Brokerage firm Nuvama Wealth and Investment Ltd. has initiated coverage on Piramal Pharma with a buy recommendation and a price target of Rs 130 per share. The price target implies a potential upside of 41 percent, as the brokerage expects a strong recovery in the company's overall business.

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Nuvama projects a Compounded Annual Growth Rate (CAGR) of 61 percent for the company's operating profit or EBITDA and 16 percent for revenue over the financial year 2023-2025 period.

The brokerage has cited three main reasons for a strong operating profit forecast:

First, Nuvama believes that Piramal Pharma is seeing a rise in order inflows with macro headwinds subsiding. The revenue mix between on and off-patent products are also witnessing a favourable change, the note said.

Nuvama further said that a recovery in demand for legacy products in its core markets like the US would be favourable, and that the change in product mix will also be favourable for the profitability of its CDMO business, which accounts for 57 percent of the overall topline.

Second, Piramal Pharma is expanding capacity, which, according to Nuvama will aid growth. The company is expected to spend $157 million over the second half of financial year 2024 on drug discovery services at Ahmedabad, peptides at Turbhe, and Riverview in the US. There is also a possibility of a few late-phase projects getting commercialised with 34 out of 188 projects in Phase-III.

Lastly, the company is planning a rights issue of Rs 1,050 crore to repay its debt. Better cash inflow will allow the company to de-stress the balance sheet.

Nuvama also mentioned that the past few quarters were challenging for the company, leading to a net loss of Rs 186 crore in financial year 2023. The company generated 57 percent, 32 percent, and 12 percent of revenue from contract development and manufacturing services (CDMO), complex hospital generics (CHG), and India consumer healthcare (ICH) businesses in the financial year gone by, respectively.

Shares of Piramal Pharma are trading 1.2 percent higher at Rs 92.92.