Published on 1/08/2020 11:15:08 AM | Source: Motilal Oswal Financial Services Ltd

Buy Piramal Enterprises Ltd For Target Rs. 1,600 - Motilal Oswal

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Lending business stable; Pharma recovering

* Piramal Enterprises (PIEL) reported 11% YoY growth in PAT to INR5.0b. The lending book was stable, while margins improved sharply QoQ (on a lower base of 4Q +230bp) to 6.5%. Asset quality was stable, with GNPA% at 2.5% and ECL provisions remaining high at 5.9% (5.8%) of loans.

* Pharma business sales were at nearly 90% of 1QFY20 levels, although EBITDA margins were a challenge. The company continues to carry unallocated networth of INR30b+ for any inorganic opportunities.

* We expect FY21 to be a challenging year for the Financial Services business. We forecast the loan book to be stable in FY21 and grow modestly in FY22. The company has a provision buffer of ~6% of loans and conservatively, we build in additional credit cost of 2.5% each year in FY21/FY22. The recent Pharma stake sale to Carlyle is a step in the right direction. Maintain Buy, with TP of INR1,600 (SOTP-based).


FS – Balance sheet stable; Margins improve

* The loan book was largely stable at INR513b, with a steady share of retail and wholesale loans. The company increased lending rates by ~100bp, while cost of funds declined 40bp sequentially. As a result, NIM was the highest in the past five quarters at 6.5%.

* In 1QFY21, the company raised INR96b in long-term borrowings. The share of bank borrowings was up 300bp QoQ to 68%. CPs were down to just INR9b.

* The GNPL ratio / Total provisions marginally increased by 10bp QoQ to 2.5%/5.9%. The top 10 exposures remained largely stable QoQ at INR142b.


Pharma – Margins under pressure

* Sales declined 10% YoY to INR10.4b for 1QFY21, weighed by COVID-19-led disruption across CDMO (-5% YoY), Complex Hospital Generics (-22% YoY), and India Consumer Healthcare (-4% YoY).

* The EBITDA margin contracted considerably to 11% in the quarter (from 21% in FY20) due to lower revenue from Complex Hospital Generics and reduced operating leverage.

* The deferment of surgeries in the Hospital segment impacted overall performance in PIEL’s Pharma segment. However, the phase-wise easing of the lockdown is improving the outlook across the CDMO and Complex Hospital Generics segments.


Highlights from management commentary

* The company will roll out retail lending products such as LAP and small business loans around the Diwali festival in 15–20 towns.

* Housing sales in Apr/May/June were 10%/22%/40% of pre-COVID-19 levels.

* INR34b of the INR37b Pharma stake sale would go to the parent.

* 67%/25% of wholesale/retail AUM is under moratorium.


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