ~20% higher than sales growth (This effect is even more pronounced for a 4 year period from FY17-FY21). Plus, check the amount of capex they keep doing.

Only looking at one metric between P/S and EVEBITDA can be misleading. If one only looks at EVEBITDA for PPL, valuations will seem artificially enhanced because of the lower than normalized EBITDA (If somebody annualizes 1Q FY23 EBITDA, then the effect will be extreme). If one only looks at P/S, the stock may seem artificially cheap in comparison to the likes of Syngene or Laurus. But the truth is, even in best case scenarios, PPL may not be able to generate the kind of operating margins that the other 2 can due to their foreign asset base and foreign employee base.

P/S is not a vanity metric in my opinion. I think P/S has come to be seen as a vanity metric lately because the Cathie Wood’s of the world have started peddling this metric for non cash flow generating non profitable super hyped tech companies. P/S, just like EVEBITDA is a pre-leverage metric and is good for valuing cyclical companies or companies with high leverage. Of course the investor has to know which metrics to combine to get the full picture. Relying blindly on any one metric (even EVEBITDA) can be misleading.

An example of getting misled looking only at EVEBITDA - Consider a highly levered company in a capital intensive industry which has a low equity base which can’t be diluted much to raise funds. Such cos have to keep depending on debt to sustain themselves and therefore interest costs can’t be ignored for them. Evaluating them on EVEBITDA may be a mistake, P/E may be the right metric in this case. Case in point - RACL Geartech.

18 Likes

@nirvana_laha

Good post & I agree. It is always case by case basis & a multitude of valuation metrics to be used. I haven’t studied enough of this business to comment more but mine is a guiding statement that comparing P/S of Syngene & saying PP is undervalued is not right.

I have also seen posts on social media by experts who too are valuing P/S way & could probably be misguiding new investors.

The caution I want to give is - the experts may have very diversified & large portfolios but the new retail investors put entire money on 1 stock expecting it to double basis the aforementioned analysis.

4 Likes

They may be valuing Piramal basis P/S and assigning a particular multiple basis their knowledge of what normalized EBITDA levels could look like and not basis what EBITDA levels are right now.

These experts have also consistently maintained that PPL can’t command as high a P/S ratio as Syngene. I think some of them (If we are talking about the same ones) have a lot of experience valuing Pharma cos. consistently on P/S. But their expectation of fair value P/S for a company is most likely underpinned by their deep knowledge of what normalized EBITDA could look like in the business.

I agree with you that blindly assigning a P/S multiple to a Pharma business on hearing the world CDMO or branded OTC is dangerous. This holds for other metrics like P/E and EVEBITDA too.

Edit: And also agree that experts can go wrong. But wrong or right is also a factor of investment horizon. So investors blindly copying experts without understanding all aspects is ultimately down to the investor I believe.

10 Likes

On May 2022, management gave a guidance of 15% growth rate for overall pharma business.

But during July 2022, they said they don’t want to give guidance for 2023 because of overall volatility in the business & certain execution issues they need to fix first.


What made them to rethink the guidance?

  1. Facing tough time in CDMO business. Some of the customers changed the phasing of orders. Orders are pushed into future.

  2. Significant attrition at overseas sites. Finding right talent, filling up these vacancies &training them may take some time. These are critical positions.

  1. Higher operating costs, increase in raw material & packaging materials prices. (Inflationary situation in UK & USA)

They have many overseas facilities which make niche products & are essential facilities in their integrated services.

Sterile injectables - Lexington (USA)
HPAPI - Aurora & Riverview (USA)
ADC - Grangemouth (UK)
Complex oral solid dosage- UK & USA.

I reckon these facilities are facing

1.Attrition of critical talents & finding the replacements & training them may take some time & effort.

2.Higher operational costs due to highly inflationary situation in UK & USA.

3.Power crisis in Europe. Pharma manufacturing is highly power intensive & this may affect the margins.

Not a buy/sell recommendation.
Disclaimer: I dont own PPL.

13 Likes

I wish someone creates a thread for Piramal Pharma. After the listing of Piramal Pharma it should be the thread for financial services arm.

3 Likes

It means PE of Piramal Pharma is close is 60. Even if if margin and profits were to revert to last year it will be PE of 25. Why would someone pay these values for a global biz. Thermo Fisher trades at PE of 25.

6 Likes

Thermo fisher has far lower growth rates.

Still maintaining 15% growth rates over the next few years.

(Thermo Fisher Scientific Reports Third Quarter 2022 Results)

Delivered very strong financial results in the third quarter, with 14% Core organic revenue growth

1 Like

That’s true but a large part of the growth is driven by acquisitions. Core earnings growth was just 1%.

4 Likes

Very bad results from PEL. This raises further questions about asset quality.

~1350Cr of provision costs this Q and 870Cr of write-offs. They have accelerated provisioning in wholesale book.

4 Likes

Q2 Con Call Notes:

  • Value unlocking to take place in the next few quarters
  • 18 RE assets resulted in the provisioning of all stage 1 to stage 2 assets (around 5800 cr.
    • Once you move the account to stage 2, you have more options to deal with it.
  • Endeavour to have FS as clear as possible.
  • To classify to stage 2
    • There are lumpy accounts.
    • Interest reversal of 220 cr.
    • Some group issues
    • Some of the accounting is nearing resolution. That requires provisioning
    • One account is already paid 120cr. Broadly classify this loans into three buckets
    • Bucket 1
      • Parents’ entities is going through some trouble even though SPV is going ok.
    • Bucket 2
      • Resolution is possible.
      • That will come through doing a haircut.
    • Bucket 3
      • The real struggle of builders.
    • Stage 2 to Stage 3- Expect some flow, but do not expect significant slippage from this book quickly
  • The wholesale book will shrink in the next few quarters.
  • Incremental cost 8.50 %.
  • Wholesale to Retail could be 50:50 by the end of the year.

Con Call Audio

Note- Invested.

6 Likes

Piramal Pharma Con call notes.

  • Margin improvements to come from higher sales and operating leverage

  • Aspire to move towards 25-26% range across all businesses over the medium term (3 to 5-year target). Q0Q margin improvement.

  • Delayed decision-making for RFP.

    • CDMO-

      • Combination of capacity investment with client late-stage commercial work. molecule progression
      • Overall growth should be higher than in the past.
    • Hospital

      • Still far from fully utilising potential
      • Increasing market share
      • Increasing further backend capacity/capabilities
      • Gaining more
      • Continue to progress same products to be sold to the same channel.
    • ICH

      • Investing 15% of the top line in investing for growth
      • With scale increase profitability
  • Margin Drop recently

  • ICH profit reinvestment. Investing in sale promotion

  • Inflation and Input cost lead to margin compression.

  • CDMO- Fix cost leverage business.

  • Some sales are won on PEL name.

  • Max debt 4-4.5 EBITDA. 4300 cr net debt.

  • No plan to raise capital as of now. Existing profits are enough to pay off debt.

  • We will go with what the customer want. If they want from the US, we will serve them from the US. No intentional plan to compel clients to purchase from India.

CDMO

  • 60% API and 40% formulations
  • More proposals are coming for the phase 3 molecule. Earlier phase 1/2 projects were more, but now more requests are for phase 3 molecules. Generally, phase 3 decision takes a long time.
  • 19 patents products.- This should grow at a faster rate than other segments.
  • Margin expansion will happen due to the top line as it is operating
  • leverage business.
  • Following the trend playing out in CDMO
    • An increasing number of queries are related to China +1 strategy
    • Due to cost, companies are looking at east to reduce cost
    • Innovator molecule- looking for onshore/western market.

Hospital

  • Inhalation market share- low to mid-teen globally. A lot of scope for improvement.
  • Difficult for new competitors to enter into the Inhalation segment and sustain.

ICH

  • Breakeven margin
  • Once we get to 1000cr, we should see show increment in profit.

My Take:

CDMO is a scale business where operating leverage is significant. PPL has chosen to expand manufacturing capacities across the world as compared to other CDMO players in India, having mainly Indian manufacturing. As a result, PPL has considerably less margin generally. It looks like they suffered badly in Q1/Q2, but their profitability was not visible due to merging with PEL. Many( myself included) did not know that PPL had a Q1 loss of 139 cr.

The more they sell, the better is profitability. Additionally, they are doing Capex considerably for CDMO, which will get completed in the next 18/24 months- assuming by March 24. Then it will slowly start getting validated/used, so profitability will take some time to reach a better level. They have been loss-making for a few quarters, and so hopefully, they will turn the corner. They indicated higher sales in H2, so hopefully, CDMO will turn around and shows a profit on a much more consistent basis.

They have around 19 molecules in phase commercial, and as more molecules move into commercial, it will drive their revenue/profit. They have indicated that they are seeing most of the RFP in phase 3 molecule, which augers well for the future.

Due to funding issues with starts up, I am sure it would have impacted emerging biopharma companies- which contribute decently to their revenue. So I feel this could have impacted them, but management has not highlighted that already. But if one sees it on Google, this trend is visible.
So, CDMO is going through a tough phase as they are working on rectifying the situation.

The hospital business seems to be a better place. They launched one product and are ready to launch 8 more in H2. These new products are unlikely to make a significant dent in H2, but it will augur well for the coming years. Management gave a hint about competitive intensity. There was only one major player who entered this space after their entry a few years back. They remained sidelined despite trying various things. As they(the new competitor) could not make headway in the Inhalation Anastasia segment, they eventually gave up. So it seems that it is comparatively difficult to enter in that segment.

ICH- Looking at the current rate, this segment could hit 900 cr this year and 1000 + cr next year. Currently, it is operating at a break-even level as it is reinvesting the profit into a growing power brand, which is reflected in its increased spending on Sales and marketing for this section.
PPL indicated that they would gradually turn toward profitability once they reach 1000 cr sales. So FY23 will break even, and Fy24 could be a lot similar to FY23. However, from FY25, they shall be reporting some decent profitability. It means ICH profitability is away at least 7/8 quarters based on current understanding. As PPL report consolidating EBITDA, this will hamper their overall profitability.

Con Call audio

PDF Transcript of Con Call

Note- Invested. Posted it here as there is no separate thread

19 Likes

PEL released new PPT.

It is very detailed (70+ pages)- most of the things they have already published earlier.

In alternatives, they are saying AUM of around $1 billion. They have been saying for 3/4 years now, may be more. India RF- stressed asset sector is underwing major changes, so not sure if this JV will make major headway. Edelweiss ARC- which is leader in the sector- has changed from wholesale to retail. India RF seems a small player in the sector.

Credit fund has huge opportunities on the sector basis. I am puzzled why PEL is not scaling up this segment despite their self proclaimed expertise (PEL say they are expert in the RE field and then book thousands of crop of losses). Many player are moving their wholesale RE funding to alternative assets as it suit the tenure and return expectation. PEL does not say much about this segment other than slight mention in their PPT. The size of the fund is sub optimal and I do not think it will be making meaningful construction to PEL anytime soon.

4 Likes

Piramal Enterp.announced Announcement under Regulation 30 (LODR)-Acquisition

They acquired 7.44 Lakh sq.ft. for 90 Cr ( approx 1,209/sq.f.t) from a Promoter Group Company. They say its for the office space owned by the Promoter Company. The price per square feet looks a steal, Any thoughts why promoter is selling at this price? Hope its not a calculation mistake from my end :frowning:

1 Like

PEL acquired another private Piramal company to take care of their current and future office needs.
Revenue is 30 cr and acquisition cost is 90 cr.

This shall reduce their cost a bit as instead of paying rent to someone they own this place outright.

2 Likes

Q3: PEL made new provision of Rs. 2300 cr. In con-call management answered on this aspect on question asked by MOSL:
Extract of reply from management:

Similiar question was again raised by another investor in aggressive way:

Extract of reply from management:


But, the same investor again asked the management about provison part but perhaps management could not explain properly the need for this extra provision.

From above one thing is clear that management is not sure about provision issue.
Perhaps market is waiting clarity on provison issue, so valuing PEL less than book value. Next few quarters will be interesting.

Disclosure: Invested. No transaction in last 30 days.

4 Likes

I am invested and hence my view could be biased.

However, I feel the company had to go thru this pain as they transitioned their business model from real estate wholesale focused NBFC…there have been surprises on provisions for sure…but I hope there are now done. Going forward, results should look fine. They dont have too much leverage, and they will definitely do some acquisitions, they have room to do that…they will monetize investments in Shriram group…also that land bank in Andheri…they have not been sharing details on that one, but as and when they start development of that, they will start to see the benefits of it accruing. As an investor, I need to be patient in this counter and have mid to long term view. If I believe in the management, and I am aggressive, I could use this opportunity to add more. There are no integrity concerns with the management and promoter. However, the manner in which they have been doing provisions quarter after quarter did make me uncomfortable. But on the other side, their disbursements have been improving, their fixed cost borrowing versus floating rate lending is good in the current scenario. On the expenses side, their operating expenses are increasing and they will continue for some time I feel, so this could keep the profitability under pressure…net net, I like to believe there is scope to make some money in this stock (dont think this is a multibagger), but patience is needed.

8 Likes

Hi, was wondering if any fellow members would have more details on the following questions.

  1. The land parcel which belonged to Omkar Group, what is the project called? Does anyone have details? I found a project called “Lawns & Beyond” which is registered with MAHARera in 3 phases but am not sure if this is the same one which PEL is developing and monetizing.

  2. The equity value of the insurance business changed from 891Cr to 1426Cr. What could have caused this change.

  3. The equity value of the Alternatives business changed from 1576Cr to 1076Cr. What could have caused this change.

1 Like