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FS consolidation continues; Pharma performance strong

* PIEL reported a consolidated loss of INR5.1b, led by a one-off tax adjustment of INR12.6b. Consolidated PBT was largely stable on a sequential basis at INR9.7b. In FY21, consolidated PBT jumped to INR34b from INR14b YoY due to a low base (it had incurred a one-time provision of INR19b in FY20).

* In 4QFY21, the Financial Services segment was characterized by continued moderation in the Wholesale lending book, gradual pick-up in Retail lending disbursements, and some increase in the GNPL ratio.

* PIEL delivered a strong performance in the Pharma segment, led by robust traction in CDMO and India Consumer Products. The Complex Hospital Generics segment also saw a recovery on a sequential basis.

* After a lackluster 1HFY21, the Real Estate segment witnessed a rebound in 2H across most large cities. We expect PIEL to remain cautious in Wholesale lending, with incremental disbursements to be largely driven by the Retail segment. We forecast 13% loan book CAGR over FY21-24E. The company has a provision buffer of 6.3% of loans, which is largely adequate. While the DHFL deal can significantly boost the retail book, we await final regulatory approvals before incorporating it in our estimates. Maintain Buy, with a TP of INR2,150/share (FY23E SoTP-based).

Running down its Wholesale loans; expanding its Retail lending product suite

* As part of its diversification strategy in Retail lending, PIEL reduced its Wholesale book by 4% QoQ to INR394b, while the Retail lending book was stable at INR53b. It has now achieved its internal target set around two years ago to reduce all exposures to sub-15% of net worth.

* NIM declined 60bp QoQ to 5.6% led by a) INR750m interest reversal due to the ‘interest on interest’ refund, b) interest reversal on one particular exposure to Omkar Developers and c) lower share of wholesale loans.

* GNPL ratio rose 80bp QoQ to 4.5%. Total provisions on the Balance Sheet remained steady at 6.3%. While PIEL restructured loans worth INR17.4b (3.8% of loans) in 3Q, it did not carry out any further restructuring in 4QFY21.

* The company received RBI and CCI approvals for the DHFL acquisition. There are two more approvals pending, post which the acquisition will be complete. Post this acquisition, the share of Retail loans will jump to ~50% from 11% at present.

* PIEL began Used Car financing in 4QFY21 with a tie-up with a fintech firm. Its FY22 strategy on Retail lending is: a) to increase its product suite to 11 from seven at present, b) boost its geographic footprint (inorganically), and c) to partner more with fintech and consumer tech firms.

Pharma – CDMO/ICP outshines; CHG on a revival path

* PIEL’s Pharma sales grew 18% YoY in 4QFY21, led by 23%/53% growth in CDMO/India Consumer Products revenue (67%/7% of sales). The Complex Hospital Generics segment (27% of sales) remained flat on a YoY basis. Better operating leverage led to 28% EBITDA margin in 4QFY21. It delivered 7% YoY growth in sales and 22% EBITDA margin on an overall basis in FY21.

* There has been addition of 50 customers in the CDMO segment. Around 40% of the order book is from integrated projects, which implies increasing confidence of innovator Pharma companies in the service offerings of PIEL.

* New launches, strengthening distribution through consolidation/technology enablement, and better traction in existing products would sustain the YoY growth momentum in sales in the ICP segment.

Highlights from the management commentary

* Exposure to Lodha declined to INR26.37b in FY21 from INR31b in FY20. Of this, INR15.93b is against an SPV, with ready inventory and 1.5x cover. The balance is with the developer. In Apr’21, Lodha repaid ~INR5b, bringing its total exposure down to INR21.5b.

* The management guided at 15% revenue CAGR in the Pharma segment over the next three years. Revenue growth can be better in FY22, led by a recovery in the Complex Hospital Generics segment, strong order book in the CDMO segment, and superior execution in India Consumer Products.

* PIEL intends to spend capex worth USD90-100m on an annual basis.

Valuation and view

Over the past two years, PIEL has done a good job of strengthening its Balance Sheet by trimming its Wholesale loan book, reducing exposures to the top 10 clients, and increasing provisions. At 6.3% of loans, total outstanding provisions exceed GNPLs. Over the next five years, we expect the company to make meaningful inroads in the Retail lending segment. Its strategy of product diversification will help it deliver strong growth, while at the same time reduce concentration risk. We expect the Financial Services business to deliver 4% RoA/12% RoE over the medium term.

We have raised our EV/EBITDA multiple for the Pharma business to 17x (from 16x earlier) considering the increasing number of projects on an integrated basis in the CDMO segment, better stance in the CHG segment, and new offerings/leveraging ecommerce in the ICP segment. Using SoTP, we arrive at our TP of INR2,150/share (FY23E-based). Maintain Buy.

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