Piramal Enterprises - Strategic synergies, optional value to follow DHFL's buyout - ICICI Securities

Piramal Capital and Housing Finance's resolution plan was duly approved by CoC of Dewan Housing Finance (DHFL) by majority voting as the successful one, inching Piramal Group (PEL) closer to claiming its rights over DHFL's franchise. We await specific contours of the deal to gauge financial implications and value accretion. Nonetheless, few positive synergies emerge for the business model, if the deal consummates: 1) Strategic portfolio diversification intent (towards 50:50 wholesale to retail mix) will be achieved sooner; 2) reduced dominance of wholesale portfolio can help ease the borrowing cost; 3) multi-asset retail digital lending can get further fillip from the existing DHFL franchise; and 4) unallocated net worth of ~Rs50-60bn can now command some optional value (utilised towards retail business ramp up). Better-than-anticipated revival in real estate sentiment, scale up of retail providing advantage of diversification and reduced concentration risk and optional value from this deal leads us to PEL value of Rs2,028 (earlier Rs1,470). Key risks: 1) Litigation by other contenders on bidding outcome can defer the process; and 2) higher mark-down on acquired portfolio.

- The way forward towards inking the deal: Piramal, Oaktree Capital, Adani Capital were the contesting bidders for DHLF's acquisition - though individual bidding involved several specific qualitative and quantitative dynamics. After CoC approved Piramal's bid and with voting being notified, the resolution plan needs to be approved by NCLT and regulators for the deal to go through. We are awaiting the specific contours of the deal with respect to the mode of recovery to creditors (through upfront cash, debt conversion, interest capitalization etc). Also, given the developments through the bidding process, there is likelihood of contenders filing litigation against the bidding outcome and dragging it to the court.

- Can bet on few positive structural synergies...: First and foremost, strategic portfolio diversification intent (towards 50:50 wholesale to retail mix) will be achieved sooner with acquisition of DHFL's retail assets. Also, DHFL's pan-India franchise (182 branches and 99 micro branches) can be leveraged to provide fillip to its newly-launched multi asset retail digital lending platform. Piramal carries an unallocated net worth of ~Rs50-60bn that can now command some optional value (if it's utilised towards retail business ramp up). Also, the scope for easing borrowing cost enhances with reduced dominance of its wholesale portfolio in the overall mix.

- ...but integration and value accretion a key monitorable: Against the loan assets worth Rs608bn of DHFL (of which Rs280bn in wholesale lending) and DHFL's insurance business, what value is ascribed to each of these businesses by Piramal is not yet formally known. Also, what proportion of retail portfolio is integrated or sold-down and is the wholesale business carried on to its balance sheet or transferred to fund management structure needs to be seen. In any case, to be financially accretive, the realisation value from assets acquired will have to be higher than the bidding price.

Shares of PIRAMAL ENTERPRISES LTD. was last trading in BSE at Rs.1589.45 as compared to the previous close of Rs. 1583.55. The total number of shares traded during the day was 60887 in over 3654 trades.

The stock hit an intraday high of Rs. 1625 and intraday low of 1581.65. The net turnover during the day was Rs. 97631056.

Source : Equity Bulls

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