A Bitter Pill, but Which Makes Money 🤑

What’s Up, Market?

Monthly Performance

Nifty 50: +3%

Piramal Pharma: +6%

Founder’s Recap 

Stuff from the Budget That Actually Matters 💰

Last week’s budget was a much-anticipated one. The country’s fiscal policy brain, heart and math were to be uncovered in a rather soupy backdrop:

• the interim budget had shown hints of a turn in direction towards fiscal prudence,
• the election outcome was marked by a surprising dilution in majority, which compelled people to expect a welfare-oriented budget, and
• despite this, the government continued focusing on its Viksit Bharat goals in the pre-announcement commentary

So, finally, what has the budget been? Growth-oriented, welfare-oriented, balanced, or plain simple directionless?

In a Nutshell

From our stock market-draped lens, the budget was opportunistically well-balanced. Why do we say that?

1. The budget continues to be growth-oriented, albeit a lower pace - which was already established in the interim budget a few months ago, where infra capex spend growth was reduced to 11%, from 30-40% per year before that
2. A lot of the building blocks for catalysing growth were already set up in the previous budgets, when individuals, corporates and monetary policy were all chained down by high inflation. Those blocks do enable all these three to make up for the minor reduction from fiscal support
3. The budget continued to focus on fiscal prudence by maintaining its target despite ramping harder on welfare spending, which didn’t come at the cost of incremental growth, but was opportunistically utilised from the Rs. 2 lakh crore RBI dividend, and robust tax collections

Policies set by the government also seem in the direction, where it can spend a much lower amount and in turn trigger a larger chunk by corporates.

A reflection of the attempt to revitalise capex using PLI could now be seen in opex initiatives, through reimbursements to corporates to hire people, thereby boosting employment, money in the hands of the youth, and hence growth.

Overall, great budget as far as our opinion matters!

Key Features of the Budget

But isn’t making money what matters at the end of the day?! Here’s a little decoding for your extremely valid question - paisa kidhar banega?.

A Couple of Hits and Misses

• The hit - Several steps the government took were visionary, and highlighted the long term orientation of policy formation. Key amongst those was the focus on nuclear energy, where the budget laid out Rs. 13,208 crore for partnerships with the private sector on (i) setting up reactors, (ii) R&D of reactors, and (iii) R&D of newer technologies, in addition to full fiscal support for a 800MW Advanced Ultra Super Critical thermal plant as a JV between NTPC and BHEL
• The miss - An increase in short-term capital gains tax and STT were expected, and designed to curb speculation and short-term trading, and rightly so. But the bummer was in an increase in long-term capital gains tax, which ended up disappointing a large strata

What Next?

Overall, we think the budget was a positive, from a longterm viewpoint. The cutback in ‘growth’ spending has been made up for by an increase in welfare spending, which also has the potential to spurt growth.

The tax increase doesn’t look too worrying, because, lets be real, it's unlikely to deter investors with a multi-decade outlook.

Market Stories 

Piramal Pharma - Turning the Tide 💊

In the world of pharmaceuticals, it's not always about the bitter pills. Sometimes, it's about the sweet comebacks too. Enter Piramal Pharma Limited (PPL), a company that has been on quite the roller-coaster ride since its IPO in October 2022.

From being a laggard with a stock price 20% below its debut to showing signs of a promising turnaround, PPL's journey is nothing short of a gripping story.

But what’s made this pharmaceutical player tick? And is it worth keeping an eye on, despite having hit a rough patch?

Piramal Pharma, Who?

Piramal Pharma deals with everything from lifesaving drugs to everyday wet wipes. With a global presence and an end-to-end service model, PPL operates under three main business verticals:

The Stock That Went Nowhere

Now, despite having an all-round presence, why did PPL’s stock get stuck in the doldrums? It’s a tale of headwinds, high costs, and heavy debt.

Between FY21 and FY24, the company faced several challenges:

1. A slowdown in growth in 90% of the business of PPL - both CDMO and Complex Generics were impacted negatively
2. Reduced demand for surgical equipment, as COVID-19 took priority everywhere, pushing operative care far behind
3. Input costs shot up as the Russia-Ukraine war created havoc in global supply chains

Over that period, the company saw a revenue growth of 9% CAGR, but that with a massive decline in profitability.

EBITDA declined at a 6% CAGR, and net profit nosediving from Rs. 800 crore to a mere Rs. 18 crore, during the same period.

The company also took on more debt for inorganic expansion, pushing net debt from Rs. 2,500 crore in FY21 to nearly Rs. 4,000 crore in FY24.

Slowing growth, a hit on margins, net losses and increased debt were a perfect recipe for disaster.

Turning the Tide

Despite the past turbulence, PPL is gearing up for brighter days ahead. Here’s a closer look at the growth potential across its three business segments:

1. CDMO Business - A Prescription for Growth

The prospects for PPL in this business seem bright with strong demand outlook, and consequent operating leverage benefits. The business can see a strong revival given:

• PPL remains among India’s top three CDMO players. Its manufacturing facilities, despite having undergone inspections by several international regulatory bodies, including the USFDA, haven’t seen a single Official Action Indicated (OAI)
• The patented product portfolio (higher margin segment) has doubled from 9 in FY19 to 18 in FY23, now accounting for over 10% of CDMO revenue

The enhanced focus on higher-margin products and differentiated offerings makes this segment a promising growth driver expected to grow at a 13% CAGR from FY24 to FY27.

2. Critical Generics Business - Strong Pipeline and Market Leadership

PPL’s Complex Generics business is poised for substantial growth, driven by:

• Its dominance, with it being the fourth-largest global inhalation anaesthesia company
• A portfolio of 40 products, with plans to develop and commercialise over 35 niche products in the near future
• Potential to leverage its strong relationships with US Group Purchase Organisations (GPOs) and a network of over 6,000 hospitals,

PPL aims for a 16% revenue CAGR through FY27 in this segment.

3. Consumer Healthcare - Scaling New Heights

PPL’s Consumer Healthcare segment has been fairly resilient to shocks, and can continue exhibiting high growth given:

• Strong growth demonstrated even during FY21-24, when other businesses were slowing down
• PPL has a strong portfolio, and boasts over a 100 product launches in recent years
• It can leverage its distribution network spanning approximately 180,000 chemists and a direct-to-consumer platform, ‘Wellify’

With this, PPL’s division is anticipated to grow at a 20% CAGR through FY27. The kicker being that, currently marketing expenses are into profitability, but as the business scales, operating leverage can drive margin expansion.

Wrapping it Up!

Piramal Pharma’s current valuation might just be the silver lining. Trading at 10x its one-year forward EV/EBITDA, it’s below the industry average of 15x, thanks to recent issues.

However, as recovery appears to be on the horizon, valuations have potential to converge with the industry average.

A rebound in earnings growth, coupled with a valuation re-rating might just work wonders for the stock, and Piramal Pharma might just turn the tide in its favour!

Life @ Rupeeting

Views on the Budget 💸

moneycontrol.com wrote an article analysing the budget, and highlighting key themes to invest in.

We contributed to the article named “Here are the key themes likely to be in focus post Budget”, with our views.

Rupeeting ’s Sagar Lele, CFA notes that a lot of work was already laid out in previous budgets. “It is more of a long-term theme,” he says. Beyond the obvious focus on renewable energy, Lele notes that there is significant attention on revamping and creating an overall transition in the grid. “This involves investments in meters, measurement systems, transmission lines, and making the entire grid smarter with IoT. Despite the allocation amount, work on this front is long-term, and I remain positive about the power sector for the next three to five years, especially in the ancillary areas like Hitachi Energy, which supports smart grid implementation,” he says.

Read the article for more!

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