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Financial services business price discovery; goes expharma a day prior to record date

Piramal Enterprises (PEL) has fixed September 1, ‘22 as demerger of Piramal Pharma record date. Accordingly, price discovery for financial services business happened during the market opening hours (on August 30, ’22) and PEL shares traded ex-pharma business valuation all through the day. Closing market price at Rs1,064 per share or market cap of Rs255bn represented financial services business valuation translating to 0.8x trailing (FY22) net worth of Rs300bn. Based on past few days’ average trading price, pharma business seems to command valuation of Rs200bn or Rs850 per share. Equity shares, proposed to be allotted by PPL (Piramal Pharma Limited), are expected to be listed on stock exchanges over the next 2-3 months, subject to necessary regulatory approvals.

We value PEL’s financial services business (factoring demerger of pharma business) at Rs332bn or Rs1,391 per share. Maintain BUY

* Lending business with FY22 allocated net worth of Rs170bn will generate RoE of 8-9% over FY23-24E and can command multiple of 1.15x book.

* Investments in Shriram Group are valued at Rs55bn / Rs230 per share

* We assign Rs38bn or Rs161 per share for unallocated equity, alternatives and life insurance

Factors that pose risk to our estimates: i) Any further sign of stress in non-retail portfolio after having disappointed in last couple of quarters, ii) lower than expected RoE accretion from retail business

* Retail traction better than expected; wholesale lending 2.0 was unveiled with new management team in place: Within the financial services business, traction in retail segment has been better than expected. It has unveiled wholesale lending 2.0 with focus on mid-market residential projects in tier-1 cities and focus on top 15-20 tier 2/3 markets. It will also pursue smaller ticket corporate non-real estate loans at the operating company level. New CEO and Credit Head has been inducted and Mr. Khusroo Jijina would retire (and act as an advisor).

* 5-year aspirations outlined for financial services business: PEL has outlined its 5-year aspirations wherein it is targeting to 1) double AUM in 5 years until 2027, 2) grow retail disbursements at 40-50% CAGR over 5 years, and 3) take retail share in total portfolio mix to ~60-70%. In terms of leverage, it will further optimise capital utilisation and target net D/E of 3.5-4.5x

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