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DTA derecognition and interest reversals weigh on earnings; strategic priorities remain in place

Piramal Enterprises (PEL) reported a loss of Rs5bn due to DTA derecognition of Rs12.6bn created on goodwill earlier. Adjusting for this, consolidated PAT was down 7% QoQ to Rs7.48bn. Company stayed put on its strategy of rationalising wholesale exposure (down 4% QoQ), ramping up secured mass retail lending, and addressing stress exposures appropriately (through provisioning or restructuring). No credit cost (all through FY21) after creating buffer in Q4FY20 despite doubling of stage-3 assets suggests adequacy of the provisioning. However, yields were dragged down due to interest derecognition and ‘interest on interest’ reversals, which weighed on core earnings.

Pharma business performance was strong – 23% revenue jump in CDMO and 55% in OTC segment supporting margins at 28%. Near to medium term triggers: a) demerger of financial services and pharma business; and b) business transformation in each of these segments opening up new possibilities and optional value. Maintain BUY. Key risks: 1) deferment in approval process of DHFL acquisition; and 2) higher mark-down on the acquired portfolio.

* Recovery in complex hospital generics:

PEL reported 18.0% revenue growth in Q4FY21 on the back of 23.1% YoY growth in the CDMO segment, which was driven by strong orderbook and approvals for five NCEs. Critical care segment reported healthy recovery during the quarter posting a growth of 27.1% QoQ (+1.4% YoY) with falling covid cases in the developed markets raising demand for elective surgeries. OTC reported healthy growth of 54.9% YoY albeit on a low base, with improving consumer sentiment and high demand for covid protection products (sanitisers, masks, etc.). We remain positive on the company’s growth potential and expect pharma revenues to grow at a CAGR 16.0% over FY21-FY23E.

* Stage-3 assets rose to 4.5%; no further restructuring beyond 3.8%:

Stage-3 assets increased QoQ to 4.5% (from 3.7%) – optically higher due to decline in the wholesale book. In absolute terms, there was an increase of Rs3.1bn to Rs20.2bn as 3 accounts slipped from stage-2 to stage-3. Couple of them will be resolved in Q1FY22 itself – one of the accounts (Sadbhav) has been repaid in April itself. In Q3FY21, PEL invoked OTR for loans worth Rs17bn (3.8% of loan book); no additional accounts were restructured in Q4FY21. Despite reduction in the wholesale loanbook, the company continues to maintain provisions at 6.3% of the loanbook (Rs28bn; down Rs1.4bn in Q4FY21) to manage any contingencies arising from covid second wave. PEL is confident that provisions of 6.8% on the wholesale portfolio is adequate, and there was no creation of any further buffer (fourth successive quarter of no provisioning post the one created in Q4FY20). Company carries provisions of Rs20.3bn against standard assets (stage 1 & 2 loans) – at 4.5%. We are building-in a credit cost of 1%/0.8% for FY22E and FY23E.

* ‘Interest on interest’ reversal, fair value adjustment and interest derecognition weighed on NIMs:

Yields corrected sharply from 14.6% in 9MFY21 to 14.1% for FY21 suggesting more than 150bps decline QoQ. We believe interest derecognition on incremental slippages and some restructuring, ‘interest on interest’ reversal of Rs750mn (on loans above Rs20mn), and consistent reduction in the wholesale book, resulted in fall in yields. Funding cost inched up marginally by 10bps to 8.5% for FY21 (from 8.4% for 9MFY21). NIMs consequently declined from 6.2% in 9MFY21 to 5.6% in FY21.

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