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Piramal Enterprises - DTA derecognition and interest reversals weigh on earnings; strategic priorities remain in place - ICICI Securities

Posted On: 2021-05-16 06:38:41 (Time Zone: UTC)

Piramal Enterprises (PEL) reported a loss of Rs5bn due to DTA derecognition of Rs12.6bn created on goodwill earlier. Adjusting for this, consolidated PAT was down 7% QoQ to Rs7.48bn. Company stayed put on its strategy of rationalising wholesale exposure (down 4% QoQ), ramping up secured mass retail lending, and addressing stress exposures appropriately (through provisioning or restructuring). No credit cost (all through FY21) after creating buffer in Q4FY20 despite doubling of stage-3 assets suggests adequacy of the provisioning. However, yields were dragged down due to interest derecognition and 'interest on interest' reversals, which weighed on core earnings. Pharma business performance was strong - 23% revenue jump in CDMO and 55% in OTC segment supporting margins at 28%. Near to medium term triggers: a) demerger of financial services and pharma business; and b) business transformation in each of these segments opening up new possibilities and optional value. Maintain BUY. Key risks: 1) deferment in approval process of DHFL acquisition; and 2) higher mark-down on the acquired portfolio.

- Recovery in complex hospital generics: PEL reported 18.0% revenue growth in Q4FY21 on the back of 23.1% YoY growth in the CDMO segment, which was driven by strong orderbook and approvals for five NCEs. Critical care segment reported healthy recovery during the quarter posting a growth of 27.1% QoQ (+1.4% YoY) with falling covid cases in the developed markets raising demand for elective surgeries. OTC reported healthy growth of 54.9% YoY albeit on a low base, with improving consumer sentiment and high demand for covid protection products (sanitisers, masks, etc.). We remain positive on the company's growth potential and expect pharma revenues to grow at a CAGR 16.0% over FY21-FY23E.

- Stage-3 assets rose to 4.5%; no further restructuring beyond 3.8%: Stage-3 assets increased QoQ to 4.5% (from 3.7%) - optically higher due to decline in the wholesale book. In absolute terms, there was an increase of Rs3.1bn to Rs20.2bn as 3 accounts slipped from stage-2 to stage-3. Couple of them will be resolved in Q1FY22 itself - one of the accounts (Sadbhav) has been repaid in April itself. In Q3FY21, PEL invoked OTR for loans worth Rs17bn (3.8% of loan book); no additional accounts were restructured in Q4FY21. Despite reduction in the wholesale loanbook, the company continues to maintain provisions at 6.3% of the loanbook (Rs28bn; down Rs1.4bn in Q4FY21) to manage any contingencies arising from covid second wave. PEL is confident that provisions of 6.8% on the wholesale portfolio is adequate, and there was no creation of any further buffer (fourth successive quarter of no provisioning post the one created in Q4FY20). Company carries provisions of Rs20.3bn against standard assets (stage 1 & 2 loans) - at 4.5%. We are building-in a credit cost of 1%/0.8% for FY22E and FY23E.

- 'Interest on interest' reversal, fair value adjustment and interest derecognition weighed on NIMs: Yields corrected sharply from 14.6% in 9MFY21 to 14.1% for FY21 suggesting more than 150bps decline QoQ. We believe interest derecognition on incremental slippages and some restructuring, 'interest on interest' reversal of Rs750mn (on loans above Rs20mn), and consistent reduction in the wholesale book, resulted in fall in yields. Funding cost inched up marginally by 10bps to 8.5% for FY21 (from 8.4% for 9MFY21). NIMs consequently declined from 6.2% in 9MFY21 to 5.6% in FY21.

- Exposures to Lodha and Omkar appropriately addressed to safeguard from risks: The group had an exposure of Rs31bn as of FY20 at holdco level in Lodha group. The exposure itself was reduced through the course of FY21 to Rs26.4bn. Of this, Rs15.9bn was transferred during FY21 to SPV where it has ready inventory as collateral against the exposure. Balance of Rs10bn is at listed entity level that would further reduce with repayment from IPO proceeds. Similarly, exposure of Rs13bn in Omkar was refinanced through PEL (from PCHFL) as it envisaged that the land is valuable and given it has rights equivalent to FSI development rights, it was sitting on a rich collateral. As the company would not have been able to enforce the rights under PCHFL, the loan of PCHFL was paid back by PEL. Now PEL will monetise the asset FY22 onwards as they are the master developers and can evaluate either doing joint development or sell development rights. Given huge land parcel as collateral, PEL is confident of getting the principal recovered and hopefully will get some interest component as well.

- Continues to monitor early trends in Q1FY22 for second wave impact: Performance of PEL's developer clients was robust in Q4FY21: 1) developers' project sales are up 115% YoY, 2) their collections from homebuyers are 74% higher YoY, 3) construction has commenced at nearly 100% of sites, etc. With learnings from covid first wave, developers now have better sales pipelines and competencies to digitally market / sell products. With 100% escrow control, PEL is verifying clients' vendor payments ensuring construction progress across projects. While construction is continuing on almost all the sites, it is seeing some labour shortage at a few locations. However, post West Bengal elections, workers are now returning. Collections were healthy due to stronger than expected sales in FY21. This trend was visible in April as well. Till 75% construction stage, doesn't see a risk to collections. Though there isn't much risk to collections, sales may drop in May if constructions are impacted

- Granularising and rationalising wholesale exposure: PEL is continuing to rationalise the wholesale loanbook - compared to one account earlier, now there are no exposures >15% of net worth of financial services business. In fact, the wholesale book declined QoQ from Rs410bn to Rs394bn (down 4% QoQ and down 23% since FY19). Top 10 exposures were down by Rs1bn to Rs133bn. We expect organic growth to be led by retail scale-up and the wholesale book to remain in consolidation mode.

- Wants to transform to 50:50 wholesale:retail mix post DHFL acquisition: The group's core objective is transform into a well-diversified lending entity with share of retail rising to 50%. This will primarily be driven by organic build-up of retail lending, completion of DHFL acquisition, and rationalising wholesale lending and making it more granular. It continued with organic build-up of retail increased product suite from two to seven products in FY21 (will add four more in FY22), expanding to 40 locations and increasing headcount to 1,000. Company is partnering with fintechs and consumer tech firms to build scalable cloud infrastructure and create a big data and proprietary information assets. Digital infrastructure and manpower excellence will be based out of Bengaluru. Traction was witnessed across product categories in terms of disbursements during Q4FY21 at Rs4.1bn at an average yield of 11.9%.

- DHFL acquisition process underway: The deal consideration is Rs342bn - comprising an upfront cash component of Rs147bn (including cash on DHFL's balance sheet) and a deferred component (NCDs of 10 years to existing DHLF lenders) of Rs195.5bn. PCHFL's resolution plan received approvals from the RBI in February and Competition Commission of India (CCI) in April. With respect to NCLT approval, hearings are underway and are expected to be concluded in a couple of months. Post NCLT approval, it will take about two months to close the deal and start integration.

- Financial services and pharma business well capitalised; no need of capital allocation in the medium term: Due to the reported loss, consolidated net worth reduced from Rs355bn to Rs351bn and, with net debt further being reduced to Rs301bn (from Rs310bn in Q3FY21), 'net debt to equity' ratio stands at 0.9x. Of this net worth, 51% of equity is earmarked to financial services at Rs180bn (compared to Rs174bn in Q3FY21), Rs60bn towards pharma (from Rs57bn), and unallocated equity is down to Rs110bn (from Rs124bn). Currently, both the operating businesses, be it financial services or pharma, are sufficiently capitalised and will not need capital for medium-term growth. However, there are several avenues for deployment of this unallocated equity, e.g. new business, inorganic opportunities or return to shareholders.

Shares of PIRAMAL ENTERPRISES LTD. was last trading in BSE at Rs.1636.95 as compared to the previous close of Rs. 1694.6. The total number of shares traded during the day was 44010 in over 2923 trades.

The stock hit an intraday high of Rs. 1686.2 and intraday low of 1616.1. The net turnover during the day was Rs. 72061479.

Source: Equity Bulls

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