PI Industries: Pharma foray with attractive risk-reward

5 May 2023 , 10:44 AM

Recommendation: Add

Target Price: Rs 3,745

While PI has taken several initiatives at the organic level to develop intermediate pipeline at R&D Centre in Hyderabad, assets and capabilities from these acquisitions will act as a launch pad for PI’s foray into Pharma CRO/CDMO. Incremental capex towards Pharma would be limited to US$10-15 million/year. Analysts at IIFL Capital Services have raised their FY24-25 EPS estimates by 7-8%, to factor impact of acquisitions and payment of purchase consideration. They have rolled over their target price to June 2024 (from March 2024) and cut their target 1YF P/E from 32x to 30x. Their Target Price has increased to Rs 3,745 (30x June 2025 estimated P/E) from Rs 3,540.

Twin acquisitions with US$113 million payout

The two acquisitions are: Therachem Research Medilab LLC (TRM) (acquiring entities in India along with assets in the US) and Archimica S.p.A. Combined purchase consideration would be US$113 million (~Rs 9.2 billion). Purchase consideration amounting to US$88 million (~Rs 7.2 billion) is to be paid in cash and the remaining US$25 million is to be paid in the form of performance-linked incentive over next 6 years to TRM.

Right set of assets to kick-start Pharma biz

TRM LLC’s wholly-owned subsidiaries in India and assets in the US are engaged in preclinical and clinical stages. Archimica S.p.A. is an Italy-based small molecule API and CDMO manufacturer. It owns 24 US DMFs, GMP manufacturing facility for APIs/Intermediates across Therapeutics. Both entities are operating at 50% utilization level and PI aims to take advantage of assets towards new partnerships.

Acquisitions accretive from outset

PI management expects both acquisitions to be earnings-accretive with immediate effect. Transaction is likely to be closed by Q1FY24 (end of May 2023). Acquired businesses, especially TRM, are operating at healthy EBITDA margins; management aims to more than double revenues over the next 3-4 years. Acquisition valuation of ~5x is attractive.