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The sale of stake in Shriram Transport has generated proceeds of ~INR 23bn for Piramal, which is ~20% of its Mar ’19 lending net worth. This could be used towards: a) M&A in housing finance, b) buttressing the core business, or c) M&A in healthcare. In the current environment, using the proceeds to support the core via lower leverage / higher liquidity would be prudent, in our view. In the event of M&A, closing leverage will be key
1: M&A in housing finance:
Closing leverage will be key – M&A would dovetail with Piramal’s strategy of having 20% of loans in retail; also, the current market offers some businesses at distressed valuations. We consider possible acquisition scenarios in figure 1, assuming a purchase multiple of below 1x trailing net worth. To illustrate we take two different sizes for a potential acquisition – one entailing INR 100bn in loans and the other INR 400b. We see closing leverage (loans / equity) rising to ~5x in the first case and ~6.5x in the second, assuming SHTF proceeds are allocated to Piramal’s financial services division (will be higher by ~1x if these are not allocated to financials). The market would be more comfortable with a 5x leverage in this environment. Piramal also has the option to monetize investments in other Shriram companies if needed.
2: Buttress core business –
As on Mar ’19, Piramal’s lending business leverage (loans/ equity) was 4.9x, which would fall further to ~4x if the proceeds from Shriram stake sale were to be allocated to this. This is below most NBFCs in our coverage (fig 2), and positive given the current environment and the recent downgrade to AA by ICRA on broader sector concerns. More structurally, progress on reducing concentration will be key – top-3 developers were 17% of loans as on Mar ’19. Lodha was ~7% of loans and management plans to nearly halve the exposure by Mar ‘20 via sale and repayments – part sale (Livemint) to this effect has happened.
3: Expand / scale-up in Healthcare –
A large part of Piramal’s growth in all segments of healthcare (viz. outsourcing, critical care, consumer) was acquired and we expect the inorganic focus to continue. Augmenting its critical care pipeline and a possible entry into formulations (post expiry of non-compete) are likely priorities.
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