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Retail business momentum continues; PCR on wholesale book improves

* Result highlights:Piramal Enterprises (PIEL) reported Q3FY23 consolidated PAT of ~Rs35.5bn (~Rs2.2bn, after adjusting for one-time tax reversal). On an adjusted basis, earnings came in lower than our estimate, primarily on account of higher-than-expected credit costs due to a one-time provisioning buffer and prudential write-offs as well as higher operating expenses. Considering it prudent in the presence of one-off gains from fair-value adjustment of Shriram Group investments (~Rs8.89bn), coupled with the tax reversal of contingent tax liability related to the DHFL acquisition (~Rs33.27bn), Management created additional provision buffers for the Wholesale 1.0 (legacy) book. As per Management, the book is now adequately provided for, with a stage 2 & 3 PCR of 45% (Q2: 40%) on the wholesale book. The focus continues to remain on running down the Wholesale 1.0 book, while simultaneously building-up the more granular Wholesale 2.0 (real estate + corporate mid-market loans) book as well as the Retail loan book, and achieve the stated target of 2/3rd retail and 1/3rd wholesale.

* We roll over our estimates to Mar-24 and retain our BUY rating, with Mar-24E TP of Rs1,300/share (earlier Rs1,200), using the SOTP-methodology for valuation: i) the financial services business using the Excess Return on Equity (ERE) method for a pershare value of Rs1,065, implying 1.0x of Mar-25E BVPS; ii) investments in Shriram Finance based on current market capitalization for Shriram Finance, post holdco discount, at Rs138 per share; iii) investments in the AIF and Insurance at allocated equity book value of Rs45 and Rs60 per share, respectively. Key risk: more forward-flows from the Wholesale 1.0 pool remain the key risk to our forecasts

* Asset quality remains focal point: In the quarter, PIEL witnessed the following gains: 1) Fair valuation gains of Rs8.89bn, from Shriram Group investments (first-time exercise; will continue in the future). 2) Tax reversal of Rs33.27bn, related to contingent tax liability of Rs34.37bn recognized at the time of DHFL acquisition. 3) PCHFL de-recognition gain on the NCD buyback amounting to Rs1.3bn. Headline asset-quality numbers rose QoQ, with reported GS3 at 4% (Q2: 3.7%) and NS3 at 1.7% (Q2: 1.3%). PCR on stage 3 was flat at 67% QoQ. Within Wholesale, a non-real estate account with an exposure of Rs19.1bn and provision of Rs14.83bn slipped to stage 3. A large part of the exposure (Rs12.55bn) has not been classified as NPA, pursuant to a High Court order. As a result, Management has taken this opportunity to strengthen its provision buffer on the wholesale book, with the following actions: i) Additional provision of Rs10.73bn (including Management overlay of Rs7.27bn) on the Wholesale 1.0 book; and ii) prudential write-off of Rs7.7bn. Combined PCR on stages 2 & 3 of the Wholesale book now stands at 45% (Q2: 40%), whereas PCR on stage 1 stands at 5.1% (Q2: 2.7%)

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