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Piramal Enterprises Ltd For Target Rs.1,360

Advent of a prominent retail-financing play; Initiate with BUY

*Piramal Enterprises (PIEL), post the de-merger of its pharmaceutical business, is a NBFC with presence across both retail and wholesale financing and assets under management (AUM) of Rs645.9bn. Building on its acquisition of Dewan Housing Finance (DHFL) and capitalized by the infusion of capital of ~Rs185bn, from stake sales and the rights issue, we forecast PIEL’s loan book to almost double to Rs1.21Tn by FY27E, at a CAGR of 15%. Backed by an experienced leadership team, we forecast the retail portfolio to clock CAGR of 30% over FY22-27E, while the wholesale portfolio is expected to remain flattish. Consequently, the retail assets are expected to constitute ~67% of the portfolio in FY27E, up from the current level of 37%.

* In our assessment, the positive P&L flow-through from the Purchased or Originated Credit Impaired (POCI) book, representing DHFL’s stages 2 & 3 retail loans, coupled with operating profit growth of 31% for the lending portfolio over FY22-25E, should minimize the impact of higher credit costs on the company’s legacy wholesale portfolio. We forecast earnings to compound at 43% over FY22-25E, with the POCI book flow-through forecasted to contribute ~25% to earnings. RoA/RoE of the consolidated lending business are thus estimated to increase, from 1.2%/4.2% in FY22 to 2.5%/14.1% by FY27E (Exhibit 10). We initiate coverage on PIEL with a BUY rating and a sum-of-the-parts (SOTP) based Sep-23 TP of Rs1,360/share, valuing the core lending business at 1.03x Sep-24E BVPS vs. the current stock price implied valuation of 0.52x Sep-24E BVPS for this business.

*DHFL acquisition – Leap-frogging into the big league: Analysis of the acquisition shows it to be NPV positive for PIEL. It has catapulted PIEL into a leading HFC with retail assets of Rs222.7bn – a feat accomplished in the past by other similar-size HFCs over a period of more than 7 years. With the retail leadership team under Jairam Sridharan (exCFO, Axis Bank), PIEL has hired ~2,000 additional employees, till Q1FY23, to augment the 3,000 strong employee-base of DHFL. With 100% of the erstwhile DHFL branches online, we forecast the retail portfolio of PIEL to quadruple, from ~Rs215bn in FY22 to ~Rs810bn by FY27E – a feat last seen on the DHFL network in FY18. While secured products like home loans and LAP are expected to be the mainstay of the retail portfolio, unsecured loans at 20% of the portfolio should help deliver 2.5% RoA by FY26E-27E.

* POCI recoveries should cushion the impact of higher credit costs on the wholesale book: We forecast provisions on the legacy wholesale book to increase, from ~8.3% in FY22 to ~18.3% by FY25E. Credit costs, net of POCI recoveries, are forecasted to be 116bps over FY23-25E (FY22: 133bps).

* Valuation and risks: We initiate coverage with a BUY rating and Sep-23 TP of Rs1,360, based on SOTP methodology, valuing: i) the financial services business using the Excess Return on Equity (ERE) method for a per-share value of Rs845, implying 1.03x of Sep24E BVPS; ii) Investments in Shriram Finance based on our TP for Shriram Transport and Shriram City Union Finance, post holdco discount, at Rs179 per share; iii) Investments in the AIF and Insurance at allocated equity book value of Rs58 and Rs40 per share, respectively; and iv) the unallocated networth at Rs237 per share. Key risk: Integration issues from the merger due to mismatch of corporate culture and technology.

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