Piramal Enterprise Ltd

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About the Company

Piramal Enterprises Limited (PEL) is one of India’s large diversified companies, with a presence in Healthcare, Healthcare Insights & Analytics business and Financial Services. In Pharmaceuticals, through end-to-end manufacturing capabilities across its manufacturing facilities and a large global distribution network, the company sells a portfolio of niche differentiated pharma products and provides an entire pool of pharma services. In Financial Services, PEL provides comprehensive financing solutions to real estate companies. Healthcare Insights & Analytics business, Decision Resources Group, is the premier provider of healthcare analytics, data & insight products and services to the world’s leading pharma, biotech, and medical technology companies and enables them to make informed business decisions.

Q4 FY23 Updates

Financial Results & Highlights

Detailed Results:

1. PAT for the quarter was a loss of INR 196 crores, mainly due to MTM loss on Shriram Investments.
2. Profit after tax (PAT) for FY ’23 grew 5% YoY to INR 1,902 crores, excluding exceptional gains from the demerger of the pharma business.
3. Capital Adequacy Ratio of 31% on the consolidated balance sheet
4. Cash and liquid investments of INR 7,430 Cr (9% of Total Assets)

Investor Conference Call Highlights 

1. Total assets under management (AUM) for Piramal Enterprises stood at approximately INR 64,000 crores.
2. Improved retail and wholesale mix to 50-50 from 33% retail and 67% wholesale in FY ’22.
3. Retail AUM grew by 49% YoY to INR 32,144 crores.
4. Quarterly disbursements in the retail business grew by 34% QoQ and 361% YoY to INR 6,828 crores.
5. Wholesale 1.0 AUM reduced by 33% YoY to INR 29,000 crores.
6. Stage 2 and Stage 3 wholesale assets were reduced by 39% QoQ to INR 6,374 crores.
7. GNPA ratio reduced to 3.8% in the last quarter of FY ’23 from 4% in the third quarter.
8. The company stated that Net interest income for FY ’23 grew 21% YoY to INR 4,176 crores.
9. The company stated that the average borrowing cost reduced to 8.6% in FY ’23 from 9.6% in FY ’22.
10. Board recommended a dividend of INR 31 per share, subject to shareholders’ approval.
11. The retail business focuses on housing loans, secured MSME loans, used car loans, and unsecured loans. Retail lending expansion with 95 new disbursement active branches, serving 515 districts across 26 states.
12. The wholesale business focuses on the resolution of Stage 2 and Stage 3 assets through monetization, settlements, enforcement, and portfolio sales.
13. The company stated that in the near term, the cost to assets may stay around 3.5% to 4% before gradually decreasing.
14. An analyst raises a question about the rationale behind growing wholesale book two while trying to reduce wholesale book one. The chairman explains that the wholesale book consists of different parts. Stage one represents assets with no stress and is seeing organic runoff. The focus is on resolving issues in stage two and stage three, while simultaneously building a more granular and diversified book in the wholesale business.
15. Credit cost for the quarter is INR300 crores, with 50-50 split between retail and wholesale segments.
16. There was a net loss of INR2,900 crores on recognition, provision reversal of INR2,500 crores, and a gain of INR130 crores on bond buyback.
17. SRs (investment instruments) worth INR3,600 crores are held, with no outstanding provisions. 63% haircut and 11% cash recovery have already been achieved.
18. The wholesale portfolio under Stage 3 is predominantly focused on real estate (RE), and a significant portion is for under-construction projects.
19. The company stated that margins are expected to stay around the current levels, with a potential increase in the cost of funds in Q1 due to repo rate increases. However, rates are expected to stabilize and potentially decline toward the end of the financial year.
20. The company stated that the operating margins have been relatively stable around 6.3%.
21. The company stated that while there might be a slight upward trajectory in the cost of funds, there is also a slight upward trajectory in yields. Overall, there is no significant concern in this regard.
22. The company stated that the credit cost in Q4 was around 1.9%. It is expected that the provisioning cycle for phase one wholesale is completed. Any provisions seen in the future will depend on the growth of the businesses rather than asset quality.

Analyst’s View

Piramal Enterprises Ltd is one of India’s largest diversified companies. Digital loan offerings have powered the company to significantly expand its customer franchise to ~2.6 million with an active customer base of over 1 million, providing it with substantial cross-sell opportunities. As the company continues to make investments in the retail business and continue to expand its branches and staff size, etc., which should continue for another year or so, the OPEX to assets is expected to go up a little. The company continues to get recoveries from old DHFL NPAs. It remains to see how the company performs in the future given the steady rise in inflation.

Q3 FY23 Updates

Financial Results & Highlights

Detailed Results:

1.  Retail AUM grew 29% year-on-year to Rs. 27,896 crores
2. Wholesale 1.0 AUM reduced 20% year-on-year to Rs. 35,101 crores.
3. Net profit of Rs. 3,545 crores during the quarter as compared with the net profit of Rs. 888 crores in the same quarter of last year
4. Net debt to equity stands at 1.3x with consolidated capital adequacy ratio of 31%.
5. Disbursements grew by 593% on a year-on-year basis and 29% on a quarter-on-quarter basis to Rs. 5,111 crores
6. Average cost of borrowings improved to 8.4% for the quarter as against 9.1% in Q3 FY22 and 8.8% in the Q2 FY23, despite a rising interest rate environment.
7. Cash and cash equivalent is Rs. 6,032 crores at the end of this quarter
8.  3% annualized OPEX to assets.

Investor Conference Call Highlights 

1. The company created a one-time additional provisioning buffer of Rs. 1,073 crores on Stage-1 and Stage-2 assets of the Wholesale 1.0 AUM. With this provision, they have adequately provided toward Wholesale 1.0 AUM, and are in the process of reducing their Wholesale 1.0 AUM in line with their strategy through a combination of various means such as accelerated repayments, settlements, etc.
2. The company continued to deliver on its strategic priority of achieving an AUM mix of two-thirds of retail and one-third of wholesale.
3. Retail AUM now accounts for 43% of the overall AUM as compared with 33% in the Q3 FY22.
4. The company is close to achieving its near-term target of having 50% retail composition of total AUM.
5.  The key transactions leading to the gains were: 1) Rs. 3,328 crores on account of reversal of an income tax provision, 2) Rs. 1,106 crores on account of restructuring our Shriram Capital Group and bond buyback.
6. The company is in the process of reducing its Wholesale 1.0 AUM in line with its strategy through a combination of various means such as accelerated repayments, settlements, etc. 
7. The company has added 74 new disbursement active branches.
8. The company’s target is to serve 1,000 locations through 500 to 600 branches over the next 5 years
9. The management states that Nearly 67% of their branches are now selling products beyond just the home loans.
10. The management states that the housing and secured MSME loan disbursements grew 387% in the last 12 months and disbursements under the unsecured loan category grew by 46% from the previous quarter and stood at Rs. 2,215 crores during the quarter.
11. The company launched 2 new products – Budget Housing in the housing loan category and LAP Plus in the MSME loan category. As there is focus on the Bharat market, they also launched a maiden brand campaign to build the brand – Piramal Finance – in their target segment.
12. Digital-embedded finance disbursements grew to Rs. 1,238 crores, contributing to 6% of the AUM in retail.
13. The company has received cross-sell disbursements of Rs. 1,862 crores in the last 1 year.
14. The company has launched a new innovation hub in Bengaluru to accelerate the development of next-generation lending solutions and analytics.
15. The management states that because they changed their stance towards the asset resolution last quarter and sort of consistently executed their resolution strategy, they have seen a significant reduction in the wholesale book.
16. The management states that within the new real estate lending business, they have deals worth Rs. 697 crores outstanding as of December 2022. Within the corporate mid-market lending business, they have already built a book of Rs. 1,174 crores diversified across industries.
17. The management states that because of the additional buffer that they are taking in Stage-1 and Stage2 assets as well as overall provisioning, our coverage ratio is going up quite significantly across these stages. 
18. The management states that since it is not a business that is about AUM building this business will always be single-digit percentages of AUM.
19. The management states its aim to exit the Shriram Group.
20. The interest reversal of the company was Rs. 58 crores during the quarter.
21. From 2 years the investors have been experiencing a downhill in returns
22. The management states that on the home loan side, on the retail business,  over the last 4 to 5 quarters the company has raised interest rates  of about 50 basis points on the portfolio and 30 basis points in terms of new originations.
23. the management states that their Stage-2 and Stage-3 assets are today lower than what they were in the previous quarter
24. the company stated that there is one specific non-real estate sector asset that had moved during the quarter to Stage-3, which had been credit impaired and which has been provided for significantly to the extent of 75-odd percent, which has caused the change in the numbers, as you see, between Stage-2 and Stage-3.
25. The management states that About 50% of this business is at roughly Rs. 1 lakh ticket size and greater than 1-year duration. The rest of the business is short-duration small-ticket business.
26. The management states that the only increase would be in the form of one resolution that they have done and that too related to some security-related increase.
27. The company thinks that the best way to resolve an asset is to actually sell it, and they might get the right opportunity to do that
28. The management states that OPEX is very limited to their internal staff, etc. Apart from that, the rest of it is all acquisition costs that we share with the partner. also the company  gives the partner a revenue share in the form of origination fee or a skim on the interest based on risk performance of the tranche, etc

Analyst’s View

Piramal Enterprises Ltd is one of India’s largest diversified companies.Digital loan offerings have powered the company to significantly expand their customer franchise to ~2.6 million with an active customer base of over 1 million, providing us with substantial cross-sell opportunities. The business, in the go-to state will likely have run rate credit costs in the 1% to 2% range. Credit cost metrics might look more suppressed because of the heavy level of provisioning that’s there right now and the fact that the wholesale book is degrowing.. The way the economics of this business work is that on a net-net basis, that makes an ROA of upwards of 4% on this business and so it’s a small part of the AUM pie but it makes a very strong ROAs and also gives the company  a massive customer base. The company has increased the provisions combined for the stage categories to Rs. 4,600-odd crores from Rs. 4,400-odd crores, which the management believes it adequate for the underlying assets for the time being. There is no expectation for any further provisions or losses to come beyond what they already have provided for, for this category of asset

As the company continues to make investments in the retail business, and continues to expand its branches and staff size, etc., which should continue for another year or so, the OPEX to assets is expected to go up a little. The company  continues to get recoveries from old DHFL NPAs.

Q2 FY23 Updates

Financial Results & Highlights

Detailed Results:

1. The company’s consolidated revenue grew by 22% and profits fall by around 460% on the YoY basis.
2. Wholesale AUM reduced by 13% to Rs. 38,908 crore
3. Total AUM has grown 35% from the prior year due to the DHFL merger, and it is now Rs. 63,780 crores
4. Retail loans are now 43% of the overall loan book as compared with 12% pre-merger.
5. Total provisions as a percentage of wholesale AUM increased to 13.1% from 8.8% last quarter
6. There was a net loss of Rs. 1,536 crores during the quarter as compared with Rs. 395 crore of recomputed net profit for the 2nd Quarter of FY’22 for the demerged financial services entity.
7. Capital Adequacy Ratio of 23% & Net Debt to Equity ratio of 2 times
8. Average cost of borrowings stood at 8.8% for the quarter. 78% of liabilities are fixed in nature.
9. This previous quarter the company raised about Rs. 1,000 at about 8.55% average.
10. Rs. 360 crores of prudential write-offs was done during the quarter.
11. Provision coverage ratio in Stage-3 is 60% at an overall level, and at about 74% to 75% at the wholesale level.
12. Retail Business

1. 1. Retail now already at 43% of the overall loan book, the company is now much closer to stated target of having 50% of total loan book as retail in the near term.
   2. Average ticket size of nearly 12 lakhs
   3. Quarterly disbursements grew across all the product categories by eight times year-on-year and 62% quarter-on-quarter to reach Rs. 3,973 crores; ahead of earlier stated guidance of Rs. 2,500 crores to Rs. 3,000 crores by the 3 rd Quarter of FY’23.
   4.  12% retail AUM growth
   5. In the one year since the DHFL acquisition, opened 64 new branches and shut down 22 branches resulting in branch network growing to 343 branches.
   6. Present PAN India across 293 cities and towns in 27 states of India. The company aim to be present at 1,000 locations through 500 to 600 branches over the next five years.
   7. NonMortgage Loans had a 42% share in our overall retail disbursements.
2. Wholesale business

• . 5,888 crores worth of assets moved from Stage-1 to Stage-2

1. Exposure to the Top 10 accounts is 33% and reduced since March 19th by Rs. 6,050 crores. And no account exceeds 10% of net worth as of September 2022
2. Wholesale AUM has reduced by 13% in the last one year to Rs. 38,908 crores
3. Stage-1 loan book is much more granular as the average ticket size of the Stage-1 wholesale book is lower at Rs. 187 crores per loan.
4. Over 90% of the Stage-1 wholesale book is into asset backed SPV OPCO loans in real estate.
5. Stage-1 book largely excludes Promoter HoldCo. Corporate Lending Transactions. Over 78% of the Stage-1 real estate book is with large and medium developers. And over 60% of the Stage-1 real estate book has limited on low completion risks.

Investor Conference Call Highlights

1. Given that this was the first quarter post demerger Rs. 5,888 crores worth of assets were moved from Stage-1 to Stage-2, largely completing the asset recognition cycle. The management believes that the company is now largely well-provided for Stage-2 and Stage-3 assets. An additional provision was created of Rs. 2,255 crores and a fair value loss were taken of Rs. 1,076 crores on our wholesale book during the quarter. The moved assets are largly real estate assets.
2. The management stated performance in retail AUM has been driven by various endeavors they took in the last few quarters:

1. Addition of new branches
2. Adding multiple new products to diversify our retail portfolio
3. Activation of branches to sell multiple products.
4. Growth in the customer base through the Digital Lending business enabling in cross sell opportunities

1. Retail business

• . The company launched multiple new products, now offering 11 retail products

1. During the quarter the company has also launched branch led personal loans to salaried individuals in Tier-2 and Tier-3 towns.
2. Nearly 82% of our branches are selling products beyond just the Home Loans.
3. Hence, not only Housing and Secured MSME loans disbursements grew 5x in the last 12 months. But also, the disbursements under the Non-Mortgage Loan categories have seen much higher traction, though from a low base to Rs. 1,677 during the quarter.
4. 20 live partnerships with FinTech, OEMs and aggregators under digital embedded finance business.
5. Digital offerings have enabled to significantly expand our customer franchise to 2.2 million, giving the company substantial cross-sell opportunity.
6. The company achieved cross sell disbursement of Rs. 945 crores over the last year. The asset quality of the acquired DHFL book remains in line with expectations. The company continues to make recoveries from the POCI book.

1. Wholesale business

• . The company will be increasing its focus on recoveries, monetization of the Stage-2 and Stage-3 loans, which will further moderate the wholesale book size in the short term.

1. The management believe that this is an opportune time to build the real estate book. Real estate lending is a large market of Rs. 4.5 lakh crores, with supply of credit significantly lower than the demand, offering significant growth potential.
2. The management stated From a cyclical perspective, we believe it’s a good time to build up the real estate book as the developer consolidation has resulted in a better-quality ecosystem.
3. Within the corporate mid-market lending book, the company has already built a book of Rs. 804 crore with an average ticket size of Rs. 50 crores.
4. The management continues to remain committed to FY2027 aspirations, doubling the AUM from FY2022 levels with strong growth in retail disbursement, keeping the net debt to equity 3.5 to 4.5 times.
5. Stage-1 part of book is roughly Rs. 27,000 crore in size. The management stated this is very high-quality book. Stage-1 assets are 130 plus odd loans. This is really a granularpart of wholesale portfolio. These assets are well secured in terms of the underlying loan structure and security structures.
6. There are three buckets of issues that are there when it comes to moving 5900 crores of assets from Stage-1 to Stage-2. One is where the parent entities of these companies where the group essentially is in some sort of financial distress, while the particular specific project might not be.

1. Second category of issues is where a resolution is possible, either through sale or through some sort of other resolution mechanism. But that will come with a little bit of a haircut.
2. The third category is where genuinely there have been some amount of movement of the market against the borrower, though they have not really kind of defaulted on payments yet, but their cash flow seem weak.

1. The management stated other efforts that are going on is to consolidate and reduce the size of the wholesale book overall over the next few quarters. So, between now and March, certainly the overall books will reduce they expect some of the reduction to come from Stage-2, a little bit from Stage-1 as well.
2. Rs. 11,000 crore portfolio in wholesale that is sitting in Stage-2 and Stage-3, and about Rs. 4,400 crores of provision. So, 40% is, the company has covered on that Stage-2 and Stage-3 book.
3. Net Rs. 100 crores POCI gains in the quarter.
4. The management stated gross yields are not materially different between the accounts on Stage-1 and Stage-2.
5. The interest reversal this quarter on account of the movement to Stage2 is around 230 crores.
6. Tthe steady state retail book credit cost that the company has is around 1.5% to 2%.
7. There two broad sort of connecting themes on retail front

• . Serving what the company call the budget customer of Bharat, that’s the core underlying theme, which says the budget customer of Bharat, what are the various products that the customer might need

1. The second, connecting theme is that from a capability standpoint, where the management believe the company is differentiated versus many other competitors are, is on tech and analytics, where the company has a world class team. And given the company’s ability to set up a particular kind of tech architecture and a particular kind of analytic workbenches is significantly different from what even the most tech advanced banks and NBFCs out there are able to do, because they have legacy problems, which Piramal don’t have.
2. The management explained for microfinance, in microfinance, a credit person of Piramal sitting in a central location can see a video that the sales RM on the ground is taking of the village or of the hut of the borrower. And as the video is streaming, an AI engine is here, which is reading every image that is coming through and identifying assets that the potential client owns, running it through in ML model, and instantly figuring out what the potential credit rating of that client is and giving that as advice to the credit person sitting in the central office.

Analyst’s View

Piramal Enterprises had a poor Q2 with a 22% YoY rise in revenues however profitability took a deep dive. The company completed a demerger of its pharma business from the financial services business. The company sees real estate financing a segment to watch for the coming future. Moreover, the company is well placed to reduce its wholesale business and make it 50-50 between wholesale and retail in near future. It remains to be seen how long it will take for the new business segments in financial services to scale up for PEL and how it manages their weak assets and their aim to focus on retail business.

Q1 FY23 Updates

Financial Results & Highlights

Detailed Results:

1.     Revenues have grown by 22% over the previous year in the same quarter and now stand at Rs.3,548 crores. In this, Financial Services grew by 33% year-on-year and Pharma revenues have grown by 9%.
2.     Net profit stands at Rs.486 crores for this quarter.
3.     Financial service- AUM grew 37% year-on-year to INR 64,590 crores with retail AUM growing 4.3x year on-year to a high of INR 22,267 crores. The share of retail loans has also increased to 37% from 12% as of June 2021.
4.     The Pharma business grew 9% delivering revenues of INR 1,485 crores- India Consumer Healthcare and Complex Hospital Generics businesses grew 17% and 10% year-on year, the CDMO business delivered a moderate growth of 8% year-on-year.
5.     EBITDA margin at 11% during the first quarter versus 12% in the same quarter last year.

Investor Conference Call Highlights

1.     Management stated that as part of the transformation journey, they have also hired key top-quality senior talent to ensure that they have a best-in-class team to help them build a large diversified Financial Services Company.
2.     CDMO business had seen subdued growth due to some execution related challenges and changes in order delivery schedules.
3.     Despite moderate growth in CDMO business, an increase in the raw materials, packaging materials and operating costs.
4.     The nature of the Pharma business is such that it generates a significant part of profits in the second half of the financial year. Last year, the second half contributed nearly 70% to our profitability.
5.     Investment that has been done in their CDMO facility at Canada, has given the company about 35% additional capacity and they have got about 1.8 billion tablet capacity at the facility in Pithampur. Management expects that over the next couple of years, they should be able to adequately utilize these capacities.
6.     Desflurane doesn’t have approval from USFDA yet.
7.     For non-real estate exposures, only one account valued -INR 100 crores has moved to Stage-3 during the course of this quarter.
8.     Management is targeting a portfolio composition of ~45% housing, 20-25% MSME, about ~20% unsecured and whatever is left will be the other secured lending products.
9.     Overall, at an FS-level management believe the kind of business that they are building two-thirds retail, one-thirds wholesale, multiproduct retail with the composition mentioned in point 8. They believe they should be able to deliver a high-2s to low-3s (%) kind of ROA.
10.   CDMO injectable space over the couple of years CAPEX investments plan for FY23 and FY24 is about $200 million per annum. This would help in creating capacity. This includes expansion of antibody drug conjugate capacities at Grangemouth, high-potent API capacities at Riverview, and they are also looking at increasing capacities for their API facilities in India and for potent injectables at Lexington.
11.   Management wants to build a diversified book. They are still at the stage where they will experiment with a lot of different products like gold loan, loan against securities etc.
12.   The wholesale portfolio this quarter from DHFL, all the big lumpy stuff is going to go through a big long process of litigation etc. So, we will keep watching the space.
13.   In FS, management clarified that they are committed to microfinance business, it’s no longer in experimental mode.
14.   Being an extremely well-capitalized company with a lot of spare capital available and as a group, they have had a rich tradition of successful M&A. Management would be open to something which is a good product fit and it checks the box on values and valuation.
15.   POCI book is all retail books where markdown has been done by 65-odd percent to about INR 3,500 crores or thereabouts. If recoveries are greater than the mark, then you get P&L flow. If it’s less than the mark, then you get a P&L hit.
16.   Incremental embedded yield 12.6% is all disbursements ex of embedded finance and including embedded finance into it, the yield increases to 13.1%.
17.   At the portfolio level, the average cost of borrowing is 8.8%.
18.   Capital adequacy is at just over 25%.
19.   Post the DHFL acquisition mix of retail has gone up from 12% to 37%.
20.   There is a little bit of seasonality with the Q1 low and the Q4 high, right. But otherwise, our stabilization cost of DHFL etc., fully baked in and settled in this year.

Analyst’s View:

PEL is the flagship company of the Piramal group. The group has presence in diversified businesses like financial services, pharma (CDMO, Critical Care, OTC) and real estate development and consulting (through a separate company). The Board of Directors has eminent persons from the industry providing their experience and governance to the group. Company has experience of lending in the real estate industry for over a decade and forayed into mortgage lending around five years back. Mr. Jairam Sridharan as the Managing Director has been appointed to scale retail finance business in the medium term and is in the process of building team, systems and process to undertake retail book expansion. While DHFL acquisitions have aided their retail book goal. There has been substantial reduction in exposure to the real estate segment in overall loan book and single group exposure of consolidated tangible net worth on a sustained basis which has led to improvement in asset quality. While demerger on track, it would bring in focus in their business. PEL would be an interesting company to keep a track off and look for upcoming updates hereon.

Q4 FY22 Updates

Financial Results & Highlights

Detailed Results

1. The company had a very poor quarter with consolidated Revenues for Q4 rising 23% YoY & PAT decreasing by 83% YoY.
2. The overall loan book grew by 33% year-on-year to Rs. 65,185 Cr and retail AUM grew four times YoY to AUM of Rs. 21,552 Cr.
3. Average cost of borrowings stood at 9.2% while average maturity of borrowings stood at 3.7 years.
4. GNPA and NNPA post the merger were at 3.4% and 1.6% respectively with provisioning at 5.7% of AUM.
5. Capital adequacy ratio stood at 21%.
6. Wholesale: retail loan mix stood at 64:36.
7. The loan book breakup after the demerger is:
   1. Affordable Housing: 68%
   2. MSME Secured:29%
   3. Used car loans:0.4%
   4. Digital unsecured:1.4%
   5. MSME unsecured:0.7%
8. Net debt to equity of the financial services division is now at 2.7 times.
9. Cumulative ALM mismatch was positive & stood at Rs.12,237 Cr.
10. Self-employed: salaried customers stood at 56:44
11. The yield on disbursements was 12.5% while the average cost of funds was at 9.1% in Q4. ROA and ROE were at 1.3% and 4.1% respectively.
12. Pharma revenues grew 16% YoY for FY22 7 11% YoY for Q4. EBITDA margins stood at 18% for FY22.
13. The breakup of pharma revenues was: 
    1. Pharma CDMO: Up 8% YoY in Q4 
    2. Complex Generics: Up 8% YoY in Q4 
    3. India Consumer Healthcare: Up 55% YoY in Q4 
14. PEL launched 40 new products in the India Consumer Healthcare division in FY22.
15. Demerger is expected to be completed by Q3 FY23.
16. The Pharma division contributed to 48% of total sales for FY22.

Investor Conference Call Highlights

1. The company has increased its presence with 1 million life-to-date customers and 309 branches across 24 states and union territories.
2. The management is aiming to increase its debt to equity to 3.5-4.5X & increase its branch count by 100 in FY23.
3. The company invested in EarlySalary (a fintech startup) for a 10% equity stake.
4. Through the DHFL acquisition, the company acquired a 50% stake in Pramerica Life Insurance JV with Prudential U.S.
5. The management states that the company has $157 million of growth-oriented Capex investments committed across various multiple sites.
6. The management states that in the medium to the long term, it expects about 15% revenue growth across the businesses and expects the EBITDA margin to be 25% to 28% in the 3-5 year time frame.
7. The company had to make extra provisions because its expected realisation from the sale of a few companies which it had lent in the past was sold at a lower rate.
8. Since the take-over of DHFL, the company has recovered Rs.715 Cr worth of loans from the POCI book out of which roughly Rs.425-odd Cr has come in Q4.
9. The management is targeting a doubling of AUM post 5 years & shift the loan mix between wholesale: and retail from 65:35 to 35:65.

Analyst’s Views

Piramal Enterprises has seen the continuation of the recovery in the financial division and good growth in the pharma division. PEL had a poor Q4 with a 23% YoY rise in revenues however profitability took a deep dive due to higher provisioning. The company announced a demerger of its pharma business from the financial services business earlier in Q2FY22. This event is expected to take place in Q3 FY2023. PEL continues to invest in adding on to its pharma business. It has acquired a minority stake in Yapan Bio which is expected to help Piramal pharma foray into biologics. It remains to be seen how long it will take for the new business segments in financial services to scale up for PEL and what challenges it will face in the integration of DHFL and the growth path of the pharma business. However, given their past track record, management capability, and surplus unallocated capital which can be deployed to support any of the conglomerate’s various businesses, Piramal Enterprises continues to be a good conglomerate stock to watch out for, particularly in the real-estate lending space.

Q3 FY22 Updates

Financial Results & Highlights

Detailed Results

1. The company had a good quarter with consolidated Revenues for Q3 rising 25% YoY & PAT rising 14% YoY.
2. The demerger of the pharma and financial services business was approved in Oct.
3. PEL acquired a minority stake in Yapan Bio in Q3.
4. Shareholders of PEL will get 4 shares of Piramal Pharma post demerger.
5. The overall loan book grew by 31% year-on-year to Rs. 60,600 Cr and retail AUM grew four times YoY to AUM of Rs. 21,500 Cr
6. The share of retail loans has gone up to 36% post the merger with DHFL. The Aum has increased 42% YoY post the merger. The company now has 301 branches in 24 states and UTs.
7. GNPA and NNPA post the merger were at 3.3% and 1.8% respectively with provisioning at 4% of AUM.
8. Capital adequacy ratio stood at 26%.
9. The loan book breakup after the demerger is:
   1. Affordable Housing: 46%
   2. MSME Secured:28%
   3. Used car loans:2%
   4. Digital unsecured:21%
   5. MSME unsecured:3%
10. Net debt to equity of the financial services division is now at 2.5 times.
11. The yield of DHFL is 11% on disbursements and cost of borrowing being 7%.
12. Disbursements in retail book increased 5 times YoY to 735 Cr while disbursement yield stood at 12%.
13. The yield on disbursements was 11.4% while the average cost of funds was at 9.1% in Q3. NIM was at 3.5% while the cost to income was at 32% in Q3. ROA and ROE were at 2.6% and 9.5% respectively.
14. ROA stood at 2.6% while ROE at 9.5%. Cost to Income ratio stood at 32%
15. Pharma revenues grew 15% YoY in Q3 & 18% YoY in 9M. EBITDA increased by 18% YoY and EBITDA margins stood at 22.1%.
16. The breakup of pharma revenues was:
    1. Pharma CDMO: Up 10% YoY in Q3
    2. Complex Generics: Up 25% YoY in Q3
    3. India Consumer Healthcare: Up 45% YoY in Q3
17. PEL launched 20 new products in the India Consumer Healthcare division in 9M.
18. Demerger is expected to be completed by Q3 FY23.
19. The Pharma division contributed to 41% of total sales for Q3.

Investor Conference Call Highlights

1. The management is expecting a 20% growth in pharma division in FY22 , 15% across the business in coming years with margins reaching to 25-28% levels.
2. The management believes covid didn’t impact CDMO biz and the key challenges are in terms of execution.
3. The company believes that excluding USA market, ROW is very volatile.
4. The CDMO order book increased by 30%.
5. Investment in Yapan will help in PEL’s foray in biologics, develop synergies with its existing sites & be a complementary business to CDMO according to the managemen
6. Overall collection efficiencies for the retail business have been in the high 90’s.
7. Company expects to add 100 new branches in the next 12 months.
8. Ebitda margins for the current quarter were higher as compared to H1 due to higher margin business being invoiced in H2 of this FY
9. The company is doing significant capex in DIgwal capacity in India which will be the company’s largest facility.
10. Logistics, distribution and manpower constraints have affected the execution in CDMO business leading to flat business.
11. The company earns 1.6% annualized fees on Rs.20,000 Cr of assets of DHFL which are being managed by the Piramal team for the public sector banks who bought these assets.
12. Overall Opex hasn’t changed despite the consolidation with DHFL due to change in manpower to a separate manpower company & cost base of DHFL being lower before merger.
13. Incremental cost of funding for the current quarter stood at 8.5%
14. The yield in mass affluent space is 10.5-10.75% while affordable housing segment being 12% thus the weighted average being 11.25%
15. Tax rate is between 24-25%.
16. The margin in the JV with Allergen for Ophthalmology was at 30%.
17. The management expects ROA to be in the range of5-3% in future.

Analyst’s Views

Piramal Enterprises has seen the continuation of recovery in the financial division and good growth in the pharma division. PEL had a decent Q3 with 25% YoY rise in revenues. The company announced a demerger of its pharma business from the financial services business. This event is expected to take place in 2022. PEL continues to invest in adding on to its pharma business. It has acquired a minority stake in Yapan Bio which is expected to help Piramal pharma foray into biologics. It remains to be seen how long it will take for the new business segments in financial services to scale up for PEL and what challenges it will face in the integration of DHFL and in the growth path of the pharma business. However, given their past track record, management capability, and surplus unallocated capital which can be deployed to support any of the conglomerate’s various businesses, Piramal Enterprises continues to be a good conglomerate stock to watch out for, particularly in the real-estate lending space.

Q2 FY22 Updates

Financial Results & Highlights

*Contains exceptional item of loss of Rs 153 Cr

**Contains exceptional item of loss of Rs 168 Cr

Detailed Results

1. The company had a down quarter with consolidated Revenues for Q2 falling 3% YoY and PAT was down 32% YoY. Normalized PAT in H1 was almost flat YoY at Rs 1090 Cr.
2. The demerger of the pharma and financial services business was approved in Oct.
3. The acquisition of DHFL and merger with PCHFL completed in Sep.
4. Shareholders of PEL will get 4 shares of Piramal Pharma post demerger.
5. Net debt to equity is at 1.3 times currently. Post demerger, PEL (NBFC) will have 1.5 times and PPL will have 0.5 times net debt to equity ratio.
6. The share of retail loans has gone up to 33% post the merger with DHFL. The Aum has increased 42% YoY post the merger. The company now has 301 branches in 24 states and UTs.
7. GNPA and NNPA post the merger were at 2.9% and 1.5% respectively with provisioning at 4% of AUM.
8. The loan book breakup after the merger is:
   1. Affordable Housing: 43%
   2. Mass Affluent Housing: 32%
   3. Loan Against Property: 15%
   4. SME: 9%
   5. Secured Business Loan: 1%
   6. Others: 2%
9. 51% of retail customers are self-employed while the rest 49% are salaried. The retail loan book had an average ticket size of Rs 16 Lacs in Q2.
10. Net debt to equity of financial services division is now at 2.7 times.
11. Retail Lending Portfolio expanded to 9 products.
12. The fresh disbursement yield in Q2 was at 11.7%.
13. The revenue drop in Financial Services was at 20% YoY in Q2 & 19% YoY in H1. This division accounted for 48% of total revenues in Q2 and 50% in H1.
14. The average yield on loans was at 13.6% while the average cost of funds was at 9.5% in Q2. NIM was at 4.3% while the cost to income was at 35% in Q2. ROA and ROE were at 2.7% and 7.1% respectively.
15. Pharma revenues grew 13% YoY in Q2 & 20% YoY in H1. This division accounted for 52% of total revenues in Q2 and 50% in H1.
16. The breakup of pharma revenues was:
    1. Pharma CDMO: Up 7% YoY in Q2 & 11% YoY in H1
    2. Complex Generics: Up 14% YoY in Q2 & 26% YoY in H1
    3. India Consumer Healthcare: Up 40% YoY in Q2 & 54% YoY in H1
17. PEL added 3 large orders for >$10 million each in H1.
18. PEL launched 6 new products in the India Consumer Products division in H1. It also launched a new brand CIR in the Geriatric Care segment.

Investor Conference Call Highlights

1. The gross loan book of DHFL was at Rs 44,000 Cr excluding any fraudulent assets and PEL was able to get it for a net outlay of Rs 20,000 Cr.
2. Organic retail lending disbursements grew 2.6 times QoQ.
3. The management expects the EBITDA margin of the pharma business to improve going forward as historically H2 has had better margins than H1.
4. The CDMO order book grew 50% YoY.
5. Of the Rs 20,000 Cr DHFL net loan book, Rs 18,500 Cr are from retail assets while the rest is from wholesale assets.
6. The management states that AUM growth will slow down probably as the whole loan book of the merged entity will be put through the company risk management and other policies for complete amalgamation.
7. The overall restructuring in the book will at 2% only.
8. The company is not in any hurry to sell off the Shriram stake and it will do so only at desirable levels.
9. The rise in goodwill in the balance sheet is from the Hemmo acquisition.
10. The transition costs reported on the PL statement is including both DHFL and Hemmo transactions.
11. The management has firm belief that disbursements will rise fast in the near future given the network that the company has gotten from DHFL.
12. The company will maintain unsecured lending at around no more than 20% of the overall portfolio according to the management.
13. The management states that it will take a few months for disbursements to over come the new level of repayments.
14. In complex hospital generics in USA, the company is seeing good recovery in the inhalation anaesthesia portfolio.
15. The average yield of the DHFL book is at 11%.
16. The management expects Pharma business margin in FY22 to be close to FY21 level at near 20%.
17. In the CDMO business, 75% of business is in the commercial and manufacturing side while 25% is in the development side including 3% from drug discovery.
18. Of the commercial side, 55% is from generics and 45% is from innovator molecules.
19. FY22 margin for the pharma business should be a little lower than last year margins due to rise in input materials, logistics and distribution costs.

Analyst’s Views

Piramal Enterprises has seen the continuation of recovery in the financial division and good growth in the pharma division. PEL had a mildly down Q2 with the decline in the financial services business mitigated by the rise in the pharma business while costs rose due to transition charges for the merger with DHFL and Hemmo acquisition. The company’s DHFL merger is complete and has resulted in 42% rise in AUM. The management aims to grow disbursement a lot from current levels with the help of the expanded network gotten from DHFL. The management maintains an optimistic stance on the retail lending platform and the pharma business. The pharma business has seen EBITDA margins fall in H1 but the management is confident that overall margins for the year will be close to last year levels of 20%. The company has also announced that it will be demerging the pharma and financial services business within the next 12 months. It remains to be seen how long this slow period for financial services will last for the company and what challenges will it face in establishing its retail lending platform and the integration of DHFL. However, given their past track record, management capability, and surplus unallocated capital which can be deployed to support any of the conglomerate’s various businesses, Piramal Enterprises continues to be a good conglomerate stock to watch out for, particularly in the real-estate lending space.

Q1 FY22 Updates

Financial Results & Highlights

                                 *Contains tax adjustment of Rs 1258 Cr for earlier years

Detailed Results

1. The company had a flat quarter with consolidated Revenues for Q1 rising 0.3% YoY and PAT was up 8% YoY.
2. The NCLT approval for DHFL acquisition was done in June.
3. Net debt to equity has fallen to 0.8 times.
4. The company has unallocated equity of Rs 11,350 Cr which is 32% of overall equity.
5. The wholesale loan book in the Financial Services segment accounted for 88% of total loan AUM. It went down to Rs 37,597 Cr in Q1. Now PEL has no single borrower exposure >15% of AUM.
6. Retail Lending Portfolio expanded to 7 products and to 40 locations.
7. The fresh disbursement yield in Q1 was at 11.9%.
8. GNPA at 4.3% with provisioning at 5.8% of the total loan book. NNPA was at 2.2%.
9. CAR was at 39% in Q1 vs 34% in Q4FY21.
10. The revenue drop in Financial Services was at 19% YoY in Q1. This division accounted for 53% of total revenues in Q1.
11. The average yield on loans was at 13.4% while the average cost of funds was at 10.1% in Q1. NIM was at 4.5% while the cost to income was at 33% in Q1. ROA and ROE were at 2.6% and 6.7% respectively.
12. Pharma revenues grew 31% YoY in Q1. This division accounted for 47% of total revenues in Q1.
13. The breakup of pharma revenues was:
    1. Pharma CDMO: Up 17% YoY in Q1
    2. Complex Generics: Up 43% YoY in Q1
    3. India Consumer Healthcare: Up 73% YoY in Q1
14. PEL added 2 large orders for >$10 million each in Q1. It also completed the acquisition of Hemmo Pharma.
15. PEL gained market share in complex health generics in major markets.
16. PEL launched 4 new products in the India Consumer Products division. It also launched a COVID home detection kit in July.

Investor Conference Call Highlights

1. The company raised Rs 804 Cr from its first public bond issue in July.
2. The DHFL acquisition is expected to help the retail AUM grow 5x after the transaction.
3. The average ticket size for secured loans has come down to Rs 20 Lacs from Rs 75 Lacs before due to the addition of new products. Digital unsecured lending accounts for only 6% of new originations.
4. After the DHFL transaction is completed, the leverage in the financial services business will rise to 2.5 times from the current 1.6.
5. Developer collections remained at an average level of 85-90%.
6. Retail loan collections were affected in April and May but they bounced back to 96% in June.
7. The company is planning to do a few more acquisitions in the next 2-3 years.
8. The Piramal Capital & Housing Finance Company will be merging with DHFL and become a subsidiary of PEL.
9. The assets of DHFL will be recorded at fair value of around Rs 60,000-70,000 Cr no matter what the carrying value.
10. The company does not have any exclusive partnerships with fintech players, and it is mostly using the tech-based APIs for seamless integration and experience for the end customer.
11. The company will be looking to merge Hemmo Pharma with Piramal Pharma in the future.
12. Of the 2 large orders won in Q1, 1 will be fully delivered in FY22 and while the other will be delivered in part in FY22 and FY23.
13. The deposit-taking license of DHFL is still existing and PEL will get back to the RBI on how to start taking deposits on this license once the acquisition is done.
14. The company does have plans to cross-sell its other products to the customer base of DHFL. The management is confident of selling some of the small ticket unsecured loans to DHFL customers as early as Q1 post-integration.
15. After the integration, the loan is expected to become heavily dependent on home loans with an 80% share of the loan book. The digital unsecured lending will be at the remaining 20%.
16. The company has also tied up with 2 used car online platforms for its newest used car financing loan product.
17. NIMs should be maintained at current levels going forward according to the management.
18. The cost of borrowing is expected to drop to 9.2-9.3% after the DHFL transaction.
19. The margin seasonality in the pharma business arises from seasonality in the CDMO business which has more projects or orders in the second half of the year.
20. The company is aiming to expand to nearly 1000 centers in the next 3-4 years even after getting 300+ from DHFL post-acquisition. The expansion will be mostly in Tier 2, 3 & 4 cities with Tier 1 cities having the least share.
21. The company had done restructuring of 2 accounts. One was in real estate with a consideration of Rs 158 Cr and the other was Mytrah Energy which was around Rs 1062 Cr.
22. The overall margin profile of Hemmo Pharma will be greater than the overall pharma margin.
23. In the case of a separate listing of Piramal Pharma, existing shareholders of PEL will also get shares of Piramal Pharma.
24. The digital unsecured lending business has an average ticket size of Rs 17,000 with a duration of 6-12 months.
25. The company is looking to concentrate on the 2 main businesses of secured home loans and unsecured digital lending.
26. The non-compete agreement with Abbott was over in 2018 and the company is evaluating opportunities to enter the domestic formulations space.

Analyst’s Views

Piramal Enterprises has seen the continuation of recovery in the financial division and good growth in the pharma division. PEL had a flat growth in Q1 with the decline in the financial services business mitigated by the rise in the pharma business. The company’s DHFL bid has gotten NCLT approval in Q1. It has also brought the net debt to equity for overall business to 0.8 but this is expected to rise after the DHFL acquisition is completed. The management maintains an optimistic stance on the retail lending platform and the pharma business. The pharma business has seen EBITDA margins fall due to seasonality factor in the CDMO business. The company is also looking to do a few more acquisitions in the pharma space. It remains to be seen how long this slow period for financial services will last for the company and what challenges will it face in establishing its retail lending platform and the integration of DHFL. However, given their past track record, management capability, and surplus unallocated capital which can be deployed to support any of the conglomerate’s various businesses, Piramal Enterprises continues to be a good conglomerate stock to watch out for, particularly in the real-estate lending space.

Q4 FY21 Updates

Financial Results & Highlights

*Contains tax adjustment of Rs 1258 Cr for earlier years

**Contains tax adjustment of Rs 1758 Cr for earlier years  

Detailed Results

1. The company had a flat quarter with consolidated Revenues for Q4 falling 0.4% YoY and PAT turning negative due to tax adjustment. Normalized net profit for FY21 was at Rs 2627 Cr which was flat YoY in terms of normalized profit.
2. The DHFL acquisition has gotten RBI & CCI approvals already and is awaiting IRDAI approval & NCLT resolution.
3. Net debt to equity has fallen to 0.9 times.
4. The company has unallocated equity of Rs 11,029 Cr which is 31% of overall equity.
5. The wholesale loan book in the Financial Services segment was at Rs 39365 Cr vs Rs 41060 Cr last year.
6. Sales of developer clients are now at 115% of Q4 last year.
7. GNPA at 4.5% with provisioning at 6.3% of the total loan book. NNPA was at 2.4%.
8. CAR was at 37% in Q4 vs 31% last year.
9. Net debt to equity for this business was improved to 1.8 times from 2.3 times last year.
10. The revenue drop in Financial Services was at 14% YoY in Q4 & 8% YoY in FY21. This division accounted for 55% of total revenues in FY21.
11. The company’s multi-product retail lending platform made disbursements of Rs 9270 Cr in Q4 with fresh disbursement yield at 11.9%.
12. The average yield on loans was at 14.1% while the average cost of funds was at 8.5% in FY21. NIM was at 5.6% while the cost to income was at 22% in FY21. ROA and ROE were at 3.4% and 10% respectively.
13. Pharma revenues grew 19% YoY in Q4 & 7% YoY in FY21. This division accounted for 45% of total revenues in FY21.
14. The breakup of pharma revenues was:
    1. Pharma CDMO: Up 23% YoY in Q4 & 15% in FY21
    2. Complex Generics: Up 1% YoY in Q4 & Down 10% in FY21
    3. India Consumer Healthcare: Up 55% YoY in Q4 & 20% in FY21
15. EBITDA margin in the Pharma division was at 22% in FY21.
16. Pharma revenues were in the ratio of 62% B2B & 38% B2C.
17. Added 50+ customers in FY21 in CDMO business.
18. Gained market share in complex health generics in major markets.
19. Launched 15+ products and 35+ SKUs in FY21 in the India Consumer Products division.
20. Announced Hemmo acquisition for INR 775 Cr which is One of the few pure play peptide API manufacturers globally with 75% export sales.
21. The Board announced a dividend of Rs 33 per share.

Investor Conference Call Highlights

1. PEL holds around Rs 7,000 Cr of cash and cash equivalents as of March 31st, 2021.
2. The company is aiming to become a 50% retail lending NBFC from the current level of 12% in retail lending contribution.
3. PEL is now the largest Sevoflurane supplier in the U.S. for the third and fourth quarter of FY ’21.
4. The new acquisition Hemmo has a higher EBITDA margin than PEL’s 22% and is expected to grow 3x or more in the next few years according to the company projections.
5. PEL is now getting ready for demerging into 2 large listed entities in the financial sense and pharma sector.
6. NIM has come down due to the rise of the retail book as retail NIMs are lower than Wholesale NIMs at present.
7. The management expects the proceedings in NCLT for the DHFL acquisition to be over in the next 2 months.
8. The management has stated that the company has enough capital to grow at 25% for the next 4-5 years.
9. The company made a reversal of Rs 75 Cr of interest on interest which was also another factor that contributed to lower NIM.
10. In the case of the Omkar transaction, PEL has taken over the development rights of 67 lakh square feet. It has yet to decide on doing either the joint development or selling of the development rights.
11. In partnering with fintechs, the company only allows the partners to apply a gating criterion to filter the applicants and does the underwriting for these filtered applicants by itself.
12. The collections from customers in April were at Rs 750 Cr which was in line with normal COVID levels. Out of this Rs 75 Cr only Rs 25 Cr was from new sales and the rest was from old sales locked up in receivables.
13. May is expected to see a dip in construction activity of 20-25%.
14. The management maintains that the current provisions are adequate to ride out the 2nd wave of COVID-19.
15. The management has provided long-term guidance of a 15% growth rate in the pharma business. It believes that the immediate growth in the business will be greater than the long-term rate.
16. EBITDA margin in Q4 was at 285 and the management believe that it can continue to stay high as operating leverage comes into play with the rise in sales of the India Consumer Products division. It can even go higher when the Complex Generics business starts growing again.
17. The management expects a capex of $ 90-100 mn per year in the pharma business in the next 2 years. This capex is mainly for the facilities in Canada at Riverview and Grangemouth.
18. The management states that it doesn’t need any additional capital to grow both Financial Services & Pharma businesses but the unallocated equity can be used at a later date for any acquisitions in both businesses if the need arises.
19. The CDMO business is expected to grow faster than overall pharma business due to the additions of the Sellersvile & Hemmo which should add to growth.
20. The Lodha exposure as of March ’21 is at Rs 2637 Cr, of which Rs 1593 Cr is now in SPV with a one-time 1.5x cover of fully ready inventory of apartments. The balance of Rs 1058 Cr is in macro tech developers. Rs 431 Cr has already been prepaid and only Rs 620 Cr of exposure is pending now. The total pending exposure adding to the SPV comes to Rs 2150 Cr which is less than 15% of the total book.
21. The total exposure to Omkar was Rs 1300 Cr and the management believes that the value of the underlying land is far greater than the loan amount due.
22. In CDMO, commercial revenues are 65% of sales while the rest 35% is from development. The management has pointed out that development used to account for only 10% of revenues and as it is rising, it is also providing new avenues for commercial production.
23. The company saw a lot of synergies rising from Hemmo which spurred them to this acquisition. For example, a lot of peptides are injectables, and the company already has a client that gets its APIs from Hemmo and gets it filled at PEL’s Lexington plant.
24. The main issue with Hemmo was its limited capacity. PEL came to know that many customers didn’t put orders with Hemmo as it didn’t have enough capacity to service these orders. Once the capacity expansion is completed here, PEL is confident of bagging many orders from existing customers.

Analyst’s View

Piramal Enterprises has seen the continuation of recovery in the financial division and good growth in the pharma division. The company DHFL bid has already gotten CCI & RBI approval & is expected to get NCLT approval soon. It has also brought the net debt to equity for overall business to 0.9 and for Financial Services business to 1.8 times which is exceptional for a predominantly NBFC company. The management maintains that the company has enough capital for organic growth of 20-25% per year for both financial services & pharma divisions. The pharma business has good runway in all 3 segments, especially in the CDMO division with the addition of capacities here throughout the year. It is also expected to see additional demand coming back in the complex generics business which has been subdued due to the postponement of most surgeries due to COVID-19. It remains to be seen how long this slow period for financial services will last for the company and what challenges will it face in establishing its retail lending platform and the integration of DHFL from the ongoing 2nd wave of COVID-19. However, given their past track record, management capability, and surplus unallocated capital which can be deployed to support any of the conglomerate’s various businesses, Piramal Enterprises continues to be a good conglomerate stock to watch out for, particularly in the real-estate lending space.

Q3 FY21 Updates

Financial Results & Highlights

*Contains exceptional item of Rs 258 Cr which is transaction cost on transfer of pharma business  

Detailed Results

1. The company had a mixed quarter with consolidated Revenues for Q3 falling 4% YoY and PAT rising 19% YoY. Similarly, 9M revenues fell 3.7% YoY while PAT rose 6.4% YoY.
2. The DHFL acquisition has total consideration of INR 34,250 Cr. –upfront cash component of INR 14,700 Cr. (incl. cash on DHFL’s B/S) and a deferred component (NCDs) of INR 19,550 Cr.
3. Net debt to equity has fallen to 0.9 times.
4. The company has unallocated equity of Rs 12,375 Cr which is 35% of overall equity.
5. The wholesale loan book in the Financial Services segment was at Rs 41060 Cr vs Rs 51436 Cr last year a reduction of 20% YoY.
6. Sales of developer clients are now at 82% of Q3 last year.
7. GNPA at 3.7% with provisioning at 6.3% of the total loan book. NNPA was at 1.8%.
8. CAR was at 37% in Q3 vs 29% last year.
9. Net debt to equity for this business was improved to 1.9 times from 2.5 times last year.
10. The revenue drop in Financial Services was at 9% YoY. This division accounted for 59% of total revenues.
11. The company’s multi-product retail lending platform made disbursements of Rs 3122 Cr since soft launch in Oct.
12. The average yield on loans was at 14.6% while the average cost of funds was at 8.4%. NIM was at 6.2% while the cost to income was at 18%. ROA and ROE were at 3.8% and 11.5% respectively.
13. Pharma revenues grew 5% YoY. This division accounted for 43% of total revenues.
14. The breakup of pharma revenues was:
    1. Pharma CDMO: Rs 846 Cr (Up 16% YoY)
    2. Complex Generics: Rs 399 Cr (Down 13% YoY)
    3. India Consumer Healthcare: Rs 130 Cr (Up 14% YoY)
15. EBITDA margin in the Pharma division was at 22%.
16. The company passed 17 successful regulatory inspections during 9MFY21.
17. Launched 15+ products and 35+ SKUs in 9M in the India Consumer Products division.
18. Announced expansion of $32 million in Riverview, Michigan facility.
19. PEL also announced acquisition of 49% remaining stake in Convergence Chemicals.

Investor Conference Call Highlights

1. The company is aiming to create a lending portfolio where retail will be 50% of the lending book in the near term.
2. The company launched 6 new products in the retail lending platform in Q3.
3. It is now live in 40 locations.
4. The company has gradually pivoted the retail lending business towards mass-affluent and affordable housing with no fresh disbursement in the affluent housing finance business. This is expected to improve profitability.
5. The DHFL retail loan portfolio should help in jump-starting the organic retail business and expansion in presence with additional branches and customer reach.
6. PEL’s top 10 exposures have reduced 27% since March 2019 from INR 18,400 crores to INR 13,400 crores.
7. Only 1 account at 15% of net worth with only 3 accounts greater than 7% of net worth.
8. The next aim for transformation for PEL is moving from short-term liabilities to stable long-term borrowings. Around Rs 12,800 Cr of long term, debt was raised in 9MFY21 while CP exposure remains low at Rs 1000 Cr. Thus ALM profile has improved with significant positive gaps in all the buckets.
9. In Q3, PEL invoked onetime restructuring for loans worth Rs 1741 Cr accounting for 3.8% of the loan book.
10. The fall in complex hospital generics business was due to volatility in the demand of products used in surgeries globally but this is expected to normalize shortly.
11. The expansion in the Riverview facility is for additional capacity in potent and non-potent API development and manufacturing.
12. The company is successfully moving towards the demerger of the Financial Services and Pharma businesses.
13. The management has stated that it does see some upside in the wholesale book of DHFL and is yet to decide on its approach in this area.
14. Now that the non-compete clause with Abbott is over, the company is looking to expand its portfolio through the OTC space.
15. In the complex generics space, the company has won a few large contracts and 1 very large contract. This business division has seen a W-shaped recovery.
16. The management expects that once vaccinations are going full way and things normalize, demand will come back to this business due to the big backlog of surgeries that got delayed due to COVID-19.
17. The infra book has been reduced to Rs 2375 Cr as of Dec 2020. The majority of exposures are now 3-5% in the wholesale book.
18. The Lodha exposure has come down from Rs 3300 Cr to Rs 2671 Cr. The company has split the deal with Lodha into 2 and has moved all finished inventory into an SPV. By March the total exposure will be near Rs 2500 Cr of which Rs 1000 Cr or less will be Lodha exposure while the rest will be in the SPV.
19. The management has stated that the cost of funds has remained high due to high wholesale exposure but it will go down significantly as the DHFL portfolio will get added which has only 6.75% cost of funds.
20. The personal loans exercise is still in the experiment phase. The company is looking at a target market with a monthly salary of Rs 25000-50000 for this business.
21. The merger with DHFL should be complete by May or June 2021.
22. The 4 main business lines in the retail lending side will be mass-affluent housing with margins just under 11%, loan against property with a margin between 11.5-12%, affordable housing with a margin above 12%, and small business secured lending with a margin above 13%. Overall the margin from the new business is expected to be above 11% at the least.
23. The company went live with ZestMoney as a partner and has 3 more fintech partnerships lined up.
24. The management has clarified that it will be doing floating economics with all partners with the front end of the partners and the back end from PEL.
25. The 4 large exposure that the company has restructured are in real estate, hospitality, auto components, and infra.
26. The company had 1 large exposure in the auto ancillary space that it let go from Stage 2 to Stage 3. This was done as the management saw that liquidating and selling the assets of the company was a better way to get back money than restructuring it. The company recovered around Rs 436 Cr from this exposure.
27. The management expects the ongoing acquisition and expansion in the pharma business to drive margin expansion in the future for the company.
28. The outstanding retail loan book is at Rs 5300 Cr currently.

Analyst’s View

Piramal Enterprises is facing the heat of the challenging economic environment and downturn in the real estate sector. The company has seen a good bounce back in the financial division and good growth in the pharma division. The company has managed to make a successful acquisition bid for DHFL which is a shot in the arm for the nascent retail lending business. It has brought the net debt to equity for overall business to 0.9 and for Financial Services business to 1.9 times which is exceptional for a predominantly NBFC company. The company is doing well since the launch of the retail lending platform in Nov. PEL’s pharma business is also expected to see additional demand coming back in the complex generics business which has been subdued due to the postponement of most surgeries due to COVID-19. It remains to be seen how long will this slow period for financial services lasts for the company and what challenges will it face in establishing its retail lending platform and the integration of DHFL. However, given their past track record, management capability, and surplus unallocated capital which can be deployed to support any of the conglomerate’s various businesses, Piramal Enterprises continues to be a good conglomerate stock to watch out for, particularly in the real-estate lending space.

Q2 FY21 Updates

Financial Results & Highlights

Detailed Results

1. The company had a good quarter which saw a bounce back from Q1 lows. Consolidated Revenues for Q2 were flat YoY and reported a rise in PAT of 14% YoY.
2. The company raised Long-Term Borrowings of Rs 11,500 Cr. during H1.
3. Net debt to equity has fallen below 1.
4. The overall loan book in the Financial Services segment was at Rs 51522 Cr vs Rs 53055 Cr last year.
5. Sales of developer clients are now at 100% of the pre-covid level.
6. GNPA at 2.5% with provisioning at 5.9% of the total loan book. NNPA was at 1.6%.
7. CAR was at 34% in Q2 vs 27% last year.
8. Net debt to equity for this business was improved to 2.1 times from 2.8 times in last year.
9. The revenue drop in Financial Services was at 5% YoY. This division accounted for 56% of total revenues.
10. The company’s multi-product retail lending platform is to be launched in Nov ’20 and will largely be doing secured lending in FY21. It will start by operating in 4 product categories and 7 variants (Affordable, Mass Affluent Housing, Secured Business loans & LAP)
11. The average yield on loans was at 14.8% while the average cost of borrowings was at 10.8%. NIM was at 6.3% while the cost to income was at 17.4%. ROA and ROE were at 3.8% and 12% respectively.
12. The company completed the deal with Carlyle Group in Oct ’20.
13. Pharma revenues grew 9% YoY. This division accounted for 44% of total revenues.
14. The breakup of pharma revenues was:
    1. Pharma CDMO: Rs 866 Cr (Up 20% YoY)
    2. Complex Generics: Rs 438 Cr (Down 8% YoY)
    3. India Consumer Healthcare: Rs 140 Cr (Up 25% YoY)
15. EBITDA margin in the Pharma division was at 23%.
16. The company passed 4 successful regulatory inspections during Q2FY21.
17. Launched 15 products and 38 SKUs in H1 in the Consumer Healthcare division.
18. Alternative AUM as of Sep ’20 was at Rs 11,230 bn.

Investor Conference Call Highlights

1. The company raised long-term debt of Rs 24,800 Cr in H1.
2. The company aims to live with its retail lending platform in Diwali with 4 product categories in 26 towns.
3. 93% of pharma revenues come from global clients. The company is always on the lookout for acquisitions that may add strategic value and fit for the company in both the pharma and financial divisions.
4. The debt in the pharma division after the Carlyle deal is at Rs 2200-2500 Cr.
5. The average yield from the retail finance segment is expected to be lower than the current yield of the financial division and is expected to be at 10-12%. The company has decided to stay out of unsecured lending as long as COVID uncertainties still remain.
6. The company had built up cash covers on the overly cautious assumption that there will be zero sales & collections in H1 and Q3 will have 20-30% while Q4 will have 40-50% collections. But in reality, the bounce-back has been much better than expected with sales back at 100% and collections at 82%.
7. The company still needs 1 quarter to see whether this bounce back is sustainable or it is just pent up demand that is temporary.
8. Prices have not really come down in RE space and collections are lagging sales as builders are giving buyers more time in the payment schedule.
9. The average cost of borrowing for the company is expected to continue to go down slowly. The management is hopeful that with the company’s strong balance sheet and the mix changing in favor of retail, it will get the rating to upgrade.
10. The company has indeed seen the incremental cost of borrowing come down and it was at 8.5-9.5% in the last 6 months.
11. The long term funding of Rs 12,000 Cr raised in H1 is in the range of 3-7 years. The company has also done rollovers of Rs 3000-4000 Cr in the same period.
12. There isn’t any particular player that the company considers its direct competitor in all spaces. It sees competition from AU or Aavas and other small finance lenders in the affordable housing business and the small business lending spaces. While in the fintech space, it sees Bajaj Finance as competition.
13. The company doesn’t want to compete for head to head with these players and is instead focusing on finding pockets in terms of products, customer segments, and properties where banks are not focused and where it can compete a little bit better on given its cost of the fund structure.
14. The company is indeed on the lookout for inorganic opportunities in the fintech space but it is unlikely to acquire in fintech purely for specific core platform capabilities of the targets.
15. The management has stated that from a liquidity standpoint, the hospitality and hotel sector might stay under some pressure for the foreseeable future and the company may have to consider restructuring in some cases in these segments. The company will take a call on it in January.
16. Around 95-97% of outstanding loans in the standalone balance sheet have been transferred to HFC or to NBFC. The company only has around Rs 1500-1600 Cr of loans left in the standalone balance sheet.
17. The management has clarified that it had not taken the decision to exit Shriram to increase liquidity or strengthen its balance sheet. They had taken the decision as they are moving into retail lending which may have direct competition with Shriram. The company is in no urgency to sell this stake and it will let it go only for the right price.
18. Stage 3 loans for the company were at Rs 1200 Cr while Stage 2 was at Rs 1200-1300 Cr.
19. The company is looking to wait till Q4 at least before considering the reversal of COVID provisions.
20. The company has reduced its renewable sector exposure from Rs 3900 Cr to Rs 2800 Cr from June to Sep. This exposure is expected to come even further down as 2 large exposures of ACME and ReNew have gotten refinanced at par with Brookfield in Oct. The management expects that by March ’21, all renewable exposure except Mytrah will be refinanced.
21. The refinance deal with Brookfield has given the company additional liquidity of Rs 1500 Cr.
22. No fresh lending was done in the wholesale business in Q2.

Analyst’s View

Piramal Enterprises is facing the heat of the challenging economic environment and downturn in the real estate sector. The company has seen a good bounce back in the financial division and good growth in the pharma division. The company has managed to complete the Carlyle deal and has brought the net debt to equity below 1 which is exceptional for a predominantly NBFC company. The company is doing well to launch the retail lending platform in Diwali and target underserved geographical and population segments that are not addressed by most of the competition. It remains to be seen how long will this slow period for financial services lasts for the company and what challenges will it face in establishing its retail lending platform. However, given their past track record, management capability, and surplus unallocated capital which can be deployed to support any of the conglomerate’s various businesses, Piramal Enterprises continues to be a good conglomerate stock to watch out for, particularly in the real-estate lending space.

Q1 FY21 Updates

Financial Results & Highlights

Detailed Results

1. The company had a rough quarter. Total Revenues for Q1 were lower by 8% YoY and reported a rise in PAT of 11% YoY.
2. The company raised capital of $ 490 million from Carlyle for a 20% stake of Piramal Pharma.
3. Net debt was reduced by Rs 13902 Cr since Q1FY21 and debt to equity has fallen to 1.2 times from 1.9 times last year.
4. Raised long-term borrowings of ~Rs 9,600 Cr. during Q1.
5. The overall loan book in the Financial Services segment was at Rs 51265 Cr vs Rs 56605 Cr last year.
6. Top 10 exposures were reduced by Rs 4000 Cr in the past 1 year.
7. GNPA at 2.5% with provisioning at 5.9% of the total loan book.
8. CAR was at 33% in Q1 vs 23% last year.
9. Net debt to equity for this business was improved to 2.2 times from 3.7 times in last year.
10. Revenue drop in Financial Services was at 6% YoY. This division accounted for 65% of total revenues.
11. The company is focused on building a multi-product retail lending platform with products such as Affordable Housing Loans, Mass Affluent Housing Loans, and Secured Business Loans in FY21. The focus for these products will Tier-II/III locations.
12. Alternative AUM in Q1 was at Rs 11480 Cr.
13. The average yield on loans was at 15.2% while the average cost of borrowings was at 10.8%. NIM was at 6.5% while the cost to income was at 17%. ROA and ROE were at 3.8% and 12% respectively.
14. Pharma revenues fell 11% YoY. This division accounted for 35% of total revenues.
15. The breakup of pharma revenues was:
    1. Pharma CDMO: Rs 614 Cr (95% of Q1FY20)
    2. Complex Generics: Rs 324 Cr (78% of Q1FY20)
    3. India Consumer Healthcare: Rs 104 Cr (96% of Q1FY20)
16. India Consumer Products grew by 28% QoQ to Rs 104 Cr.

Investor Conference Call Highlights

1. All the pharma businesses are getting integrated into a subsidiary of PEL, Piramal Pharma Limited. The business was valued at an enterprise value of $2.775 billion with a potential upsize of up to $360 million, based on FY21 performance.
2. The company now has only 1 account that is greater than 15% of the total exposure.
3. The company conducted a scenario analysis at the onset of the COVID-19 outbreak. The stressed scenario assumed, no sales, no collection, and no construction activity for the first and second quarters of the current year, followed by minimal pickup starting in the third quarter. The outcome showed that 88% of the wholesale real estate portfolio had a >1x times security/ cash cover, under the stressed scenario.
4. In the retail lending space, the company is looking to focus on locations with a population between 10,000 to 4 million. The company has identified these markets to target based on potential and historical risk performance.
5. This business shall have a digital core strategy with physical channels for customer acquisition and collection.
6. As of June’20, the moratorium on the wholesale loan book was at 67% of the AUM and in the retail loan book, 25% was under moratorium.
7. The company has recently acquired a solid oral dosage drug product facility in the US.
8. For the retail lending business, FY21 is widely expected to be a year of foundation building and the management is not expecting much growth in the year.
9. The company is looking to go live with its product offering in retail lending around the Diwali season.
10. Sales in the month of April and May were 10% and 22% of pre-COVID sales while in June sales reached 40% of pre-COVID levels. The maximum sales for the company are actually taking place in affordable and mid-market segments.
11. There was no change in RM in the pharma business and the lower EBITDA was due to adverse product mix. The management does not expect any significant change in RM costs going forward.
12. The company expects revenues to go close to $35-40 million over the next three to four years from the newly acquired US facility.
13. PEL will receive around Rs 3400 Cr from the stake of Rs 3700 Cr to Carlyle. This amount will be used to further reduce debt for the company. These funds will also be used to fund inorganic expansion opportunities in the near future.
14. Collections in June had reached 40% of pre-COVID levels.
15. In the injectables and inhalation anesthesia businesses, sales may have slowed down due to drop in surgeries but underlying is expected to bounce back once normal activity resumes for the sector.
16. In the pharma business, the sales were down 16% YoY in constant currency terms.
17. The management is confident that the company will be compliant with any guidelines issued by RBI for HFCs.
18. The main reason for the company to target tier II & III locations for its retail lending is that the competition in Tier I locations is too high and it is easier to establish itself as a differentiated provider in such markets.
19. Commercial real estate is 8% of total real estate book at Rs 3700 Cr where LAP & LRD are at Rs 1300 Cr and the rest is under construction finance. Most of the construction finance is in office space. The average LTV in LAP & LRD is at less than 65%.
20. Loans to hospitality is at Rs 2000 Cr. The company has lent to top brands in the space like Marriott, Taj Group, and Hyatt.

Analyst’s View

Piramal Enterprises is facing the heat of the challenging economic environment and downturn in the real estate sector. Although the prospects of the pharma business seem good, the financial business is expected to stay muted for FY21. The company is constantly working on improving the liquidity condition of its Balance Sheet and has also managed to raise capital in Q1 both through a stake of 20% in Piramal Pharma and raising debt. The company is doing well to use this downtime to develop its retail lending platform and target underserved geographical and population segments. It remains to be seen how long will this slow period for financial services lasts for the company and what challenges will it face in establishing its retail lending platform. However, given their past track record, management capability, and surplus unallocated capital which can be deployed to support any of the conglomerate’s various businesses, Piramal Enterprises continues to be a good conglomerate stock to watch out, particularly in the real-estate lending space.

Q4 FY20 Updates

Financial Results & Highlights

*One-time accounting write-off of INR 1,758 Cr. of Deferred Tax Asset (DTA) and reversal of Minimum Alternate Tax (MAT) Credit

*One-off incremental provisions of INR 1,903 Cr.

Detailed Results

1. The company had a rough quarter. Total Revenues for Q4 were lower by 2% and reported a loss of 1703 Cr for the quarter.
2. Pharma business showed good growth for the quarter and the full year. Pharma revenues up 13% to INR 5,419 Cr for the year with the EBITDA margins at 26%, FY20 EBITDA for the Pharma business crossed INR 1,400 Cr.
3. Financial Services business took a big hit. Revenues were down 11% in the quarter and 8% for the full year. Pharma business, on the other hand, grew 10% YoY in Q4 and 13% YoY for FY20.
4. The company announced a final dividend of Rs 14 per share for FY20.
5. Capital inflows of INR 14,500 Cr. from key milestone transactions in FY20. These include the preferential allotment for CDPQ, the right issue for existing shareholders, and the sales of a 10% stake in Shriram Transport Finance and DRG.
6. The company has an unallocated surplus equity pool of Rs 10,482 Cr.
7. Total equity increased 12% to INR 30,572 Cr. vs. INR 27,224 Cr. last year.
8. Net debt reduced by 25% to INR 37,283 Cr. vs. INR 55,122 Cr. last year. Net debt to equity reduced to 1.2 times
9. One-time accounting write-off of INR 1,758 Cr. of Deferred Tax Asset (DTA) and reversal of Minimum Alternate Tax (MAT) Credit, as the Company opted for a lower tax rate under the new corporate tax regime.
10. One-off incremental provisions of INR 1,903 Cr. (INR 1,411 Cr., net of taxes) in Financial Services. Adopted a conservative and prudent approach, given macroeconomic uncertainties.
11. Loan book at INR 50,963 Cr., with top-10 exposures reduced by ~INR 4,200 Cr. during the year.
12. Raised ~INR 13,500 Cr in long-term borrowings over last one year
13. ~INR 8,900 Crores were available in the form of cash and undrawn bank lines as of Mar 31st, 2020.
14. Housing Finance loan book of INR 5,534 Cr.; aim to create a multi-product Retail Lending franchise.
15. Overall provisioning at ~2.5x times of GNPAs and 5.8% of the overall loan book. PCR at 40%.
16. Capital Adequacy Ratio of the Financial Services business at 31% (vs. 22% as of Mar-2019).
17. Loan book split as on 31.03.2020:
    1. Whole Sale Real Estate: 70%
    2. Hospitality: 4%
    3. Corporate Lending: 15%
    4. Retail Financing: 11%
18. 12% YoY reduction in wholesale loan book, which includes real estate and corporate loans
19. Exposure to top-10 accounts reduced by ~INR 4,200 Cr. during the year (a decline of 23% YoY)
20. As of Mar-20, three exposures were >10% of the net worth of the FS business, which includes one account >15% of net worth
21. Share of CPs in overall borrowings has declined 94% to INR 1,080 Crores as of Mar-2020 from INR 18,017 Crores in Sep-2018.
22. The company also has a positive asset-liability mismatch across all maturities.
23. Gross debt to equity of Financial services business reduced to 2.6 times from 3.9 times a year ago.
24. In the Pharma division, FY20 revenue & growth across segments was:
    1. CDMO: Rs 3154 Cr & 13% YoY
    2. Complex Generics: Rs 1853 Cr & 11% YoY
    3. Consumer Healthcare: Rs 418 Cr & 25% YoY
25. The JV with Allegan saw revenues of Rs 393 CR and a net profit of 104 Cr in FY20. PEL has a 49% stake here.
26. EBITDA margins for the division improved further to 26% in FY20 from 21% a year ago.
27. In the CDMO business, two client NCEs (new chemical entities) were approved for launch by the USFDA in Q4FY20.
28. In complex generics, the company launched 11 products in FY20 and 3 products in Q4.
29. Company plans are to raise funds by issuing a minority stake in the pharma business to potential financial investors.

Investor Conference Call Highlights

1. PEL has 10000 Cr of repayments coming due in the next two quarters. Against that, they have carried 4000 Cr of cash in the new FY. They have cash inflows of two banks of 4000 Cr in April. In LTRO they have a modest success of 1000 Cr sanctioned loans. And in the next 2-3 months, they expect further 4000 to 5000 Cr through bank lines. They are also in the next two to three months they are trying to down-sell a couple of their assets.
2. In the pharma business, the company is in advance talks with investors for selling some stake. The pharma business would first be transferred into a 100% subsidiary of PEL. And then the investor(s) are expected to invest in the pharma subsidiary for around 20% stake. This money would eventually flow into PEL, the holding company.
3. Debt on pharma books is currently around 4500 Cr. When investment comes, the debt will reduce to around 3000 Cr. and rest will be used in the holding company of PEL.
4. Goodwill of the pharma business is 852 Cr. In CDMO business management expects to grow at a CAGR of 15-20%.
5. On the lending side, 80% of the borrowers of PEL have asked for a moratorium of the payments.
6. Management is building technology for their consumer finance vertical and refrain from divulging much information. They would share more details in the next call.
7. PEL is focusing on diversifying its loan book and making it more granular. Hence, they are consciously down-selling a few of the real estate and corporate wholesale assets.
8. Rs 260 Cr of additional GNPA The same is split between two groups- Marvel & Maitra. 208 Cr of exposure is in Marvel, where PEL has accepted a one-time settlement resulting in a loss of 31 Cr. The majority of the balance of 260 Cr post-Marvel exposure is in the Maitra group. PEL is in process of selling the assets in due course of time and hence taken suitable provision.
9. The portfolio churn is happening in retail housing where there is a down-selling of past loans and pickup of new loans. Hence, the management foresees very tepid growth for a few quarters.
10. The incremental cost of funds during the quarter is 9.5%-10%.
11. PEL has a 2000 cr hospitality portfolio. Management expects the hospitality industry to at least take 18 months to recover. However, they claim that all the loans have been on operating assets. Not a single loan is on under-constructed property. And the majority is given to top brands like Taj, Oberoi, Hyatt etc.
12. The company’s LTV is also very low (below 65%) in the case of the hospitality sector.
13. Company is expecting only about 1000- 1500 Cr sanction from LTRO1
14. Loans moratorium which PEL availed for was around 1500 Cr. Out of that also, they paid roughly 50% as the banks later asked them to. So, currently, the loan moratorium is Rs 750 Cr.
15. In the LRD book company has around 950 Cr of assets. The majority of that is in BKC, Mumbai to Wadhwa group and it is going on smoothly.
16. Whenever there is a tsunami in the financial market, management stress-tests its books and makes the provision accordingly. This time it is an even worse situation. Management has in its scenario analysis has also included a case where there would be zero sales, zero construction, and zero collection for the next three quarters. And post that the industry would limp back to normalcy.
17. In real estate, the lender must provide liquidity to the developer to ensure that the project gets completed. If the project gets delayed or stuck, the whole value chain suffers.
18. To one of the questions, management clarified that they are not looking at any new business segment at the moment.
19. The reduction of exposure in Lodha was supposed to be completed by March 2020. However, it has got delayed. Management expects it to get to that reduced level by September 2020.
20. The corporate loan book is around 7000 Cr. 4700 Cr of that is in Infrastructure (renewables). The company is in advance talks with private InvITs to sell these assets. They expect the corporate book to reduce to half in the coming year.
21. The additional provision of 1900 Cr was not mandated by RBI. The company has done that on its own by following a prudent and conservative policy for the way forward.
22. Management continues to stay conservative and resist from making any comment on growth plans. Hence, the focus is on improving the liquidity and the health of the Balance Sheet.

Analyst’s View

Piramal Enterprises is facing the heat of the challenging economic environment and downturn in the real estate sector. Even though the pharma business is doing well, the problems of financial business are dragging their overall performance. The company is constantly working on improving the liquidity condition of its Balance Sheet. They are in advance talks of selling a stake in the pharma business which can be partly used to retire debt in the pharma business and partly to improve the liquidity of the financial business. In this period of the pandemic, how the company adapts to the new environment remains critical. However, given their past track record, management capability, and surplus unallocated capital which can be deployed to support any of the conglomerate’s various businesses, Piramal Enterprises continues to be a good conglomerate stock to watch out, particularly in the real-estate lending space. But looking at the valuations, it seems like near term worries are outweighing the long term prospects for the company in investor’s minds.

Q3 2020 Updates

Financial Results & Highlights

*Containing an exceptional item of a loss of Rs 1287.9 Cr

Detailed Results

1. The company has shown modest growth for the quarter with consolidated revenues growing 10% YoY and net profit also growing 20% YoY. The cause for YoY profit growth is mainly the corporate tax cut instituted earlier this year.
2. The company received Rs 6750 Cr from the sale of the Healthcare Analytics division in the quarter.
3. It also raised Rs 3650 Cr from the rights issue to existing shareholders and Rs 1750 CR from preferential allotment to CDPQ.
4. The company has reduced its debt to equity ratio to 1.2 times and a debt reduction of Rs 15000 Cr since March ’19.
5. The ROE (considering Cash Tax and other synergies from the merger) for 9MFY20 was 15.9%.
6. In Financial Services, the total loan book was at Rs 51429 Cr vs Rs 53,055 Cr a year ago. This is because of the company reducing single borrower exposures. The company currently has only one exposure that is higher than 15% of the net worth of the financial services business.
7. The stage 2 & 3 loans now form 2.1% of the total loan book which is up 30 bps QoQ.
8. The housing finance loan book grew 56% YoY and now forms 12% of total loan book vs 7% a year ago.
9. The Segment breakup of revenue growth is as follows:
   • Financial Services: Up 7% YoY
   • Pharma: Up 13% YoY
   • Healthcare Analytics: Up 9% YoY
10. Gross NPA ratio stands at 1.8% vs 0.9% in Sep ’19. The increase is mainly due to the rise in stage 2 & 3 loans in the quarter.
11. Pharma revenues grew 15% YoY and 9M EBITDA margins were consistent at 23%.
12. Consumer Healthcare division saw growth of 37% YoY in 9M revenues.
13. Despite trying industry conditions, the financial services division grew 16% YoY in the 9M period.
14. Book value per share for the company was at Rs 1457 in Dec ’19.
15. Alternative assets under management grew 20.3% YoY.
16. The company is also co-investing with IIFL on an AIF platform to fund late-stage and last-mile real estate projects. The AIF target size is Rs 2000 Cr and has concluded deals amounting to Rs 1000 Cr already.
17. The company also maintains a healthy CAR of 32% in Dec ’19. It has also reduced the debt of the financial services division to equity of 2.8 times vs 4.6 times a year ago.
18. The company has maintained a positive gap in ALM mismatch across all maturity brackets.
19. Overall, the company maintained a healthy average yield of 14.3% while keeping the borrowing costs at 11.1% and maintaining a cost to income ratio of 19.9% in the 9M period.
20. The company is planning to bring Pharma businesses under a subsidiary and raise funds by issuing a minority stake to potential investors.

Investor Conference Call Highlights

1. In retail financing, the company is partnering up with a large telecom player to offer tailored financial products and solutions to customers. The company will restructure the retail lending business under a 100% owned subsidiary.
2. The company has appointed Jairam Sridharan, the former CFO of Axis Bank, as the CEO of Retail Financing. The company has also appointed McKinsey & Company to prepare a strategic plan to build a complementary lending business across the risk-return spectrum, comprising of retail housing finance, consumer and small businesses.
3. In the CDMO business, the company is planning to expand production capacities at multiple sites. The company has increased market share in the inhalation anesthesia portfolio and has added Desflurane to its product portfolio.
4. Within the 3 deals added to stage 3 in the quarter, 2 deals are with Ornate and Delhi Baroda whom the company is taking to NCLT to take over their assets. The third is ILD where the company went for a onetime settlement and write off Rs 34-35 Cr.
5. The management has assured that the transaction for the sale of the Healthcare Analytics division will be completed soon and the company will receive the proceeds before the end of March 2020. Most of these proceeds will be used to repay company debt.
6. The management has mentioned that the pharma business does not need any allocation currently and it is yet to be decided how much is to be allocated to the financial services division.
7. The company will start in consumer finance in the coming year and it is also looking for possible acquisition opportunities in this field.
8. The management has clarified that Delhi Baroda is not a real estate company but a truck financing company that was part of the ECL portfolio.
9. The management has clarified that the AIF with IIFL is for senior secured lending only and it is different from the CPPIB and Ivanhoe tie-ups as the latter ones involve equity investments into real estate projects.
10. The company’s securitization book is now more than Rs 4000 Cr out of which Rs 1200 Cr is from the retail book while the rest is from wholesale real estate book.
11. The company will not engage in an inorganic transaction with the Shriram group for the consumer finance division.
12. The management has stated that most of the refinancing and selling down of its exposures is being down by the public sector and private sector banks.
13. The company is focussed on building brands in the consumer pharma business and it has seen this business turn EBITDA positive with EBITDA of Rs 30 Cr in 9MFY20 vs Rs (30) Cr in 9MFY19.
14. The management has assured that the consumer finance division will be fintech and analytics-driven and the company will be building its proprietary fintech platforms. It may also look for acquisition opportunities in this space.
15. The management has stated that it has taken the decision to consciously to run down loans and to avoid areas where housing finance is already being done by banks. The average ticket size is between Rs 15 to 25 Lacs and the cost of funds is expected to stay between 8.5-8.75%. The management also expects the HFC book to rise to 16% in revenue contribution in FY21 from its current level of 12%.
16. The management has also stated that because of the above-mentioned recalibration, disbursements are expected to fall to Rs 150 Cr to 200 Cr per month from average levels of Rs 300 Cr to 350 Cr.
17. The company’s exposure to Lodha is now down to Rs 3000 Cr out of which Rs 2500 Cr is completed assets. The company also has a cover of Rs 6000 Cr for this exposure. The company also expects Rs 1000 Cr of assets to be completed in the next 6 months. The company will further refinance and shave off Rs 400-500 Cr by April to bring down the total exposure to around Rs 2500 Cr at the time.
18. The total provisioning for the company remains at Rs 1000 Cr.

Analyst’s View

Piramal Enterprises has been one of the premier conglomerates in the country. They have built a robust and rigorous financial services business while slowly growing and building their pharma and health analytics businesses. The company continues to provide resilient performance despite tough industry conditions. It has done well to raise capital through various means showing the company’s money-raising abilities. The company also concluded the sale of the Healthcare Analytics division which was sold at a good exit valuation of 5 times EV to sales and 20 times EV to EBITDA. The company has also been proactive in developing its housing finance division consistently and in reducing large borrower exposures steadily. The company’s decision to expand into consumer finance using fintech and analytics platforms in the near future looks very promising. The company’s pharma division is also growing well with the consumer products division turning EBITDA positive this year. It remains to be seen how long will the current real estate depression keep the pressure on the company and how the path for the consumer finance and pharma divisions pans out for the company. Nonetheless, given the company’s track record of consistent performance and the management history of making good pivot decisions, Piramal Enterprises remains a good stock to watch out for every investor.

Q2 2020 Updates

Financial Results & Highlights

*Containing an exceptional item of a loss of Rs 1287.9 Cr

**Contains exceptional item of loss of Rs 452 Cr

Detailed Results

1. The company has shown good growth for the quarter with consolidated revenues growing more than 14% YoY and net profit excluding exceptional items also growing 18% YoY.
2. In Financial Services, the total loan book was at Rs 53305 Cr and a reported ROE of 17.3% considering the cash tax and synergies from the merger.
3. The housing finance loan book grew 2 times YoY and now forms 12% of total loan book vs 4% a year ago.
4. The Segment breakup of revenue growth is as follows:
   • Financial Services: Up 13% YoY
   • Pharma: Up 19% YoY
   • Healthcare Analytics: Up 14% YoY
5. Gross NPA ratio stands at 0.9% with provisioning at 1.8% of the loan book.
6. In Housing Finance, the company has disbursed Rs 1100 Cr in the current quarter while it has approved of Rs 2500 Cr of yet to be disbursed loans.
7. Wholesale loans are now at 48% of loan books with around 66% of these loans in mid/late-stage and completed projects.
8. The company has significantly reduced its CP exposure to Rs 1480 Cr from Rs 18000 Cr last year.
9. Total disbursements in the quarter were at Rs 7900 Cr with Rs 11,800 Cr in repayments/prepayments in H1FY20.
10. The company has also successfully raised Rs 24,000 Cr of long term funds in the past year. Rs 8400 Cr from this were through bank term loans while Rs 14700 Cr were through NCD issues.
11. The company has maintained a positive gap in ALM mismatch across all maturity brackets.
12. In the India RF Platform (JV with Bain Capital Credit), the company concluded 3 investments which are:
    • USD 156 million invested in marine chemicals business in Nov-2018
    • USD 144 million invested in pharmaceutical & vaccines player in Apr-2019
    • USD 51 million in debt purchase of downstream steel player
13. Overall, the company maintained a healthy average yield of 14% while keeping the borrowing costs at 11% and maintaining a cost to income ratio of 19.7%.
14. The company’s pharma division passed 3 USFDA inspections in H1FY20 and 75 customer inspections in the same period.
15. The pharma division also added 30 new customers and now boasts of >15 million-dollar biotech customers.
16. The company also had 7 key launched in H1FY20 out of which 3 were in Q2FY20.
17. The company also improved upon their EBITDA margin which grew 400 bps YoY to 24% in H1FY20.
18. The India Consumer Products has shown a good growth of more than 53% YoY in H1FY20.
19. Healthcare Insights & Analytics also showed good growth with revenues rising 14% YoY in H1FY20 and EBITDA margins improved to 24% in Q2FY20.

Investor Conference Call Highlights

1. The management states that the top 10 exposures to the loan book have been brought down to 30% and they plan to reduce it to <20% before the end of FY20.
2. The management expected significant consolidation to take place in the NBFC industry and the company to be able to properly capture the opportunity arising from the industry shifts.
3. The management has maintained that they are raising equity despite their comfortable balance sheet position because they want to maintain enough liquidity to be able to bear further shocks to the system and stay on the lookout for possible acquisitions in the undervalued NBFC sector.
4. The management has stated that out of the 18 deals that were under stress, the company has resolved almost all of them and only 4 deals are remaining which should be resolved in the next 30 days. These 4 deals account for less than Rs 600 Cr.
5. The yields on structured real estate deals are around 16% while in construction the yield is >14%. In CFG, yields are between 16%-18% and the yield on senior debt is around 13.5%-14%. The housing finance business produces a yield of around 9%.
6. The management has clarified that the cost of funds of housing finance is around 8.5% and they remain committed to keeping the cost of funds lower than yield.
7. The company has allocated Rs 1700 Cr into financial services from the Rs 2300 Cr obtained from the stake sale in Shriram Transport Finance. The primary reason for this allocation was to bring down the debt-equity ratio below 3 for the financial services division.
8. The management has maintained that they will probably stay flat in terms of AUM for the year in the financial services division and their focus in this area is to maintain liquidity. In pharma, they expect revenue growth to be above 15% and margins to be close to 24%.
9. The company is still evaluating the opportunity from the change in tax rate and will decide in the near future about what action to take in this area.
10. The company has had a good response to its securitization deal of wholesale loans. The underlying loans here are a mix of real estate and non-real estate loans the total pool is around Rs 3300 Cr with 20% cash rate enhancement. The company has already raised funds of around Rs 2400 Cr with a coupon of 10.5% from this deal. The issue has been provided an AA+ rating from CRISIL. This is also the first time a real estate loan pool has been rated AA+.
11. The management guides that the exposure to Lodha will see a reduction of 450 to 500 Cr in the next 3-4 months.
12. The company is focussing on the retail housing finance business to understand consumers in greater detail so that they may be able to launch other retail lending products in the future.
13. The company remains committed to its dividend policy and has no plans to withhold dividends to convert to capital.
14. The company is looking into acquisition opportunities to reenter the domestic pharma market in the OTC space.
15. The management has clarified that their exposure to Omkar is only on 2 projects, one of which is run by L&T Realty and the other is run by Piramal Realty. The Piramal Realty project exposure is only of Rs 100 Cr and this commitment has been met by Omkar.
16. In the housing book, around 50% are inactive developer projects. Geographically Mumbai Metropolitan Region accounts for 45% of the housing book and the rest is distributed across Bangalore, Pune, Hyderabad, and other Tier 1 cities.
17. The management has maintained that with the current infrastructure, the company can service loan books of up to Rs 1000 Cr per month.
18. The management expects demand to provide opportunities for the company as fewer competitors after consolidation shall result in higher NIMs.
19. The management maintains that they are committed to growing the healthcare insights and analytics business organically and they will only step in for acquisitions for this division if they find some very attractive technology or expertise.

Analyst’s View

Piramal Enterprises has been one of the premier conglomerates in the country. They have built a robust and rigorous financial services business while slowly growing and building their pharma and health analytics businesses. The company has suffered from the slowdown in the NBFC space and despite the current environment, they have provided steady revenue and profit growth while reducing their exposure to wholesale real estate. The company remains committed to maintaining liquidity in its financial services business in the hopes that once the industry looks up, they will be in pole position to take advantage of it. The pharma division, on the other hand, has shown good growth and is expected to maintain its steady growth in the near future. The Healthcare Insights & Analytics business is also looking up and starting to deliver on its potential. It remains to be seen how the NBFC slowdown pans out for the company and how long this environment will last. Nonetheless, based on their robust and rigorous financial services business and their pharma and healthcare insights divisions which have begun to deliver, Piramal Enterprises remains a good stock for any investor looking into these particular themes.

Notes from Annual Report FY18-19

Financial Services

Industry Overview

The past year has been a turbulent one for NBFCs and other financial services companies due to the liquidity tightening from the ILFS debacle. MFs reduced their exposure to NBFCs / HFCs by nearly ~₹67,000 Crores between September 2018 and April 2019 signifying the stress in the sector. The combined loan book growth of NBFCs and HFCs slowed down significantly in Q3 and Q4 FY19 to 18% YoY and 13% YoY respectively, from around 23% in H1 FY19. Post-September ’18, HFCs’ monthly average disbursement has fallen to ₹13,500 Crores from ₹25,000 Crores per month in the past four quarters (before Sep ’18). Few players, who were not getting enough liquidity, have had to resort to portfolio sell-downs, which resulted in a subdued performance of the overall sector.

Since then, lenders started to classify NBFCs into three broad categories based on their (i) performance track record of growth, asset quality and return profile, (ii) promoter’s reputation and commitment and (iii) balance sheet strength. The first category, of ‘best-in-class’ NBFCs, across the parameters, mentioned earlier, continued to receive funds, although their cost of borrowing increased marginally. For the second category of NBFCs, which were relatively good, but not among the ‘best-in-class’, liquidity was available, but only selectively.

As a result of these funding constraints, only a few top-quality NBFCs could grow their loan book in H2 FY2019. Subsequently, interventions by the Reserve Bank of India (RBI) and the government helped relatively ease system-wide liquidity to a certain extent, particularly for good quality players.

Over the past couple of years, NBFCs have played a critical role in India’s economic growth, as they have been instrumental in extending credit to Micro, Small and Medium Enterprises (MSMEs), real estate and retail consumers. MSMEs account for 31% of GDP, 40% of exports and hire 25% of the labor force. Banks’ lending to MSMEs has declined significantly and it is estimated that NBFCs will have to lend around ₹2 Lakh Crores, or nearly 75% of the incremental credit demand, to MSMEs in the next 3-4 years. The real estate sector, which contributes more than 5% to GDP and hires 17% of the labor force directly or indirectly, is also dependent on NBFCs and Housing Finance Companies (HFCs) for funds.

It is clear to see that despite the hit that the NBFC and HFC sectors have taken, they are crucial to the nation’s growth and financial strength and stability. Thus top players like PEL stand well-positioned to capitalize on their inherent advantages to set themselves apart from the industry and reap the benefit once the industry rises again.

Financial Services Business Performance

The Financial Services division has done well to deliver strong performance and a robust balance sheet despite the ongoing tight liquidity situation. The company’s total loan book grew to ₹  56,624 Cr which is a rise of 34% YoY on 31^st March 2019. The total assets under management for the firm were at ₹ 74,000 Cr. The AUM break up is as follows:

The company maintained a GNPA ratio of 0.9% with provisioning at 1.9% of the loan book.

The company has continued to reduce its dependence on wholesale real estate loans and are moving away from securing funds using commercial paper. Exposure to CPs has reduced to Rs 8,900 Cr in March ’19 from Rs 18,000 Crores in September ‘18. The following graphic shows how the company’s loan book evolved and how dependence on wholesale real estate is being reduced:

Operational Performance in Real Estate Developer Finance

The company has seen good growth, healthy consolidation and increased transparency in this sector as a result of the reforms of the past few years like RERA and GST and changes in accounting standards. The company expected consolidation to happen in the rea estate space with compliance getting tighter. This consolidation seems to have accelerated due to the recent liquidity tightening since Sep ’19. There are a few trends picking up pace in this sector. They are:

• Distressed developers are either partnering with or exiting to stronger players
• Rising interest of Private Equities (PEs) as they are trying to fill the space vacated by struggling NBFCs
• The market is shifting towards quality developers, amid faster consolidation in the real estate sector

PEL has positioned itself well with respect to the sector due to its developer selection criteria. This has helped the company create a resilient asset base despite the headwinds in this sector. Going forward as the real estate sector starts to pick up, PEL looks relatively better positioned to benefit from the pick-up in residential real estate sales, as their clients have a track record of superior project performance and a relatively high share in overall sales in the markets they operate.

The real estate developer financing loan book grew 26% YoY to ₹40,160 Crores on 31^st March 2019 In FY19, the Company’s incremental disbursements stood at ₹20,992 Crores, of which ₹6,692 Crores was disbursed in H2 FY19. Also, ₹13,357 Crores was refinanced during the year, equivalent to 42% of the opening loan book as of April 1, 2018, of which ₹5,893 Crores was in H2 FY19.

Construction finance contributed nearly 64% to the real estate loan book and lending to commercial real estate, which includes construction finance, hospitality loans, and LRD, now constitutes 17% of the real estate loan book. LRD was at ₹2,318 Crores, constituting 6% of the real estate loan book. In FY18, the Company forayed into the hospitality sector, given the opportunities to invest in quality assets at good locations, which have thrived across business cycles. As of March 2019, PEL had committed nearly ₹2,109 Crores across marquee hotel assets in Gurugram, Bengaluru, and Pune.

The company has done well to reduce its total exposure to the top 10 developers less than one-third of the overall loan book. This has helped lower the risk profile of the loan book and reassure investors and lenders that they are doing their best to reduce single borrower exposure.

The company’s endeavor to reduce developer concentration, while continuing to participate in deals by these quality clients, it has created a pool of like-minded partners, such as foreign banks and pension funds, who will co-lend with PEL in the future. PEL will also generate fee income through such co-investment deals, as it would take a lead in these transactions in terms of underwriting, asset monitoring, and loan servicing.

Operational Performance in Corporate Finance Group

In India, corporate lending covers a wide range of financing requirements, which were traditionally served by the banking system. However, over the last few years, with rising NPA levels especially in public sector banks, NBFCs have stepped in to fill the void.

Going forward, credit demand is expected to increase as the government plans to boost infrastructure spending by targeting $1.4 Trillion of capital investment in infrastructure by 2024. PEL’s CFG appears well-positioned to capture this growth opportunity and will likely benefit from its ability to offer customized solutions to customers and expand its product portfolio and sector coverage.

CFG successfully exited or down-sold deals amounting to ₹2,021 Crores in FY19. The exited investments have ranged from ₹50 Crores to ₹1,000 Crores and spanned across sectors such as renewables, infrastructure, cement, warehousing, and building materials. CFG down-sold/syndicated sanctions to other NBFCs, banks and other financial institutions amounting to ₹627 Crores.

Overall, CFG’s loan book grew by 20% YoY to ₹9,889 Crores in FY19. The business unit has gradually diversified its risk profile, from high‑yield structured credit solutions to the infrastructure sector, and now offers multiple solutions-, with Internal Rate of Return (IRR) ranging from 11% to 18%. The product suite has expanded from mezzanine and structured debt to promoter funding, Capex financing, acquisition funding, senior corporate lending, project financing and loan against shares.

Operational Performance in Emerging Corporate Lending

The ECL unit has been in existence for only one year but they have adopted a regional origination and a centralized underwriting model. Origination efforts are led by Senior Relationship Managers based out of Mumbai, Delhi, Chennai, Ahmedabad, Hyderabad, and Pune, while the centralized underwriting team operates out of Mumbai. The key differentiators for the business unit are:

• Regional origination: Has helped improve turnaround time for loan approvals and disbursals
• ‘Solution’ versus ‘Product’ approach: Provide customized solutions based on client requirements while maintaining a rigorous underwriting process
• Robust risk management is driven by centralized underwriting

The ECL loan book stood at ₹1,383 Crores as on 31^st March 2019 and the division executed a total of 36 deals in FY19.

Operational Performance in Retail Housing Finance

As mentioned at the start of this report, the past year has been very turbulent for NBFCs and HFCs with tight liquidity conditions and big headwinds in the sector. Housing loan portfolio growth of HFCs/NBFCs reduced to 13% y-o-y for the period ended December 31, 2018, versus 18% for the same period the previous year.

PEL’s HFC loan book more than quadrupled YoY to ₹5,188 Crores as of 31^st March 2019. loans that are sanctioned but not yet disbursed stood at nearly ₹2,500 Crores as of 31^st March 2019. During FY19, the HFC business acquired ₹500 Crores of loan portfolios from other NBFCs/HFCs, capitalizing on the opportunity created by the tightening liquidity situation. As of March 31, 2019, the HFC loan book accounted for 9% of the overall loan book versus only 3% a year ago. The division has now established its presence in 15 cities across India through 16 branches.

As of March 2019, the average ticket size of home loans within the HFC business was ₹70 lakhs, with 59% of customers comprising of salaried individuals and 41% comprising of self-employed individuals. During FY19, two new products were launched – AdvantAGE Loans and Bridge Loans.

PEL is looking at this business division to be the next big winner from their stable and are working hard to grow in this sector. The company is rolling out a new-age IT system that will be rolled out during H2 FY20 under Project Elixir. The system will enable them to underwrite a loan with minimal human intervention; e-loans will be operational in FY20. The new system will enhance customer experience, facilitate productivity and improve cost efficiency.

The prime focus areas for the company in this sector are:

• Significant opportunity from existing developer relationships.
• Leveraging Brickex which is the in-house arm for B2B aggregation platform focusing on sales and marketing of Real Estate and Financial Services products with a network of 10,000+ distributors across Tier I cities.
• Focusing on Tier II and Tier III cities by partnering with grade ‘A’ developers and opening 50% of our branches in these markets in the coming year.
• Extending loans to self-employed individuals

Strategic Partnerships & Alliances

Last year in November, the India Resurgence Fund or IndiaRF (PEL’s 50/50 JV with Bain Capital Credit of $200 million) concluded its first transaction by investing $156 Million along with its affiliates in a company in the marine chemicals business, in the form of debt and equity. The fund is working closely with the investee company’s management to implement the turnaround plan

IndiaRF, along with its affiliates, invested $144 Million in a pharmaceutical and vaccines player through non‑convertible debentures and share warrants in April 2019. It is also working with the promoters and management team to provide long-term strategic solutions that would enable an effective turnaround driving sustainable revenue growth and improvement in profitability.

In February 2019, Piramal and Ivanhoé Cambridge announced an equity investment of ₹500 Crores in a smart city being developed by a large developer, located in the Mumbai Metropolitan Region. This was the first deal through the Piramal-Ivanhoé Residential Equity Fund. The investment was made towards enabling the development of the second phase of the project, an established integrated smart city near Mumbai with over 4,500 acres of land under development across phases. Phase II is spread across 700 acres and is currently under development with a potential saleable area of 57 million sq. ft. The fund is evaluating several other deals with Tier I developers across Mumbai, Bengaluru, NCR, Pune, and Chennai.

PEL and APG Asset Management (a Dutch pension fund asset manager) have a strategic alliance for investing in rupee-denominated mezzanine instruments issued by India’s infrastructure companies and focus on operational and near-completion projects with limited execution risks and high visibility of cash flows coming from a portfolio of projects.

Under this 50/50 strategic alliance, PEL and APG jointly committed ₹4,745 Crores as on March 31, 2019. Of this, ₹3,799 Crores were disbursed jointly by APG and PEL across five deals in the renewable energy and infrastructure sectors.

PEL has also entered into a strategic alliance with CPPIB Credit Investments Inc., a wholly-owned subsidiary of CPPIB, to provide rupee debt financing to residential projects across India’s major urban centers. Under this alliance, PEL and CPPIB have jointly invested in one transaction in the NCR, which has been fully exited.

Financial Performance of the Financial Services Division

• Revenues for the division grew 42% YoY to Rs 7,063 Cr for FY19.
• Total Loan book grew 34% YoY to Rs 56,624 Cr.

• This segment has recorded an ROE of 19%.
• Gross NPA stood at 0.9%, with provisioning at 1.93% of the loan book.
• Wholesale real estate declined to 63% from 83% last year.
• Housing loan book has grown 32% YoY to Rs 5188 Cr which counts for 9% of the total loan book.
• The company has radically shifted its asset mix over the last year with floating assets counting for 68% as compared to 34% last year.
• The company has reduced commercial paper borrowings by 50% to Rs 8900 Cr.
• The company has raised Rs 16,500 Cr through NCDs and bank loans in the last 6 months.
• It also has nearly Rs 5400 Cr in cash and credit lines.
• The ALM Profile for the financial services division is as follows:

• The largest exposure to a single borrower is at 7% as of 31^st March 2019.
• The company recovered Rs 107 Cr from two of their NPA marked deals.
• PCHFL maintained a Tier I CAR ratio was 27.2%.
• The important metrics for the financial services division are as follows:

Strategic Initiatives and Focus Areas for Financial Services Business

Pharma Division

Industry Overview

According to Deloitte, global healthcare spending is expected to increase to more than $10 Trillion by 2022. Pharma spending is expected to hit $1.2 Trillion by 2022, growing at a CAGR of above 6%. This acceleration is likely to be driven by growth in specialty medicines such as oncology and autoimmune biologics, the rising share of emerging markets, novel therapies that address key unmet needs and increased access to medicines as a result of new pricing policies around the world.

One particular sector expected to be on the rise in the pharma industry is CDMO (Contract Development and Manufacturing Organizations). These CDMOs are expected to be on the rise due to the increasing trend of outsourcing in the pharmaceutical industry. CDMOs are also expected to benefit from the strong funding environment in Biotech in the developed world. CDMOs serving API clients are likely to benefit due to sector consolidation and erratic API suppliers from China.

Through its recent acquisitions of sterile injectable and HPAPI facilities in the US, PEL has proactively set itself to create a one-stop-shop CDMO for its customers. This has resulted in make its value proposition much stronger and attractive for the big pharma companies to not only continue outsourcing but to also consider PEL as a strategic partner for new/existing initiatives.

In the Global Pharma Products Business, PEL has carefully maintained its product portfolio so that the Company experiences lesser competitive pressures than most peers. PEL serves the institutional market, with a diverse set of buyers. The company is predominantly in injectable and inhalation anesthesia dosage forms, which are difficult to manufacture and in the case of inhalation anesthesia, the manufacturing as well as delivering requirements are unique.

According to the IBEF, the Indian OTC market to grow at around 9% annually to reach ₹44,000 Crores by 2026. The primary factors behind this are:

• Growth in GDP and purchasing power
• Propensity for self-medication
• A rise in geriatric population
• Likely new regulations leading to liberalization of OTC drug sales
• Increased use of media, particularly digital, to reach and educate consumers (in certain categories)

In the past couple of years, the Indian OTC industry has been impacted due to the GST rollout and demonetization. Channel partners started down-stocking as the GST deadline approached, leading to shrinking of the wholesale channel. The companies that were able to optimize their supply chain and rationalize CFAs and distributors stand to benefit from the reduced compliance burden.

PEL undertook key initiatives both at strategic and operational levels in preparation for and after GST implementation. The Company supported its channel partners with additional credit, held extensive interaction to educate and understand their concerns and invested in capability building and people development to create sustained advantages.

The company is successfully using e-commerce and technology to grow its India Consumer Products Business (OTC Drugs Business). It is tapping e-commerce, exports, and institutional sales to widen the distribution network and focusing on further growth by increasing the number of SKUs listed in this channel.

The company is using technology in unique ways across operations like

• Using Analytics for making business decisions such as trade schemes and distributor credit limits
• Training the field force that is spread pan-India
• Real-time tracking and reporting of sales data

The company has already partnered with a number of e-commerce players ranging from all-weather e-commerce sites like Flipkart and Amazon to specialized e-commerce portals like Nykaa, Netmeds, and Firstcry.

Pharma Industry in India

The pharma industry in India faced significant performance issues due to lapses surfacing during inspections at the premises of major pharma players in the country. Over the past few years, almost all leading Indian pharma players have faced USFDA issues. Seven of the top ten Indian pharma companies have been issued import alerts or warning letters by the USFDA. The USFDA made a total of 483 observations in 2018 of which critical data integrity issues were the most common at 17% of total observations.

PEL’s strategic choices and consistent execution enabled it to emerge stronger despite challenging circumstances. It maintained a strong focus on robust regulatory compliance, stringent quality control, and providing reliable services to its clientele.

PEL has successfully maintained a strong track record of inspections and has cleared 33 US FDA inspections, 143 other regulatory inspections and 989 customer audits in the last 8 years.

Consolidation and integration of purchasing organizations have adversely affected pharmaceutical manufacturers and increased the product pricing pressures for generic manufacturers. Buyer consolidation in the US has left just three distributors controlling 85% of the market. Most peers are increasingly realizing the importance of establishing presence in Specialty Pharma therapies.

PEL has done well to stay away from the generics business and focusing on the niche specialty business which has seen the division shrug off the headwinds faced by other pharmaceutical majors in India who primarily deal in generic drug-making and selling. Over 90% of revenues for the division are derived from niche businesses of complex generics and CDMO, as compared with less than 5% for most Indian pharma companies.

Operational Highlights of the Pharma Division

Global Pharma Services Business

• Substantial growth in the order book in FY2019: – 50 new customers during the year and >75% order book from existing customers
• >70 integrated projects till date; 28 integrated projects in FY2019
• Completed a High Potency API plant annexed to the Riverview facility
• Completed a major API investment in support of a key innovator customer at Morpeth site

Global Pharma Products Business

• The year saw the launch of Sevoflurane Integrated Closure variant in select European markets
• The Company also launched marquee products such as MITIGO, which is an opioid agonist indicated for the management of intractable chronic pain
• Integration of key acquired products from Janssen and Mallinckrodt remains on track. The acquired products have high entry barriers as they are complex in terms of manufacturing, selling or distribution, resulting in limited competition

India Consumer Products

• Added key brands in the Vitamins, Minerals and Nutrients categories
• Successfully initiated national distribution and sale of Digeplex. Products sold under Digeplex brand names are digestive enzymes used as remedies for digestive disorders
• E-commerce channel was established in FY2019. The Company is tapping e-commerce, rural, exports and alternate opportunities in order to widen the distribution network
• Increasingly using technology and analytics for making decisions in sales and operations

Financial Performance of the Pharma Division

• Pharma revenues were up 11% YoY at Rs 4786 Cr in Fy19.
• EBITDA margins grew to 23% for the last financial year.
• The company also cleared 44 regulatory checks and 163 customer audits in the last year.
• Over 93% of pharma revenues are sourced from complex generics and contract manufacturing.

Strategic Priorities and Focus Areas for the Pharma Division

Healthcare Insights & Analytics

Market Overview

The addressable market for business information services in the life sciences, healthcare provider and payer industries, is in excess of $16 Billion across various solution areas, and it is expected to reach $24.7 Billion by 2021. Healthcare businesses increasingly need up-to-date and easily-accessible solutions leveraging complex data sets and advanced analytics and therefore, there is increased demand for high-quality analytics and decision support tools and services.

Operational Highlights

The company has positioned itself very well in this industry. They have focused on long term revenue visibility with nearly all leading life sciences companies as their clients including

• 48 of the top 50 life sciences companies
• 18 of the top 20 medical device companies
• 8 of the top 10 US payers and top US health systems

The company’s business is also derisked and distributed carefully to avoid dependence on a single client. The details of this arrangement is as follows:

1. Top 10 relationships comprise of <30% of revenues
2. >10-year relationships with top 10 customers
3. 96% client retention by value
4. 70% of total revenue highly recurring in nature

During the year, PEL undertook several steps to strengthen its offerings:

• A noteworthy key launch was Healthbase, a platform that provides customers with both granular data and the ‘big picture’ analyst view on integrated delivery networks.
• The company launched a learning division, which connects expert insights, proprietary data, and analytics with experienced learning architects, instructional designers, and educational technologists.
• Additionally, PEL expanded the Global Market Access Solution (GMAS) platform to include the first and only available Managed Entry Agreement (MEA) database in the industry.
• The company doubled the size of data repository (healthcare claims, outcomes, formulary and insurance coverage) to 100 Terabytes.
• PEL partnered with EUnetHTA and other Health Technology Assessment (HTA) support projects to ensure seamless client submissions.

Financial Performance of the Healthcare Insights & Analytics Division

• The Division saw a revenue growth of 10% YoY to Rs 1332 Cr in FY19.
• Revenue growth was primarily driven by strong growth in Life Sciences Data & Analytics and Consulting Services.
• Operating Profit Margin for the division came in at 17% in FY19 which was up 3.13% up YoY from 13.87% in FY18.

Strategic Priorities & Focus Areas for Healthcare Insights & Analytics Division

Drivers for Growth for PEL in the Near Future

Analyst’s View

Piramal Enterprises has been one of the premier conglomerates in the country. They have built a robust and rigorous financial services business while slowly growing and building their pharma and health analytics businesses. The company has suffered from the slowdown in the NBFC space but despite the current environment, they have provided steady revenue and profit growth.  The management has acknowledged that the current tough environment is likely to persist and thus have refrained from providing any revenue growth guidance as their primary focus in this tough period is to maintain liquidity and not take undue risks to maintain their top-line numbers. PEL is committed to bringing in equity infusion in the range of INR 8000 to 10000 Cr. It remains to be seen how the industry and PEL shall come out of the ongoing NBFC crisis but PEL is a stock to look out for in this segment, solely on the basis of their past performance and their focus on maintaining asset quality and their rigorous risk management even in the time of a severe  slowdown in the NBFC sector.

Q1 2020 Updates

Financial Results & Highlights

*Containing an exceptional item of a loss of Rs 1287.9 Cr

**Contains exceptional item of loss of Rs 452 Cr

Detailed Results

1. The company has shown good growth for the quarter with consolidated revenues growing more than 20% YoY and net profit excluding exceptional items also growing 21% YoY.
2. In Financial Services, the total loan book grew 20% YoY to Rs 56605 Cr and a reported ROE of 20% considering the cash tax and synergies from the merger.
3. The housing finance loan book grew 4 times YoY and now forms 11% of the total loan book.
4. The Segment breakup of revenue growth is as follows:
   • Financial Services: Up 29% YoY
   • Pharma: Up 12% YoY
   • Healthcare Analytics: Up 15% YoY
5. Gross NPA ratio stands at 0.9% which is the highest since FY16. Stage 2 loans have declined 63% QoQ from Rs 838 Cr to Rs 309 Cr and now count for only 0.5% of the total loan book.
6. In Housing Finance, the company has disbursed Rs 1100 Cr in the current quarter while it has approved of Rs 2500 Cr of yet to be disbursed loans.
7. Out of the 232 deals the company is involved in, 214 have cleared their sensitivity analysis and 18 deals have been identified for corrective measures out of which 10 have already had corrective actions done on them.
8. According to the rigorous sensitivity analysis, financial closure for 84% of all deals can be secured by selling 30% of unsold inventory. Financial Closure here means repaying the loan and interest amount that the company borrowed to pursue the deal.
9. The company has significantly reduced its CP exposure to Rs 7300 Cr from Rs 18000 Cr last year.
10. The company aims to raise Rs 20000 to 25000 Cr of long term funds by the end of the current financial year. It has also received the first ECB tranche of $75 million from the total committed $125 million from IFC.
11. The company has maintained a positive gap in ALM mismatch.
12. In the Pharma segment, the India Consumer Products has shown a good growth of more than 70% YoY and an EBITDA margin of 22%.
13. The company has added 15 new customers in the last quarter for the Pharma business.

Investor Conference Call Highlights

1. The company is confident that the measures taken by the government and RBI to boost liquidity for financially sound NBFCs should be helpful but they are still awaiting final guidelines form the government on some of these measures.
2. In the current period, the company is prioritizing caution and liquidity preservation rather than chasing growth. The company is focused on strengthening their assets and their liabilities in this time.
3. The company shall continue to raise long term funds through ECB issuance, dollar bonds, additional bank lines, and NCDs.
4. The management believes that the major reforms undertaken by the government should bring consolidation in the NBFC space and the company is primed to take advantage of it.
5. The company has maintained its asset strength by keeping the debt to equity lower than 4.
6. The company also sees the current period as a time to take opportunities for acquiring valuable assets from banks and NBFCs.
7. The company is committed to bringing in further equity of Rs 8000 to 10000 Cr into the Financial Services business in the current financial year.
8. In the current quarter, the company disbursed around Rs 4800 Cr mainly in their construction finance and also did down selling of Rs 4900 Cr.
9. The company has also down sold Rs 3100 Cr in the last 9 months to reduce single borrower exposure.
10. The management wants to clarify that investors should not believe the rumors going on in the market such as the default of Lodha.
11. The management also wants to clarify that they have not sold off their stake in Shriram Transport Finance to ease liquidity issues but have other rationales behind this decision and they had made their position clear before exiting the transaction.
12. The company has seen a big jump in floating rate assets in the last year because they transitioned a lot of their existing fixed assets to floating and all of their incremental assets is also floating.
13. The company plans to house all of their infra loans under the PHL FIninvest entity for which they have already applied to the RBI for an IFC license.
14. On the matter of the merger with Piramal Phytocare, the process already has gained shareholder approval and they are waiting on approval from the NCLT.
15. The NPAs in the wholesale residential real estate segment is around 0.6% and none in the commercial real estate segment.
16. The company has been easily able to pass on the increased cost to their borrowers.
17. The management has refrained from providing any guidance on growth.
18. Currently, incremental borrowing costs have gone up by 1% and this is not expected to persist as the management expects incremental costs to go down post the proposed equity infusion into the financial services business later in the financial year.
19. The company gets a yield of 9.4% on the housing loan book.
20. In their 3 big loan exposures of Lodha, Wadhwa, and Omkar, the company is on track to bring all of them below 15% each in the current year. In Wadhwa, the company expects to drop below 15% exposure in the next quarter itself.
21. The overall provisioning remains at 1.8% of the total loan book.
22. In the 8 deals highlighted above for corrective actions, the total size is of around Rs 1000 Cr and 6 of these deals are in the final stages of getting resolved while 2 of them have been recognized as NPAs already.
23. The company expects to see the ROEs from the housing finance division to improve in the near future as the cost-to-income ratio comes down.
24. The company is looking to separate Pharma and Financial Services sometime in the future.
25. The management has requested investors to not believe any rumours floating in the market and to seek clarification directly from the company whenever any need arises.

Analyst’s View

Piramal Enterprises has been one of the premier conglomerates in the country. They have built a robust and rigorous financial services business while slowly growing and building their pharma and health analytics businesses. The company has suffered from the slowdown in the NBFC space but despite the current environment, they have provided steady revenue and profit growth. The management has acknowledged that the current tough environment is likely to persist and thus have refrained from providing any revenue growth guidance as their primary focus in this tough period is to maintain liquidity and not take undue risks to maintain their top-line numbers.  It remains to be seen how the industry and PEL shall come out of the ongoing NBFC crisis but PEL is a stock to look out for in this segment, solely on the basis of their past performance and their focus on maintaining asset quality and their rigorous risk management.

Q4 2019 Updates

Financial Results & Highlights

*Containing an exceptional item of a loss of Rs 1287.9 Cr

**Contains exceptional item of loss of Rs 466 Cr

***Deferred tax addition of Rs 3569 Cr on account of merger of subsidiaries

Detailed Results

1. The company saw a good YoY growth of 24% in both Q4 and yearly revenues on a consolidated basis.
2. The normalised net profit on consolidated basis grew 25% YoY both for Q4 and the whole financial year.
3. The company has now delivered 20%+ growth in revenues and profits for 15 consecutive quarters and have maintained a revenue CAGR of 28% over the past 7 years.
4. The board has decided to award a dividend of Rs 28 per share to all shareholders.
5. The segment revenue growth breakup for the last quarter and last financial year is as follows:
   • Financial Services:                   Q4          Up 39% YoY        FY19       Up 42% YoY
   • Pharma:                                     Q4          Up 11% YoY         FY19        Up 11% YoY
   • Healthcare Analytics:              Q4          Up 16% YoY        FY19        Up 10% YoY
6. In Financial Services, Total Loan book grew 34% YoY to Rs 56,624 Cr.
7. This segment has recorded an ROE of 19% according to the company.
8. Gross NPA stands at 0.9%, with provisioning at 1.93% of loan book.
9. Wholesale real estate declined to 63% from 83% last year.
10. Housing loan book has grown 32% YoY to Rs 5188 Cr which counts for 9% of total loan book.
11. The company has also embarked on a JV with Ivanhoe Cambridge with an investment of Rs 500 Cr.
12. The company has radically shifted their asset mix over the last year with floating assets counting for 68% as compared to 34% last year.
13. The company has reduced commercial paper borrowings by 50% to Rs 8900 Cr.
14. The company has raised Rs 16,500 Cr through NCDs and bank loans in last 6 months.
15. They also have nearly Rs 5400 Cr in cash and credit lines.
16. In Pharma segment, the EBITDA margins grew to 23% for the last financial year.
17. The company also cleared 44 regulatory checks and 163 customer audits in the last year.
18. Over 90% of pharma revenues are sourced from complex generics and contract manufacturing.
19. In Healthcare Analytics segment, revenues grew 16% YoY for the last quarter.

Investor Conference Call Highlights

1. Despite easing of borrowing costs at the start of the year, the NBFC sector has seen tighter liquidity and have struggled to raise funds from institutional investors.
2. In order to better adapt to current situations, the company has identified diversifying their borrowing mix to be their first strategic priority. The company has already reduced CP borrowing by half and are raising funds using NCDs and other mechanisms.
3. The company is also looking to raise funds through dollar bond issues.
4. The company has also reduced their RE exposure to 63% and have also reduced single borrower exposure significantly. Now, the largest exposure to a single borrower is at 7%.
5. The company has been proactive in conducting rigorous sensitivity analysis on their real estate deals to identify potential weaknesses and have already initiated measure to address them.
6. Further, the company has also been able to recover Rs 107 Cr from two of their NPA marked deals.
7. The company remains committed to deliver 18% to 20% ROE in the future.
8. In pharma segment, the company is seeing branded generics business slowing down due to pricing controls. Thus it is pushing for complex generics and specialized products in this area.
9. The pharma business has maintained EBITDA margin of 23% despite the headwinds mentioned above.
10. The sequential drop in profit has been due to high build up from the DRG business in the Q3.
11. The company is guiding that margins for the coming year would be higher in the health analytics business.
12. The company is guiding that by the end of next year, the retail housing finance segment should account for 15% to 18% of their loan book. Currently it accounts for 9%.
13. The company is down-selling some of their Lodha exposure to bring it below the RBI mandated 20% exposure mark.
14. The company has reiterated their statement of consolidation to take place in the NBFC space and that despite venturing into other areas of consumer lending, the company shall maintain a conservative debt to equity ratio of less than 4 times in the long term.
15. The management has confirmed that they are looking for ways to consolidate the different operations of the Shriram group into different consolidated entities. They are also looking for ways to create value by exiting this investment. But they have also stated that they will consider exit only if they find the right value for it.
16. The management have also clarified that the negative outlook that ICRA has given to them is actually reflecting the negative outlook on the NBFC industry rather than them as a company. The company continues to borrow at the same rate as before the rating thus showing that it had minimal impact on the company’s borrowing program.
17. The company is set announce their own pension fund in the near future.
18. The structured debt portion of the company accounts for only 15% of loan portfolio.

Analyst’s View

Piramal Enterprises have been one of the most stable NBFCs in India for a long time. They have been consistently providing good performance which is evident from their strong growth record and comfortable NPA numbers. However, NBFC sector is going through a very difficult time. A lot of the players in the industry are facing a challenge to raise funds at the moment. Raising funds is like a raw material for an NBFC. If an NBFC fails to raise funds at the right time, the whole business cycle breaks and makes it difficult for the NBFC. As of now, PEL has been able to manage the fund raising plans well.  But, it remains to be seen whether the company will be able to maintain their stellar growth record going forward in such a bleak environment. Despite all the negativity around the NBFC space, PEL appears to be the best bet in this sector if we consider the fact that at around 40,000 Cr market cap, it generates a profit of around 2000 Cr and cash flows of around 2600 Cr. The long term tailwinds of the financial industry coupled with strong management track record makes PEL worth a look for all investors.

Q3 2019 Updates

Financial Results & Highlights

Detailed Results

1. Revenues have grown 22% YoY and 11% QoQ. PBT and PAT have both grown 27% and 23% respectively in YoY terms.
2. This is the 14^th consecutive quarter where the company has delivered more than 20% growth in both revenues and profits in YoY basis.
3. Financial services segment has grown 40% YoY and accounts for 53% of total revenues today.
4. Pharmaceuticals segment has grown 13% YoY and accounts for 33% of total revenues today.
5. Healthcare Insight & Analytics has grown 5% YoY and accounts for 14% of total revenues today.
6. Maintaining an ROE of 19.4% for 9M FY2019 despite lowering overall risk profile.
7. Gross NPA ratio remains stable at 0.5%, total provisioning maintained at 1.8%.
8. Loan book growth for Developer Financing segment has been 31% YoY to Rs. 40,080 Cr currently, with more than Rs. 2,094 Cr towards top-tier brands in hospitality.
9. Housing Finance loan book has grown 69% QoQ and 800% YoY despite the current volatile environment.
10. Corporate Finance loan book grew 53% YoY with successfully exited transactions worth around Rs. 1,135 Cr.
11. Emerging Corporate Lending loan book grew 133% YoY to Rs. 1,447 Cr vs Rs. 619 Cr last year
12. Overall Loan book has grown 45% to Rs. 55,255 Cr vs Rs. 38,036 Cr last year.
13. Maintaining robust liquidity of Rs. 5,400 Cr in cash and credit lines.
14. Raised Rs. 10,000 Cr via NCDs and bank loans.
15. Additional measures / proposals to boost liquidity:
    • Secure additional bank lines.
    • Issue NCDs with a longer-term tenure.
    • Received in-principal approval for an ECB lines.
    • Set-up a Euro medium-term note (EMTN) programme.
16. Within the Pharmaceutical segment, Global Pharma has grown 14.4% YoY and 15 new customers added in current quarter.
17. Indian Consumer Products has grown 23% QoQ thus indicating healthy ramping post GST.
18. Within Healthcare Insights and Analytics, the Analytics business has grown 26% YoY and the Learning business has grown 42% YoY, highlighting significant potential in these subsectors for the company.

Investor Conference Call Highlights

1. NBFCs will be increasingly important in the near future as part of the Indian growth story.
2. RBI expects that MSME shall require incremental credit of Rs. 13.6 Lakh Cr in the next few years. This demand for credit is likely to be fulfilled by NBFCs as bank credit is expected to stay muted.
3. The tightened liquidity environment has led to higher cost of funds which has hurt overall demand and impacted growth of the lending market.
4. Despite the above conditions, PEL has successfully opened new credit facilities in order to raise liquidity to adequate levels.
5. One major point for contention is that many first time lenders approached Piramal and conducted a thorough analysis of their internal processes and have started lending to the company.
6. In the medium to long term, the company expects consolidation to take place in the NBFC and real estate sectors, which the recent credit crisis has hastened to some extent.
7. The strategy of working with Tier 1 developers has proved beneficial to the company.
8. In order to stay ahead of the curve, the company is focussing on:
   • Effectively manage and further strengthen the company’s liquidity position.
   • Continue to diversify the loan book to go further down in risk profile.
   • To maintain their best in asset quality and deliver healthy ROE despite lowering overall risk of loan book.
9. Have significantly lowered CP exposure and are moving towards longer term borrowing.
10. Additionally, they are looking to issue ECB and Euro term loans to further diversify their borrowing mix.
11. The share of Real estate loans has come down to 71% of total loan book, and this expected to decline further as other avenues continue to grow.
12. Expecting the Housing Finance share of revenues to continue to grow and go from 7% currently to 10% by next quarter.
13. Focus on risk adjusted returns is back as unhealthy competition from smaller players has reduced.
14. In the Pharma segment, the company’s differentiated business model has helped them avoid the competition in the US generics market and deliver better than most pharma majors.
15. They will continue to acquire lending portfolios from other NBFCs who are looking to sell them to raise liquidity.
16. They aim to be in the top 15 in the housing finance space by March 2019 and top 10 by March 2020.
17. They want to emphasize that overall real estate sector has been on the rise and the problems in Mumbai real estate should not be taken as indicative of the market all across India.
18. The average age of unsold inventory in their RE portfolio is almost one third the average age of unsold inventory across the sector, further emphasizing the quality and saleability of their holdings.
19. Except Lodha, none of their RE developers constitute more than 5% of overall loan book. Even in Lodha, the exposure is going down with the number reducing to Rs. 3800 Cr from Rs. 4300 Cr last quarter.
20. PEL is also seeing a surge in borrowers looking to borrow at its rates as developer are looking for lenders who have strong enough balance sheet and liquidity to be able to support them through the life cycle of each project.
21. Yields are going up because of reduction in competitive pressure.
22. PEL has started work on an asset aggregation platform, acquired a merchant banking license and have received SEBI approval for setting up an AIF. All of this is expected to increase free income in the future and reduce dependence on their lending operations.
23. Reducing single borrower exposure by entering into co-investment and co-lending deals.
24. They are also developing products for real estate redevelopment financing.
25. Ultimately aiming to bring down RE exposure of loan book from the current 73% to less than 50% in the future.

Analyst’s View

Piramal Enterprises has consistently performed well with 14 consecutive quarters of more than 20% growth in both revenues and profits. They have been doing well despite the current climate of tightening in lending market and have come out as one of the most dependable players in the NBFC sector. Coupled with their commitments to keep delivering robust ROE while bringing risks down, they also boast of best in class underwriting and risk management practices. Their forward looking outlook and commitment to always stay ahead of the curve is also something that helps differentiate them from the rest of the market. Their efforts to diversify their revenue sources, the consistent improvement in those segments and their diversification of both borrowing and lending sources highlights how they are putting their money where their mouth is and cementing their position as one of the best NBFCs in the market today. However, the NBFC sector remains under a lot of pressure at the moment. It would be interesting to see how PEL would perform given the stress in the NBFC sector.

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