Piramal Enterprises Ltd. share price target

Piramal Enterprises (PIEL) reported completion of DHFL's acquisition after it paid INR342.5b to the latter's creditors. This included an upfront cash component of INR147b and deferred component of INR195.5b paid via 10year NCDs raised at 6.75% p.a. Principal on NCDs will be repaid at 5% p.a. for the first five years and 15% p.a. thereafter for the next five years. As per the resolution plan, there was an additional carve out consideration of INR38.1b from the available cash on Dewan Housing Finance's (DHFL)...

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...

The valuation of 6x EV/FY21 sales (estimated at INR1.2b) is attractive as it is at a ~50% discount to leading CDMO players such as DIVI. We raise the Pharma segment EBITDA of Piramal Enterprises (PIEL) by 5%/6% for FY22/FY23E after factoring in the acquisition. Accordingly, we raise PIEL's SOTP-based target price to INR2,210. We remain positive on PIEL on the back of superior execution in the Contract Development and Manufacturing (CDMO), complex hospital generics (CHG), and India Consumer...

The Complex Hospital Generics (CHG) business was volatile due to COVID in 3QFY21. On the other hand, the Contract Dev. and Manufacturing Org. (CDMO; led by a strong order book) / India Consumer business (led by increased demand for Self-Care and Baby Care products) has been steady. As the Carlyle deal commenced in Oct'20, the consol. networth jumped from INR315b to INR355b QoQ. The equity infusion was used to primarily pare down debt consol. net debt/equity ratio is at a multi-year low of 0.9x. After a lackluster 1HFY21, the Real Estate segment rebounded in 3QFY21...

Four products launched; INR500m disbursements in the first month The company launched four retail lending products in Nov'20 LAP, affordable housing finance, mass housing finance, and small business loans (refer Exhibit 1). It also plans to reduce the focus on affluent housing finance. The idea is to have products that banks typically do not focus on and where NBFCs have higher pricing power due to their niche capabilities. PIEL is currently present in 40 locations (14 hub and 26 spoke locations), with an employee strength of over 400 people. Half of its employees are frontline sales persons. In the first month, it disbursed INR500m across these four products....

The EBITDA margin contracted considerably to 11% in the quarter (from 21% in FY20) due to lower revenue from Complex Hospital Generics and The deferment of surgeries in the Hospital segment impacted overall performance in PIELs Pharma segment. However, the phase-wise easing of the lockdown is improving the outlook across the CDMO and Complex The company will roll out retail lending products such as LAP and small business loans around the Diwali festival in 1520 towns. The Pharma business is witnessing increased traction, and the recent stake sale has set a benchmark for its valuation. INR34b of the INR37b Pharma stake sale to Carlyle would go back to PIEL. While PIELs Pharma business was impacted by COVID-19, management indicated U-shaped recovery over the next two to three quarters. We keep credit costs elevated over the next two years The Pharma business is witnessing increased traction.

28 June 2020 PIEL has announced that all Pharma related businesses at the group level would be merged into a wholly-owned subsidiary, Piramal Pharma Ltd (PPL). Further, PPL would get strategic growth investment from the Carlyle group for 20% equity stake in the company. EV for the proposed transaction is USD2.8b with an upside of USD360m if PPL achieves certain financial parameters in FY21. According to the manegement, PIEL would utilize part of the stake sale money to reduce net debt to INR25b from INR42b and the rest could be utilized for inorganic opportunities. With EV of USD2.8b (INR210b) and debt reduction to INR25b, the equity value works out to INR185b with a realized upside value of INR212b (USD360m). Accordingly, Carlyle would invest USD490m for the proposed 20% stake and an additional USD72m if the upside is triggered. Piramal Enterprises Consolidated leverage declined from 2.1x in FY19 to 1.4x in FY20. Leverage of the FS business declined from 3.9x to 2.

23 October 2019 Piramal Enterprises (PIEL) PBT increased 29% YoY to INR7.3b in 2QFY20. However, with a tax rate of 36%, the company has not availed of the tax rate reduction this quarter. Net income (calc.) declined 7% QoQ to INR7.6b. Total equity in FS (ex Shriram Group) stands at INR143b. Debt to equity of FS declined to 2.9x versus 3.8x a quarter ago. Pharma revenue grew 17% YoY to INR13.2b. EBITDA margin improved to 24% from 22% a year ago. In the current environment, PIEL has focused on (a) reducing the top 10 exposures from INR140b to INR100b by Mar 20, (b) lowering the share of short-term borrowings and (c) diversifying the loan mix towards retail assets.

Given the ongoing growth momentum and upside potential, we rate the stock a BUY with a target price of Rs. 2,119 based on SOTP valuation. Financial Services perform well despite challenging environment Company reported strong topline growth in Q1FY20 (+20.8% YoY to Rs. 3506cr). Growth is primarily led by robust performance in Financial Services division (+29.2% YoY to Rs. 2,014cr), despite liquidity tightening in the NBFC space and overall slowdown across sectors. Total loan book rose 20.2% YoY to Rs. 56,605cr, while gross NPA ratio stood at 0.9% (63% QoQ decline in stage 2 assets), maintaining healthy asset...