Piramal Pharma Is Jefferies' Top Pick Among Contract Manufacturers With Sector Outlook Positive

Jefferies sees 2025 as a year of reckoning, where earnings delivery will delineate winners from laggards in the Contract Development and Manufacturing Organization stocks. These stocks delivered stellar returns in 2024, despite mixed earnings. The investor confidence and expectations have grown in long-term story.

While there's strong earnings growth across most of the brokerage's coverage, slippages may not be taken kindly, given steep valuations, Jefferies said. It remains selective, with Piramal Pharma Ltd. as the top pick. The brokerage upgraded Syngene International Ltd. to 'hold', while downgrading Gland Pharma Ltd. to 'underperform'.

The recently concluded 2024 was an exceptional year for CDMO stocks, according to Jefferies, as they delivered 20% to 80% returns. Majority of their coverage outperformed Nifty and Nifty Pharma.

Taking earnings into perspective, however, the stocks had a mixed bag. With Divis Laboratories Ltd. and Piramal seeing slight upgrades, other players saw sharp downgrades.

The impact of earnings was a meaningful re-rating of these stocks. This was largely attributed to increased optimism in the long-term story due to 'China + 1' tailwinds. The brokerage also cites better growth for innovator-led CDMO segments, that offset pricing pressures in generic active pharmaceutical ingredients.

Investors also drew comfort from positive management commentary on increased client inquiries and on-site customer visits, according to Jefferies. Expectations of a recovery in biotech funding and likely passing of the Biosecure Act also helped sentiment, although actual outcomes lagged.

Jefferies sees this year as a 'show-me' year for the sector, where actual earnings delivery will delineate winners from laggards.

Calendar year 2025 is set to have multiple triggers to monitor, ranging from policies of the new US administration, trends in biotech funding, conversion of request for equations received into firm orders and growth guidance in the next year. They also highlight company-specific triggers.

With investments on new capacity and likely tailwinds from RFQ conversions and better biotech funding, the brokerage believes they already build healthy FY26 growth across coverage.

This coverage is led by Divi's and Concord Biotech Ltd., mid-teens for Syngene, Piramal and Laurus Labs Ltd., while Gland lags at 10% year-on-year. Ebitda growth should better sales growth, led by better utilisation, operational leverage and product mix that is faster growth in higher-margin CDMO, according to the brokerage. They also note that a stronger US Dollar also benefits Indian CDMO companies, to some extent.

Jefferies likes the structural story for Indian CROs and CDMOs, as they are underpinned by investments behind capacities and capabilities and cost competitiveness. There is also an increased focus of Western pharma to diversify supply chains.

As an industry, Indian CRDMOs are well-placed to grow at healthy double-digits and double in size over the next five years, according to the brokerage. This is well complemented by the valuations in the sector.

With one-year forward multiples at 50-70 times price to earnings. There is also 20 to 40 times enterprise value to Ebitda.

The stocks are priced to perfection, according to the brokerage. Earnings trajectory for CDMO companies is inherently volatile, and they note that any miss against elevated expectations may pose downside risks to stocks in 2025.

Due to the above cited reasons, Jefferies prefers stocks with good earnings visibility.

It expects Piramal to continue its momentum thereafter in CY25, led by traction in CDMO. Piramal should also deliver margin expansion, on the back of operating leverage, according to Jefferies.