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Piramal Enterprises - Much awaited demerger announced; to strengthen governance and create value - ICICI Securities

Posted On: 2021-10-10 15:37:36 (Time Zone: IST)

Piramal Enterprises (PEL), post DHFL acquisition and integration, has now announced the much awaited demerger of its pharma business and simplification of the corporate structure. Board has approved a scheme of arrangement with the objective of transforming the group from a multi-sector conglomerate into two separate sector-focused listed entities in financial services and pharma business. The demerger will: 1) strengthen the governance architecture for the businesses with separate dedicated Boards and management teams; 2) create an optimal capital structure for each of the two businesses; 3) empower and enable both the entities to independently pursue their growth strategies (organically and inorganically) with sharper focus; 4) trigger value-unlocking for PEL shareholders. The demerger is subject to shareholders, creditors and regulatory approvals and the process is expected to take another 9-10 months. We earlier highlighted this as a trigger to further drive up valuation with optimal capital allocation. Maintain HOLD with a revised SoTP-based target price of Rs2,933 (earlier: Rs2,797). Effectively leveraging the acquired DHFL network to cross-sell existing retail products will be key going forward. We continue to await visibility on utilisation of unallocated equity (an optional value).

Scheme of arrangement primarily to simplify corporate structure:

  • Demerge the pharma business and list it separately
    • The pharma business will get vertically demerged from PEL and consolidated under Piramal Pharma (PPL). Post the demerger, PPL will be listed on BSE and NSE.
    • Two operating subsidiaries, wholly-owned by PPL, will also be amalgamated with PPL to further simplify the pharma corporate structure. They are: 1) Hemmo Pharma Private Limited (focused on development of peptide APIs and manufacturing capabilities), and 2) Convergence Chemical Private Limited (for development, manufacture and sales of speciality fluorochemicals).
  • Financial services structure: NBFC at holdco level with 100% HFC subsidiary
    • PHL Finvest Private Limited, 100% owned NBFC subsidiary of PEL, will be amalgamated with PEL to create a listed NBFC.
    • The merged housing finance company, post the DHFL acquisition, will remain a wholly-owned subsidiary of PEL.
  • No change in PEL shareholding structure; 4:1 equity share consideration
    • Shareholders of PEL will get 4 equity shares of PPL for every 1 equity share in PEL, in addition to their existing holding in PEL. Both the companies will be separately listed on NSE and BSE.
    • Shareholders of PEL will directly own shares in both the listed entities, without any cross-holdings and minority stakes.
    • No change in the shareholding pattern of PEL pursuant to the demerger.
  • Consolidated equity includes Rs68bn towards pharma; Rs110bn unallocated
    • Compared to the Rs53bn equity allocated towards pharma business in Jun'21, the management highlighted that the demerged PPL will have an equity of Rs68bn.
    • Rs110bn will be retained at PCHFL and its 'net debt to equity' post DHFL integration will be 3.5x in the near term.
    • Balance equity of Rs170bn will be housed under PEL against which it would be holding assets of Rs90bn-100bn.
    • PEL generally tends to maintain cash and cash equivalent of Rs70bn in the financial services business, which will continue even post the demerger.
  • Other highlights:
    • There will be no tax on this scheme of arrangement, and the demerger and merger of entities will not lead to any incremental tax liability.
    • With respect to life insurance, which PCHFL will inherit from DHFL integration, it is still evaluating various optionalities available.
    • Cash from DHFL balance sheet (of Rs125bn as of Jun'21) has been utilised to repay its creditors and further Rs22bn was raised by PCHFL.

    Shares of Piramal Enterprises Limited was last trading in BSE at Rs. 2736.05 as compared to the previous close of Rs. 2886.40. The total number of shares traded during the day was 111220 in over 10110 trades.

    The stock hit an intraday high of Rs. 2957.30 and intraday low of 2727.80. The net turnover during the day was Rs. 309794116.00.

    Shares of Piramal Enterprises Limited was last trading in NSE at Rs. 2736.25 as compared to the previous close of Rs. 2888.20. The total number of shares traded during the day was 2561863 in over 131744 trades.

    The stock hit an intraday high of Rs. 2943.30 and intraday low of 2728.00. The total traded value during the day was Rs. 7128328291.00.

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