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Published on 10/10/2019 10:34:22 AM | Source: Motilal Oswal Services Ltd

Buy Piramal Enterprises Ltd For Target Rs.2,400 - Motilal Oswal

Financial Services’ domination increases

Moderating growth

* The liquidity crisis, lag impact of demonetization, RERA implementation and stress in the Real Estate financing space has weighed down the growth of PIEL’s Financial Services (FS) business. FY19 saw PIEL’s customer assets grow by 34% YoY to INR566b v/s 50%+ in the past few years. Nevertheless, dominance of FS in overall revenue and operating profitability continue to rise with share of 53%/67% v/s 47%/67% in FY18.

* Pressure on margins (partially led by move towards low yielding Retail Housing loans) and cost of Retail rollout weighed on profitability. ROAs declined ~50bp to 3.1%.

* Stress loans increased with stage 2/3 loan share at 1.9% v/s 0.9% a year ago. Outstanding provisions on the balance sheet stand at 1.8% of loans (stable YoY). Real estate share of the loan book is down to 71.6% YoY v/s 75.9% a year ago, helped by sharp rise in the share of Retail Housing loans (9.5% v/s 2.9% a year ago).

* In the FS business, banks (71%), mutual funds (11%) and insurance companies (8%) are the largest sources of funding. The share of CPs is down to 12% v/s 18% a year ago. At consolidated level, the mix between floating and fixed rate borrowing is 75:25 v/s 43:57 a year ago and at the FS business level, it is 60:40 v/s 50:50 a year ago. From an Asset Liability Management (ALM) perspective, ~84% (~90% in FY18) of liabilities mature within three years, while ~55% (~58% in FY18) of assets mature during the same period.

* Networth allocation disclosure:

(a) FS business at INR114b;

(b) Pharma and IT business at INR50b;

(c) Shriram group’s outstanding value at INR72b; and

(d) the rest is DTA related with networth of INR36b.

Outstanding aggregate debt of Pharma and IT business stands at ~INR95b.

* Pharma business: PIEL has implemented multiple initiatives for improvement in margins, thereby resulting in global EBITDA margin increasing from 14% in FY13 to 23% in FY19. Domestic pharma business continues to show moderation and remains a drag on overall pharma business’ profitability. Company sold the Imaging business and booked loss of INR4.5b (pre-tax) at the consolidated level and INR12.9b (pretax) at the standalone level (including investment write-off of INR8.4b)

* In the current environment, PIEL is focusing on

(a) reducing key large exposures such as Lodha, Wadhwa and Omkar,

(b) reducing share of short-term borrowings, and

(c) diversifying the loan mix to lower risk assets.

The company also plans to raise capital to reduce leverage – this would help lower its cost of funds in the Financing business, which is currently elevated at 10.3%. Considering the challenging environment, we expect the company to keep higher capitalization and liquidity on the balance sheet. Buy with TP of INR2,400 (FY21E SOTP-based).

 

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