Piramal Pharma Limited (PPLPHARMA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Piramal Pharma Limited Q1 FY '27 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. At this time, I would like to hand the conference over to Mr. Gagan, Head of Investor Relations and Enterprise Risk Management. Thank you. And over to you, sir.

Thank you, Steve. Good morning, everyone. I welcome you all to our post results earnings conference call to discuss our Q1 FY '27 results. Our results material have been uploaded on our website, and you may like to download and refer them during our discussion. The discussion today may include some forward-looking statements, and these must be viewed in conjunction with the risks that our business faces. On the call today, we have with us our Chairperson, Ms. Nandini Piramal; CEO, Global Parma, Mr. Peter DeYoung; and our CFO, Mr. Vivek Valsaraj. With that, I would like to hand it over to Ms. Nandini Piramal to share her thoughts.

Good morning, everyone, and thank you for joining our Q1 FY '27 earnings call. We have started FY '27 on a strong and encouraging footing, with all 3 businesses delivering mid- to high-teen revenue growth along with meaningful EBITDA margin expansion. During the quarter, revenue from operations grew 17% year-on-year to INR 2,270 crores, while EBITDA increased 72% to INR 285 crores. EBITDA margins also expanded by approximately 400 basis points to 12.5%. Our profitability improved significantly, driven by all-round revenue growth, higher capacity utilization, operating leverage, pricing discipline and continued focus on operational excellence. Our CDMO business delivered broad-based growth across India and the overseas sites. Over the last year, we have strengthened our commercial team, deepened customer engagement and sharpened our go-to-market approach. Combined with the continued signs of recovery in U.S. biopharma funding, these efforts contributed to healthy RFP activity and robust order inflow during the quarter. Our complex hospital generics business delivered a resilient performance while maintaining leadership positions across key therapies. We're seeing encouraging traction in ex-U.S. inhalation anesthesia markets, Kenalog supplies, which remain an important growth driver for FY '27 are expected to start from Q2 FY '27. Our Consumer Healthcare business delivered yet another quarter of strong mid-teen growth, led by continued momentum in Power Brands and e-commerce. Expansion in distribution, disciplined brand investments, premiumization and cost optimization initiatives supported both growth and profitability during the quarter. Quality and compliance continue to remain a key differentiator for us. During the quarter, our Sellersville facility in the U.S. received an EIR from the U.S. FDA, successfully concluding the inspection. We're also proud of our long-standing quality track record across the global network, having maintained a strong compliance culture and a 0 OAI classification date. Moving to our business-specific performance, starting with our CDMO. Our CDMO business delivered 19% year-on-year revenue growth during the quarter. Growth was broad-based with a healthy contribution from both India and overseas sites, supported by strong execution, improved demand conditions and good order inflows across the network. Over the past year, we have made significant investments in strengthening our commercial capabilities. We have expanded our commercial team, enhanced customer engagement and refined our commercial strategy to improve market coverage and win rates. Combined with the continued recovery in U.S. biopharma funding over the last few quarters, these initiatives have contributed to a meaningful increase in RFP activity across most of our sites. While customer decision-making time lines remain extended, we remain encouraged by both the quality and the breadth of RFPs entering our funnel. And importantly, a significant portion of these RFPs are directed towards our overseas sites, which have a favorable margin profile and offer meaningful scope for margin expansion as utilization levels continue to increase. Geopolitical and trade-related uncertainties are reinforcing the importance of supply chain resilience and diversification efforts across the pharmaceutical industry. Increasingly, customers are seeking reliable CDMO partners with differentiated capabilities, high-quality standards and manufacturing footprint spanning multiple geographies. Our global network positions us well to capture these emerging opportunities. Operationally, strong execution drove growth across most of our sites. High utilization levels, pricing discipline and operational excellence initiatives supported profitability improvement despite ongoing inflationary pressure. We continue to strengthen our differentiated capabilities, particularly in the ADC space. During the quarter, we inaugurated a new commercial scale payload linker development manufacturing site at our Riverview facility. Equipped with advanced containment, automation and analytical capabilities, the facility enhances our ability to support customers from development through commercial manufacturing. The expansion of sterile injectable capacity at Lexington also remains on track. Together, the Riverview and Lexington investments form part of our USD 90 million expansion program and significantly strengthen our integrated ADC platform, spanning payload linker manufacturing and sterile fill-finish capabilities. We continue to witness encouraging customer interest in these capabilities. During the quarter, we also announced a strategic collaboration with Ajinomoto Bio-Pharma Services, combining the AJICAP site-specific conjugation technology with our ADC manufacturing expertise. This collaboration will provide customers with a more seamless pathway from early development to commercial manufacturing while simplifying technology trends and scale-up. In addition, we announced a manufacturing and supply agreement with Botanix to support development and commercial supply of Sofdra. This arrangement highlights the strength of our integrated North American network and our ability to offer customer supply continuity, operational flexibility and potential dual-site manufacturing. Overall, improving market conditions, strengthening commercial capabilities, differentiated offerings and strong execution position the CDMO business well for continued growth and progressive profitability improvement. Moving on to our Complex Hospital Generics business. Our Complex Hospital Generics business delivered a resilient performance over the quarter, with revenue growing 17% year-on-year to INR 743 crores. We maintained our leadership position across key therapies, including sevoflurane, intrathecal baclofen in the United States while continuing to expand our presence in the ex-U.S. market. In inhalation anesthesia, we retained our leadership position in the U.S. Sevoflurane market with a 48% market share while witnessing encouraging traction across select ex-U.S. markets. We expect these markets to become an increasingly important contributor to growth over time. In inhalation anesthesia, we retained our leadership -- sorry in intrathecal therapy, we continue to maintain our leadership position in the baclofen market, reinforcing our strength in differentiated hospital products. Within injectable pain, we are making steady progress in addressing supply constraints and improving product availability. Enhanced supply should enable us to better capitalize on demand opportunities across key markets going forward. Kenalog supplies, which are an important growth driver for FY '27 are expected to start from quarter 2 FY '27. We also remain focused on building a differentiated specialty portfolio through a combination of 505(b)(2) products, complex generics, branded products, in-licensing opportunities and co-development partnerships. These initiatives are aimed at not only broadening our product portfolio, but leveraging our customer relationship and worldwide supply network to support long-term growth. Overall, the business delivered strong growth while maintaining cost discipline amid supply-related challenges and input cost pressures. Moving to our Consumer Healthcare business. Our Consumer Healthcare business continued its strong momentum, delivering another quarter of mid-teen revenue growth. Growth was driven by the continued strength of Power Brands, rapid expansion in e-commerce, wider distribution reach and disciplined investments behind our brands. Power Brands grew 23% year-on-year and contributed 53% of Consumer Healthcare sales during the quarter, reflecting the success of our focused brand building efforts and consumer engagement initiatives. Our e-commerce business grew 40% year-on-year and contributed 28% of sales. E-commerce remains a key strategic growth channel and important source of long-term value creation. During the quarter, we launched i-choose, a new master brand that brings together our women's intimate care portfolio under a unified identity. The platform addresses consumer needs across multiple life stages and represents another step in our strategy of building scale and differentiated brands. We continue to invest behind the brands and allocated approximately 12% of sales towards media and trade promotion during the quarter. Our approach combines traditional and digital media channels to maximize reach, engagement and effectiveness. Our innovation strategy remains focused on fewer, better and bigger launches. We continue to prioritize high-potential opportunities that can scale meaningfully while also driving premiumization across the portfolio through higher-margin offerings. In addition, judicious pricing actions and cost optimization initiatives helped mitigate raw material inflation and supported profitability despite a challenging input cost environment. Overall, strong brand momentum, channel expansion, premiumization and disciplined execution position the business well for sustained growth and continued EBITDA improvement. Summarizing the performance. To conclude, we're very pleased with our strong and encouraging start to FY '27. All 3 businesses delivered mid- to high-teen revenue growth supported by favorable long-term industry dynamics, focused investments and disciplined execution. Importantly, this growth translated into meaningful EBITDA expansion and improved profitability. Our diversified portfolio, strong customer relationships, quality track record and global manufacturing network continues to strengthen our competitive positioning. Looking ahead, we remain focused on deepening customer engagement, driving operational excellence, maintaining financial discipline and judiciously investing behind select long-term opportunities. We will continue strengthening our differentiated CDMO capabilities, expanding our specialty product portfolio in complex hospital generics and investing behind priority brands and channels within the Consumer Healthcare space. Based on our strong start and current business momentum, we look forward to delivering sustained revenue growth and expansion during FY '27 while staying agile in a fluid external environment. With that, I'd like to open the floor for questions.

[Operator Instructions] The first question comes from the line of Amey Chalke with JM Financial.

Congrats management on a good set of numbers. First question I have on the CDMO business. We have delivered good number during first quarter. Typically, we have seen the trend in CDMO particularly that quarter-on-quarter growth is always there from 1Q to 4Q. We keep on seeing the gradual improvement in the number. Considering the first quarter of this year has been quite good, do you expect that trend to continue for following quarters during the year? And do you intend to upgrade your top line guidance for the year considering we have done well during the year.

So Amey, thank you for the question. And yes, historically, what we have seen is that our CDMO business has seen higher quantum of revenues being delivered in H2 versus H1. This year, we began with a more stronger opening order book, which we had referenced to during our last investor call, which is why we began on a stronger note. Between the quarters, there may be some ups and downs depending upon how delivery patterns emerge throughout the course of the year. But on a full-year basis, we continue to stand with the original guidance that we had given at that point in time. At this stage, it's early days, Amey, and we don't want to revise any guidance. We'll come back with anything fresh maybe after the September quarter results, but we are maintaining the annual guidance at this stage.

Sure. Just one more thing on CDMO side, we have, I think, a couple of contracts, which will be commercialized during the course of the year, like NewAmsterdam, et cetera. When exactly it's likely to start adding up in our numbers?

Again, we discuss this from time to time on our investor calls. We don't really comment on specific contracts. We would suggest the best way to look at if it's a publicly traded customer, they have their own analyst reports and investor calls, and you can make your own conclusions from those because they're covered very well by very strong analysts. And I would suggest you read those materials for predictions on when they would expect to have revenue from the different offerings that they have.

Sure. Just one more last question on Complex Hospital Generics, where our trend for last few quarters have been muted at least for last 5 to 6 quarters. This quarter has -- we have delivered something like 17%, 18% kind of a growth. You mentioned in your opening remarks, it is largely driven by non-U.S. market. So the issue which we are facing in this segment, which was from the Chinese competition, should we assume that has been subsided? And should we expect this growth trend to continue for the rest of the year?

So, I would say that we started to take actions over the course of last year to respond to the Chinese competitive situation. The Chinese competitive situation remains. However, our actions have started to bear fruit. And we would expect to, as Vivek mentioned, we reaffirm our guidance for the full year for the business. I wouldn't necessarily assume that the exact percentage rate we had in Q1 will be the full-year number. I would look back at the full-year guidance we gave for the business. And I would take the Q1 base business growth that you noticed in the -- particularly in the RoW market is a positive indication that we have a plan to execute at this year throughout the year.

The next question comes from the line of Sajal Kapoor with Antifragile Thinking.

I've got a couple of questions. In CDMO, many companies initially been isolated development or manufacturing assignments, but over time, the stronger platforms become embedded partners across multiple molecules and multiple stages of the development and commercial manufacturing life cycle. When you look at your top 10 CDMO customers today, is the average customer spending meaningfully more with Piramal every 3 to 5 years? Or is the growth is still largely driven by continuously replacing completed projects with new ones?

So, I think we covered some of this in our annual report breakup where we do a bunch of demographics, but we're particularly proud of our growth rate with our top 20 customers over a multi-year period. And also, we break up and share in that the fact that many of our top 20 customers are working with us across multiple sites because they see value in our network. And even further, we give a breakdown showing that it's not just multiple sites, a lot of them see the East-West benefit where they're working at least one of our Indian sites and one of our Western sites. And so we think that these demographics are meaningful and significant in terms of the top 20 customers demonstrating that they're buying multiple things from us and that they're growing faster than the rest of our business.

And Peter, are you saying that they actually expand their relationship by giving us multiple molecules over multiple sites or over time? So, we get in the door, do one with them and then becomes 5 and 7?

So, I'd say that I was trying to draw the fact that we have absolute revenue growth higher for this segment. And the second point was that we have multiple offerings we give them. And very rarely, would you get a whole bundle at once. You'll get that over time. And so we use the concept of land and expand. And so you often would begin with a single offering at a single site or maybe a single integrated project. But yes, we have a track record of growing and adding projects with our larger customers over time. It's a core part of our strategy where we're trying to -- obviously, we like to grow across the different segments, but we would like to make our larger customers become more larger.

No, that's helpful. And in your experience, what are the common characteristics of customers who expand their relationships with Piramal or who have expanded their relationship with Piramal from a single project to multiple programs, more complex programs for commercial manufacturing?

Part of it is us and part of it is them. I'd start with what the part that is in our control is that we deliver on what we committed to and delight them. So, we have a whole customer satisfaction program to ensure that we're delighting, we call delivery to delight and how do we ensure that we are delighting our customers and get to the point where they want to give us a referral or a reference. That's our measure of success. It's the emotional in addition to the objective outcomes. And so that's under our control. And then what would be under the customers' control is that they need to have enough needs that are not being met or that we could meet that are in their portfolio. And so that would need to have enough things in their pipeline or their offering that would be needing services. And so we would see the strategy work best with the medium to larger-sized customers that have multiple pipeline offerings for whom we are delivering on our promises.

The next question comes from the line of Abdulkader Puranwala with ICICI Securities. The current participant has been disconnected. We'll move on to the next question. It is from the line of [ Raj ] from Kotak AMC.

Just a few questions. So, first in terms of the operating -- in terms of the gross margin expansion actually at the subsidiary level. So, I can see that it is going from 72% year-on-year go to 68%. So at what level of revenues in the subsidiary levels or any guidance that you can give in terms of when this subsidiary gross margins starts to show a meaningful improvement towards -- can you put a target, of say, 80% gross margin?

Okay. So, Raj, firstly, if you look at gross margins for the quarter, they are not necessarily indicator of what the annual gross margins for the respective geographies would be. Therefore, there is some mix impact that normally affects gross margins. Typically, on an average, our gross margins for our overseas facilities are in the range of north of 75%, so anywhere between 75% to 85%, whereas in India, if you look at it, the gross margins are on the lower side, around 55% to [ 65% ]. And that's how the blended average comes to about 64%, 65% for the overall company as a whole. Typically, gross margins tend to be higher in our overseas facilities. The margin profile is high. Therefore, expenses will also be high. So at an EBITDA level, at scale, the EBITDA margins are comparable, whether it's India or whether it's overseas. So, don't go by 1 quarter gross margin. It's not indicative of how the gross margin profile for the geography is.

Sure. You mentioned in terms of mix. So again, not necessarily only for CDMO, but just if you can get some color on both qualitatively, quantitatively in terms of the split between stand-alone and consol for basically your CHG, the CHG split between stand-alone? So, I think -- so sevoflurane in the U.S. is made in the subsidiaries and I think the ex-U.S. is in the standalone. So, what would roughly be that mix, first for CHG and then for CDMO? Yes.

Currently, for our CHG business, predominant portion of the business continues to reside outside of India. So the stand-alone has a very small component of the overall CHG business. It's predominantly outside of India. And as far as the CDMO is concerned, it is roughly 48% outside of India and the balance is India.

Okay. And just one last bookkeeping question. So, I think last quarter, you mentioned about the FY '26 ADC sales of $64 million. Any sense that we can get this quarter, Q1, either an exit rate or annualized rate for ADC this quarter?

We're not providing this on a quarterly basis. You will see another update coming later during the fiscal year, Raj, not on a quarterly basis.

The next question comes from the line of Vinod Jain with WF Advisors.

Congratulations. The position continues to be adverse in this quarter 2 of taxation. How will it pan out in the coming 3 quarters? And secondly, is there any thinking on business reorganization to reduce the tax impact?

Yes. So Vinod, there are a couple of questions that you have asked. So, let me take them one by one. The first is on the tax for the quarter. So, there are 2 components to it. Firstly, the tax for the quarter, if you're comparing that versus the corresponding period last year is on the higher side, and that's predominantly due to 2 factors. The first being higher incidence of profit in tax-paying jurisdictions. And therefore, you have a higher absolute value of tax. And the second is last year, we had created a deferred tax asset on the R&D tax credit that we get in our overseas facilities. This year, we actually had to take a disallowance for some of those R&D work, and we are going to file an appeal for that. But pending that, that impact is there. So, you see a negative tax last year and a positive tax impact this year creating that delta. But to answer your larger question, which is how are we thinking about in structure, let me just assure you that we don't pay tax higher than the tax rate applicable to the respective jurisdiction, which means tax in India is less than 25%. Tax in the U.S. is less than 21%. The overall effective tax rate appears higher because some of the overseas facilities currently are not to scale, which means their PBT is lower, which is why the tax outflow divided by the PBT looks on the higher side. As we have said that as our overseas operations scale up, EBITDA margins will improve and you will see a reduction in the tax. Our normalized tax rate should be in the range of 24% to 25% when we are at scale. Currently, it will look inflated because of this anomaly.

So, you can expect a sharp reduction in the coming quarters?

No, not a sharp reduction in the coming quarters. As we have guided, tax rate will remain elevated in this financial year. But as we scale up on revenues in the years ahead, you will see a reduction.

The next question comes from the line of Bharat Sheth with Quest Investment Managers Private Limited.

Congratulations, Piramal team. So, I have a question for Peter. Peter, when we are referring our annual report where we have stated that our differentiated offering within CDMO space has increased from, say, 32% to 40% to 47% in FY '26. So with now several -- again, CapEx that we are entering and which is likely to get over in 1 year time, so how do we see this differentiated offering really start contributing over the next 2-, 3-year time frame in CDMO and hence, I mean, improvement in the EBITDA within the CDMO business?

I'll try and tackle that in 2 parts. The first is if you look over the last few years, our contribution from differentiated offerings has been increasing, and we expect that -- and growing at a higher rate than our overall business, and we expect that trend to continue. That's because of, I guess, some obvious points, but we will restate it. First is they're differentiated and therefore, more attractive to our customers. And second, we're putting more of our investments behind the differentiated offerings than the non-differentiated offerings. And so our overall capacity is aligning towards differentiated offerings and customers want them because they're differentiated. So, we would expect over the forecast period in our LRP, this percentage should go up. If you asked the question about our EBITDA margins improving, I think we've discussed in the multiple calls over the past, there's -- the single largest driver for our EBITDA margins to improve will be operating leverage and related to getting more of our facilities at the target scale. And we've demonstrated that when our revenues go up, that our operating leverage pulls through and we see the EBITDA margins expand. And we've also demonstrated that as we increase the scale of our overseas sites that the EBITDA margins get more towards the target levels. And so that will be the single largest driver for our overall margin expansion. But a second important driver would be a combination of differentiated offerings and also our on-patent portfolio. And those would be a mix-related element that would be individually and together supporting the EBITDA margin expansion story on top of operating leverage.

Okay. Great. And second question on now with our NPS has improved to around 60% in CDMO, which was much lower in earlier year. So, where do we target and with that NPS continuously improving and improving our deliverability to the various customers, so how much new customer we have been able to, I mean, onboard or within existing customer deepening and hence, we expect some utilization of -- I mean, our international plant and then hence, improving EBITDA margin?

So, we have different approaches to trying to get the positive impression our customers have leading to new business. The first is we have the NPS, which is an indicator of customer delight. And just to remind the background, they can go from negative 100 to positive 100. And a third-party benchmark demonstrated that the average CDMO has a negative Net Promoter Score. So, I think the fact that we're in the 60 range is very favorable. And so our targets are to maintain that as we grow and maybe modestly improve it, and we lay out those goals each year. The second point is in terms of ammunition we have. We see that with these positive Net Promoter Scores, we can get referrals, references at each of our sites and we find that, that's a very useful tool. Often when you're down to the, let's say, the last 3 choices in an RFP process, a customer will ask for referrals. And we look for the people who have given us a 9 or a 10, and they're very often the same ones that will be willing to give a reference. And so we see this as very good ammunition when we want to go after new business. And we have added a number of new logos first-time clients this quarter, and we see that as a positive sign of our collective commercial efforts, of which the delighted customer base is one of the inputs.

Okay. Great. One more question on -- and it's a very hearty to that we have announced a large ESOP for our customer -- employees who are a key pillar of the growth and education. So with this kind of ESOP, can we -- what kind of roughly we assume in our financial model cost within the P&L?

So if you're referring to the ESOP cost, it's normally based on the accounting guidance in terms of how the ESOPs get valued using a Black Scholes model that considers the impact of the ESOP across the 3-year period over which the vesting happens and accordingly, proportionate impact of that is taken in the P&L every year.

With this new ESOP, what's...

So, nothing changes from that. This is just a process of continuation of the ESOP policy that already existed. So it's not like a new policy that's come in. We already had an ESOP policy in place. These are just with respect to the additional grants for the upcoming years.

[Operator Instructions] The next question comes from the line of Abdulkader with ICICI Securities.

Sir, my first question is with regards to your CDMO growth. So, possible to break it down between how the innovative portfolio would have grown versus generics and within the innovative, how ADC would be a contributor for this particular quarter?

So, Abdul, I would say it's a more broad-based growth. So it's across each of the sub-verticals within the CDMO. So whether it is our North American assets or whether it's our Indian assets, it's been more broad-based.

Okay. And sir, with our partnership with Ajinomoto, what are the kind of investments we are planning to put into this partnership?

The way this particular partnership works is that it's more about us sharing our ability to work together on the technology. And so we already have examples where we're using their technology with clients. And so it's about signaling to the market and particularly, our customers or prospective customers on both our side and their side that we know how to work with each other to progress their technology in our facilities. And so it's really actually already capitalizing on work we had done with their technology for our clients to demonstrate that we can do it and for them that they can use -- their clients could use our facilities. And so it's a positive signal that we know what we're doing with each other and that we are compatible.

Okay. And my next question is on the Complex Hospital Generics business. So, that business has grown fantastically well in this quarter. And for the quarters ahead, I know we would have Kenalog contribution coming from Q2. But on an organic basis, do we see this kind of a revenue run rate flowing into the next few quarters as well?

So, we tried to address that, I think, in the first question in the queue, which was we reaffirm our original guidance for the year, and that does include both organic growth and Kenalog-related growth. However, I wouldn't necessarily assume the exact organic percentage that we had in Q1 will continue through the rest of the year. I would look back to the original growth we gave for the business overall.

The next question comes from the line of Shyam Srinivasan with Goldman Sachs.

Yes. Just going back to your opening remarks, you mentioned higher capacity utilization, and you also mentioned pricing discipline as some of the things that are driving growth. So if you could illustrate, say, how our utilization levels have either moved Y-o-Y in our key plants or if there is an average number for the network as a whole? And from a pricing discipline perspective, so what have we affected that's leading to better realizations?

I'd say that I think we don't disclose utilization on a plant-by-plant basis, but I would say that this quarter, we -- as Vivek said, we've seen broad-based growth and that includes increased revenues from our overseas sites. In terms of pricing discipline, I think it's both a mixture of -- especially in the Consumer Healthcare business, we have raised prices a little bit to combat input cost inflation as well as even in the CDMO business, we are looking at different pricing measures and how to manage some of the rising input costs.

Helpful. Just my second question on the CapEx update. So, how much was -- sorry, if I missed the number of quarter, how much did we do? What's our reiterated guidance for this year? I can see that we have completed the Riverview one, but what about Lexington? If you could just give us the update on the CapEx plans and the qualitative updates?

So, Shyam, we had guided for an annual CapEx of anywhere between $120 million to $135 million of CapEx. And currently, we have spent about $21 million. It's -- obviously, CapEx also ramps up as we progress through the year. The Lexington CapEx is on track for getting completed by the end of 2027, and the spends on that as well has been progressing as per plan.

This would be calendar year '27.

Calendar year.

The next question comes from the line of Tushar Manudhane with Motilal Oswal Financial Services.

Sir, this ADC facility now sort of commercialized, so what kind of revenue potential one can think and over what period of time?