Piramal Enterprises - Business transformation in the offing; optional value to follow DHFL's buyout - ICICI Securities

Piramal Enterprises' (PEL) Q3FY21 earnings reflect better than anticipated revival in real estate sentiment suggesting the provisioning buffer of 6.3% made by the company is adequate against its stage-3 pool at 3.7% plus restructuring pool at 3.8%. Lower credit cost calls for upwards earnings revision. Disbursements too have started kicking in under the company's new retail lending strategy coupled with rollout of new products and partnerships. PEL is actively pursuing consolidation - loan portfolio is down 10% QoQ and 20% since FY19 - and the consolidation cycle seems to be nearing its end. Pharma business too reported healthy performance led by CDMO and OTC segments, which supported margins at 22%. Near to medium term triggers: a) demerger of financial services and pharma business; b) business transformation in each of these segments opening up new possibilities and optional value. Maintain BUY. Key risks: 1) Litigation by other contenders on DHFL's bidding outcome can defer the process; and 2) higher mark-down on acquired portfolio.

- CDMO continues to perform: PEL reported 5.1% revenue growth in Q3FY21 driven by 15.4% YoY growth in the CDMO segment. Growth in the CDMO business was driven by strong order book and approvals for 4 NCEs. Critical care segment underperformed in the quarter posting a decline of 13.4% YoY (-8.9% QoQ) as surge in COVID-19 cases caused a slump in elective surgeries. OTC reported a healthy growth of 14.0% YoY with improving consumer sentiment and timely launch of COVID-19 protection products (sanitisers, masks, etc.). We remain positive on the segment's overall growth potential and expect pharma segment revenues to grow at a CAGR of 6.3% over FY20-FY23E.

- Consolidating loan portfolio; stress now is likely to be lower: Active consolidation of the loan portfolio has caused it to shrink 10% QoQ, and 20% since FY19, to Rs464bn. Not only the value of top 10 exposures has reduced (by 9% QoQ and 27% since FY19), but across-the-board rundown in real-estate and corporate loans too was reflected. Surprisingly, the retail book too witnessed 7% QoQ decline to Rs53bn; launch of multiple products under a new retail lending strategy is yet to offset the moderation in erstwhile retail book oriented towards metro focused affluent category. We expect organic growth to be led by retail scale-up and the wholesale book to remain in consolidation mode.

- Stage-3 assets at 3.7% plus restructuring at 3.8% against which PEL is carrying a provisioning buffer of 6.3%: Early trends indicate better performance of PEL's developer clients: 1) their developer's project sales are up 82% YoY, 2) their collections from homebuyers are 49% higher YoY, 3) construction has commenced at nearly 100% of sites, etc. Proforma GNPAs have increased QoQ from 2.5% to 3.7% (in absolute terms, addition of Rs4.4bn) due to slippage of one account (in auto ancillary segment) from stage-2 to stage-3. Stage-2 plus Stage-3 assets too increased by 5% in absolute terms during the quarter. Restructuring settled at Rs17.4bn (3.8% of the book) - only one real estate exposure got restructured and the other accounts were inter alia in hospitality, auto component and infra segments. Retail loan restructuring was contained at <1%. DCCO extension was done in the early stages of the pandemic to the extent of 10-12% of the book. On the overall stress pool, PEL continues to carry a buffer of 6.3% of the book (Q3 was the third successive quarter during which no further provisioning was created). We are building-in a credit cost of 1% each year for FY22E and FY23E.

- Disbursements have started kicking under new retail lending strategy: In addition to four products launched in H1FY21, PEL has launched digital purchase finance and digital personal loans in partnership with fintechs. Under the new strategy, the business pivots towards affordable and mass-affordable housing and gradual exit from the affluent segment through natural attrition (by not being competitive on rates). PEL disbursed Rs1.5bn during the quarter with yields at 11.4-11.8%.

- DHFL acquisition update: The deal consideration is Rs342bn - comprising an upfront cash component of Rs147bn (including cash on DHFL's balance sheet) and a deferred component (NCDs of 10 years to existing DHLF lenders) of Rs195.5bn. The existing gross block of DHFL's wholesale lending portfolio will be significantly marked down prior to acquisition and, on the truncated value, PEL expects some upside through recoveries. Company has applied to regulators for approval, which might take a fortnight, and post that, NCLT approval will be likely in 2-3 month (by April-May). Thereafter, it will take a couple of months to close the deal and start integration.

Shares of PIRAMAL ENTERPRISES LTD. was last trading in BSE at Rs.1843.55 as compared to the previous close of Rs. 1731.25. The total number of shares traded during the day was 183832 in over 11234 trades.

The stock hit an intraday high of Rs. 1855.3 and intraday low of 1731. The net turnover during the day was Rs. 332013908.

Source : Equity Bulls

Keywords