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Published on 25/10/2021 9:23:54 AM | Source: ICICI Securities

Hold Piramal Enterprises Ltd For Target Rs.2,797 - ICICI Securities

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DHFL integration on expected lines; discharges creditors dues

Piramal Capital and Housing Finance (PCHFL) discharging the consideration to Dewan Housing Finance (DHFL) creditors with 46% recovery run-rate pursuant to resolution plan is on expected lines. Successful bidding, timely regulatory approvals and improving visibility towards building a diversified book (through DHFL acquisitions), coupled with stable stress in wholesale segment, have triggered re-rating of its financial services business.

Detailed financials will be disclosed post the completion of review by auditors. Proportion of ‘high risk’ and ‘medium risk’ in DHFL’s retail portfolio and the extent of mark-down of wholesale portfolio will be known then. In our estimate, net deal consideration (ex-cash and insurance) for DHFL portfolio (post mark-down) is estimated at Rs215bn (refer table 1,2). Effectively leveraging the acquired network to cross-sell existing retail products will be key going forward. Maintain HOLD. Factors that can further drive up valuation: i) Optional value of utilisation of unallocated equity, ii) demerger of financial services and pharma business.

* Key to note with respect to DHFL integration: 1) DHFL’s creditors recovered 46% of pending dues (Rs381bn paid to creditors on claims of Rs870bn); 2) due-diligence was conducted on DHFL’s customer pool and NPA formation from ‘high risk’ portfolio was already consummated into deal consideration; 3) 90% of DHFL retail loans have LTV of <75%, 78% of loans are towards fully constructed properties, 58% portfolio is towards self-employed and average CIBIL score is 730. 4) Post DHFL integration, PCHFL will be more retail oriented, well diversified and one of the leading HFCs. 5) Borrowing cost will also reduce by 130bps to 9.5% and leverage will rise to 3.5x in the near term

* DHFL creditors recover Rs380bn – 46% of pending dues

* Creditors of DHFL (including FD holders) would recover an aggregate amount of ~Rs.380bn from the resolution process of DHFL.

* Rs342.5bn will be paid by PCHFL as a combination of cash and nonconvertible debentures.

* Rs38bn, which is the entitlement of creditors (as per the resolution plan), will be paid from the cash balance available with DHFL.

* There were ~70,000 creditors of DHFL and most of them are recovering nearly 46% of their pending dues.

* Consideration of Rs342.5bn, paid by the Piramal Group at the time of completion of the acquisition, includes an upfront cash component of Rs147bn and issuance of NCDs of Rs195.5bn (10-year NCDs at 6.75% p.a. on a half-yearly basis).

 

DHFL integration facilitates huge scale up in franchise and diversified profil

* Piramal Enterprises (PEL) will become more retail oriented, well diversified lender and one of the leading HFCs in India, focused on affordable financing with access to over ~1mn lifetime customers, presence across 24 states with a network of 301 branches and 2,338 employees. Numbers speak of scale the integration will facilitate:

* 43x jump in the number of lifetime customers from 23,286 to ~1mn.

* 2.4x increase in presence from 10 to 24 states and 6x increase in presence from 40 to 236 cities and towns.

* 22x increase in the number for branches from 14 to 301.

* ~5x increase in the size of retail AUM.

* From being largely wholesale led, it will transition to 50:50 retail wholesale mix in near term.

* Integration will support reduction in borrowing cost by 130bps to 9.5% and improve ALM profile by increasing weighted average maturity of borrowing to 4 years.

* It will also improve equity utilisation in financial services business as no further capital will be allocated and leverage will rise to 3.5x in the near term (from 1.6x in Jun’21).

* Over the last two years, it has built next-gen technology platform, advanced analytics engine and AI/ML capabilities and going forward will leverage the “phygital” lending platform driven by machine learning (ML) and artificial intelligence (AI), including the new mobile app.

 

Texture of DHFL book doesn’t reflect any cause for concern

* 90% of DHFL’s retail loan book has LTV less than 75%

* 78% of loans are towards fully constructed properties

* Market value of mortgaged properties is 2.6x of the loan book acquired

* 58% of AUM is skewed towards self-employed and 42% towards salaried customers

* Average CIBIL score of retail customers is ~730.

 

Diligence conducted on DHFL’s portfolio; outcome adequately consummated in deal consideration

* The company has conducted financial & performance diligence on the entire customer pool of DHFL. It has also developed proprietary AI/ML models to predict default risk in DHFL portfolio. The book was segmented into ‘high’, ‘medium’ and ‘low’ risk. Incremental NPA formation was largely anticipated from the ‘high risk’ segment predicted by ML-models. Moreover, the company has generated asset reference number for all live accounts. Lastly, it has done bureau checks of exposures and physical diligence was conducted on a sample of ~2,600 customers (physical visits and verification of 1,416 customers and reviewed 1,206 files to establish title documents). The outcome of diligence process was adequately factored in when it arrived at consideration value of Rs342.5bn.

 

Near term notable triggers priced in; optional value co-exists with risks

* Stock has doubled in past nine months with notable triggers: 1) Robust performance of pharma business, 2) successful consolidation of wholesale mortgage book reducing concentration risk; 3) stress exposures being addressed appropriately; 4) build-up of organic retail portfolio; and 5) successful bidding and timely regulatory approvals for DHFL integration.

* Improving visibility towards building a diversified book (through DHFL acquisitions), coupled with stable stress in wholesale segment, has triggered rerating of financial services business. We expect this business to now command 1.5x FY23 book. Pharma business will command 16x EV/EBIDTA and 4.5 EV/sales. This along with value of its stake in Shriram group and unallocated equity value gives us SoTP based fair value of Rs2,797.

* Factors that can further drive up valuation: i) Optional value of utilisation of unallocated equity into new business, inorganic opportunities or return to shareholders, ii) demerger of financial services and pharma business, and iii) business transformation opening up new possibilities.

* However, at the same time, risks persist with respect to i) integration challenges; ii) detailed financials will be disclosed post the completion of the review by auditors and proportion of ‘high risk’/‘medium risk’ in DHFL’s retail portfolio and extent of mark-down of wholesale portfolio will be known then; and iii) effectively leveraging acquired network to cross-sell existing retail products.

 

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