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Firming up, to up the game; initiating with BUY
Piramal Enterprises (PEL) has niche capabilities in asset monitoring and resolution of stressed assets. While most investors today remain skeptical about anything ‘wholesale’ and anything ‘real-estate’, we feel PEL would be able to watchfully navigate the current tough environment. Foray into consumer finance in partnership with a telecom partner has considerable optionality value knowing that PEL has successfully incubated new businesses in the past. In order to diversify, PEL has uniquely positioned itself in the pharma industry with its CDMO services and critical care products. This is expected to provide a steady pharma revenue CAGR of 12.2% over FY20E-FY22E. Inability to achieve resolutions in high/concentrated exposures could lead to risks on the asset quality of its loanbook. We initiate coverage on PEL with a BUY recommendation and an SoTPbased target price of Rs2,025.
* Robust risk management will help PEL navigate the current turbulence: We do acknowledge that there is considerable stress in residential real estate and that the financial health of the developers is indeed worrying. However, PEL’s superior client selection, conservative underwriting, asset monitoring capabilities and ability to find resolutions in stressed projects gives us confidence that it will emerge stronger from the current phase of turbulence. PEL is strengthening itself to remain relatively insulated in case of further deterioration in the financial health of developers (Pg 10).
* Consumer financing is a massive opportunity with only a select few dominating the space: PEL’s foray into consumer and SME finance using a digital analytics platform in partnership with a telecom partner has potential to disrupt the conventional lending landscape. Of course, entry in this segment will have a gestation period since the incumbents have wide presence at all the points of sale.
* Concentration out, granularity in: PEL is taking strong measures to reduce its large single-borrower exposures. Many of the newer sanctions in real estate will be through the fund structure/co-origination model and will earn fee income. Company has a newer and improved strategy in place in housing finance. Both retail segments – consumer and housing – will bring in granularity and give comfort to investors.
* Unique pharma positioning: Requirement for development services, especially with increasing complex regulatory processes, remains high with increasing demand for newer drugs. Differentiating itself from its peers is its portfolio of institutional branded generic products, which are inherently used for critical care and are complex to manufacture. Thus, PEL has carved a unique space for itself in the pharmaceutical industry with its CDMO services and critical care products.
* Valuations and risks: The stock is currently trading at 0.9x FY21E P/BV (including the equity capital raise). While FY20-TD has been more of a period of consolidation, we estimate the company to grow its loanbook at a CAGR of ~18% and achieve consolidated RoA of 4.0%-4.2%, over FY21E-FY22E. We have an SoTP based target price of Rs2,025 on PEL (page 3). Initiate with BUY. We discuss risks to our investment hypothesis in greater detail in a subsequent section of the report. (pg 34).
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