Published on 15/12/2018 11:57:54 AM | Source: Motilal Oswal Securities Ltd

Buy Piramal Enterprises Ltd For Target Rs. 2,735.00 - Motilal Oswal

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Disbursements calibrated

Focus on maintaining liquidity and tracking early warning signals

* Piramal Enterprises (PIEL) hosted an analyst meet with Mr. Khushru Jijina, Managing Director of Piramal Capital and Housing Finance, to discuss the financial services business in detail. In the current scenario, PIEL is focusing on maintaining adequate liquidity and will only disburse money to existing projects till December.

* In the past month, it received a INR20b loan sanction from a leading PSU bank and also has other bank lines worth INR70b. An external commercial borrowing (ECB) of USD200m is also in the pipeline. As a result, the company is well placed on the liquidity front.

* With tightening liquidity, there has been some easing in the competitive scenario. Price wars in the wholesale finance segment have faded and the company has hiked rates by 50bp to 200bp across developers for the existing portfolio. For the incremental portfolio too, it has hiked rates by 150-200bp– yields now range between 13-17%, depending on the product. This should provide some respite to margins, which have been consistently declining over the past four quarters.

* PIEL has also been reducing its dependence on short-term borrowings and targets to reduce the quantum of Commercial Papers (CPs) from INR59b in 2QFY19 to INR35b by end-3QFY19. The company also has adequate liquidity amounting to ~INR76b on the balance sheet. We maintain our EPS estimates. Our September 2020 SOTP-based TP is INR2,735. Buy.

* Plan to double the share of core home loans

Within a year of launch, PIEL has scaled up its loan book to INR23b, i.e. 4% of total loans. This segment is a key focus for management, which expects it to grow to 8- 9% of total loans by end-FY19. There would be some margin impact on the overall book due to the rising share of home loans. However, it would also help PIEL lever up the balance sheet further with higher share of retail lending.

* Some respite on margins after four quarters of decline

Over the past four quarters, net interest margin for the lending business has declined by 100+bp to 6.9% as the competitive environment has heated up. With the competitive scenario now benign, price wars in the wholesale finance segment have abated. PIEL has hiked interest rates between 50-200bp across developers on the existing portfolio and between 150-200bp on incremental loans. In construction finance, its incremental yield has increased from 11.5% to 13%, while yields for land funding range between 15-17%. As a result, management expects margins to improve from the current 6.9%, as of 1HFY19. However, we estimate stable margins as yield hikes on the corporate book would be offset by rising cost of funds, changing loan mix (towards low-yielding home loans) and changing borrowing mix (towards long-term borrowings).


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