About the Company

Piramal Enterprises Limited (PEL) is one of India’s large diversified companies, with a presence in Healthcare, Healthcare Insights & Analytics business and Financial Services. In Pharmaceuticals, through end-to-end manufacturing capabilities across its manufacturing facilities and a large global distribution network, the company sells a portfolio of niche differentiated pharma products and provides an entire pool of pharma services. In Financial Services, PEL provides comprehensive financing solutions to real estate companies. Healthcare Insights & Analytics business, Decision Resources Group, is the premier provider of healthcare analytics, data & insight products and services to the world’s leading pharma, biotech and medical technology companies and enables them to make informed business decisions.

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Q4 FY20 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
  Q4FY20 Q4FY19 YoY % Q3FY20 QoQ % FY20 FY19 YoY%
Sales 1277.77 1041.52 22.68% 1068.77 19.56% 4918.25 4117.16 19.46%
PBT -118.44 -82.78 -43.08% 112.7 -205.09% 539.84 -797.61 167.68%
PAT -484.28 -63.81 -658.94% 36.72 -1418.85% 144.85 -868.01 116.69%

 

Consolidated Financials (In Crs)
  Q4FY20 Q4FY19 YoY % Q3FY20 QoQ % FY20 FY19 YoY%
Sales 3580.55 3491.08 2.56% 3411.34 4.96% 13559.4 12192.2 11.21%
PBT -1101.53 796.61 -238.28% 898.3 -222.62% 1407.12 2541.84 -44.64%
PAT -1702.6 454.63 -474.50% 724.2 -335.10% 21.14 1464 -98.56%

*One-time accounting write-off of INR 1,758 Cr. of Deferred Tax Asset (DTA) and reversal of Minimum Alternate Tax (MAT) Credit

*One-off incremental provisions of INR 1,903 Cr.

 

Detailed Results

  1. The company had a rough quarter. Total Revenues for Q4 were lower by 2% and reported a loss of 1703 Cr for the quarter.
  2. Pharma business showed good growth for the quarter and the full year. Pharma revenues up 13% to INR 5,419 Cr for the year with the EBITDA margins at 26%, FY20 EBITDA for the Pharma business crossed INR 1,400 Cr.
  3. Financial Services business took a big hit. Revenues were down 11% in the quarter and 8% for the full year. Pharma business, on the other hand, grew 10% YoY in Q4 and 13% YoY for FY20.
  4. The company announced a final dividend of Rs 14 per share for FY20.
  5. Capital inflows of INR 14,500 Cr. from key milestone transactions in FY20. These include the preferential allotment for CDPQ, the right issue for existing shareholders, and the sales of a 10% stake in Shriram Transport Finance and DRG.
  6. The company has an unallocated surplus equity pool of Rs 10,482 Cr.
  7. Total equity increased 12% to INR 30,572 Cr. vs. INR 27,224 Cr. last year.
  8. Net debt reduced by 25% to INR 37,283 Cr. vs. INR 55,122 Cr. last year. Net debt to equity reduced to 1.2 times
  9. One-time accounting write-off of INR 1,758 Cr. of Deferred Tax Asset (DTA) and reversal of Minimum Alternate Tax (MAT) Credit, as the Company opted for a lower tax rate under the new corporate tax regime.
  10. One-off incremental provisions of INR 1,903 Cr. (INR 1,411 Cr., net of taxes) in Financial Services. Adopted a conservative and prudent approach, given macroeconomic uncertainties.
  11. Loan book at INR 50,963 Cr., with top-10 exposures reduced by ~INR 4,200 Cr. during the year.
  12. Raised ~INR 13,500 Cr in long-term borrowings over last one year
  13. ~INR 8,900 Crores were available in the form of cash and undrawn bank lines as of Mar 31st, 2020.
  14. Housing Finance loan book of INR 5,534 Cr.; aim to create a multi-product Retail Lending franchise.
  15. Overall provisioning at ~2.5x times of GNPAs and 5.8% of the overall loan book. PCR at 40%.
  16. Capital Adequacy Ratio of the Financial Services business at 31% (vs. 22% as of Mar-2019).
  17. Loan book split as on 31.03.2020:
    1. Whole Sale Real Estate: 70%
    2. Hospitality: 4%
    3. Corporate Lending: 15%
    4. Retail Financing: 11%
  18. 12% YoY reduction in wholesale loan book, which includes real estate and corporate loans
  19. Exposure to top-10 accounts reduced by ~INR 4,200 Cr. during the year (a decline of 23% YoY)
  20. As of Mar-20, three exposures were >10% of the net worth of the FS business, which includes one account >15% of net worth
  21. Share of CPs in overall borrowings has declined 94% to INR 1,080 Crores as of Mar-2020 from INR 18,017 Crores in Sep-2018.
  22. The company also has a positive asset-liability mismatch across all maturities.
  23. Gross debt to equity of Financial services business reduced to 2.6 times from 3.9 times a year ago.
  24. In the Pharma division, FY20 revenue & growth across segments was:
    1. CDMO: Rs 3154 Cr & 13% YoY
    2. Complex Generics: Rs 1853 Cr & 11% YoY
    3. Consumer Healthcare: Rs 418 Cr & 25% YoY
  25. The JV with Allegan saw revenues of Rs 393 CR and a net profit of 104 Cr in FY20. PEL has a 49% stake here.
  26. EBITDA margins for the division improved further to 26% in FY20 from 21% a year ago.
  27. In the CDMO business, two client NCEs (new chemical entities) were approved for launch by the USFDA in Q4FY20.
  28. In complex generics, the company launched 11 products in FY20 and 3 products in Q4.
  29. Company plans are to raise funds by issuing a minority stake in the pharma business to potential financial investors.

Investor Conference Call Highlights

  1. PEL has 10000 Cr of repayments coming due in the next two quarters. Against that, they have carried 4000 Cr of cash in the new FY. They have cash inflows of two banks of 4000 Cr in April. In LTRO they have a modest success of 1000 Cr sanctioned loans. And in the next 2-3 months, they expect further 4000 to 5000 Cr through bank lines. They are also in the next two to three months they are trying to down-sell a couple of their assets.
  2. In the pharma business, the company is in advance talks with investors for selling some stake. The pharma business would first be transferred into a 100% subsidiary of PEL. And then the investor(s) are expected to invest in the pharma subsidiary for around 20% stake. This money would eventually flow into PEL, the holding company.
  3. Debt on pharma books is currently around 4500 Cr. When investment comes, the debt will reduce to around 3000 Cr. and rest will be used in the holding company of PEL.
  4. Goodwill of the pharma business is 852 Cr. In CDMO business management expects to grow at a CAGR of 15-20%.
  5. On the lending side, 80% of the borrowers of PEL have asked for a moratorium of the payments.
  6. Management is building technology for their consumer finance vertical and refrain from divulging much information. They would share more details in the next call.
  7. PEL is focusing on diversifying its loan book and making it more granular. Hence, they are consciously down-selling a few of the real estate and corporate wholesale assets.
  8. Rs 260 Cr of additional GNPA The same is split between two groups- Marvel & Maitra. 208 Cr of exposure is in Marvel, where PEL has accepted a one-time settlement resulting in a loss of 31 Cr. The majority of the balance of 260 Cr post-Marvel exposure is in the Maitra group. PEL is in process of selling the assets in due course of time and hence taken suitable provision.
  9. The portfolio churn is happening in retail housing where there is a down-selling of past loans and pickup of new loans. Hence, the management foresees very tepid growth for a few quarters.
  10. The incremental cost of funds during the quarter is 9.5%-10%.
  11. PEL has a 2000 cr hospitality portfolio. Management expects the hospitality industry to at least take 18 months to recover. However, they claim that all the loans have been on operating assets. Not a single loan is on under-constructed property. And the majority is given to top brands like Taj, Oberoi, Hyatt etc.
  12. The company’s LTV is also very low (below 65%) in the case of the hospitality sector.
  13. Company is expecting only about 1000- 1500 Cr sanction from LTRO1
  14. Loans moratorium which PEL availed for was around 1500 Cr. Out of that also, they paid roughly 50% as the banks later asked them to. So, currently, the loan moratorium is Rs 750 Cr.
  15. In the LRD book company has around 950 Cr of assets. The majority of that is in BKC, Mumbai to Wadhwa group and it is going on smoothly.
  16. Whenever there is a tsunami in the financial market, management stress-tests its books and makes the provision accordingly. This time it is an even worse situation. Management has in its scenario analysis has also included a case where there would be zero sales, zero construction, and zero collection for the next three quarters. And post that the industry would limp back to normalcy.
  17. In real estate, the lender must provide liquidity to the developer to ensure that the project gets completed. If the project gets delayed or stuck, the whole value chain suffers.
  18. To one of the questions, management clarified that they are not looking at any new business segment at the moment.
  19. The reduction of exposure in Lodha was supposed to be completed by March 2020. However, it has got delayed. Management expects it to get to that reduced level by September 2020.
  20. The corporate loan book is around 7000 Cr. 4700 Cr of that is in Infrastructure (renewables). The company is in advance talks with private InvITs to sell these assets. They expect the corporate book to reduce to half in the coming year.
  21. The additional provision of 1900 Cr was not mandated by RBI. The company has done that on its own by following a prudent and conservative policy for the way forward.
  22. Management continues to stay conservative and resist from making any comment on growth plans. Hence, the focus is on improving the liquidity and the health of the Balance Sheet.

Analyst’s View

Piramal Enterprises is facing the heat of the challenging economic environment and downturn in the real estate sector. Even though the pharma business is doing well, the problems of financial business are dragging their overall performance. The company is constantly working on improving the liquidity condition of its Balance Sheet. They are in advance talks of selling a stake in the pharma business which can be partly used to retire debt in the pharma business and partly to improve the liquidity of the financial business. In this period of the pandemic, how the company adapts to the new environment remains critical. However, given their past track record, management capability, and surplus unallocated capital which can be deployed to support any of the conglomerate’s various businesses, Piramal Enterprises continues to be a good conglomerate stock to watch out, particularly in the real-estate lending space. But looking at the valuations, it seems like near term worries are outweighing the long term prospects for the company in investor’s minds.


 

 

 

Q3 2020 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q3FY20 Q3FY19 YoY % Q2FY20 QoQ % 9MFY20 9MFY19 YoY%
Sales 1068.77 826.85 29.26% 1630.23 -34.44% 3640.48 3075.64 18.36%
PBT 112.7 -99.49 213.28% 645.55 -82.54% 658.28 -714.83* 192.09%
PAT 36.72 -68.7 153.45% 633.1 -94.20% 629.13 -804.2 178.23%

 

Consolidated Financials (In Crs)
Q3FY20 Q3FY19 YoY % Q2FY20 QoQ % 9MFY20 9MFY19 YoY%
Sales 3947 3592.1 9.88% 3666.39 7.65% 11186.33 9763.38 14.57%
PBT 954.8 895.08 6.67% 825.48 15.67% 2457.22 2098.55 17.09%
PAT 724.19 602.04 20.29% 551.51 31.31% 1723.76 1009.46 70.76%

*Containing an exceptional item of a loss of Rs 1287.9 Cr

 

Detailed Results

  1. The company has shown modest growth for the quarter with consolidated revenues growing 10% YoY and net profit also growing 20% YoY. The cause for YoY profit growth is mainly the corporate tax cut instituted earlier this year.
  2. The company received Rs 6750 Cr from the sale of the Healthcare Analytics division in the quarter.
  3. It also raised Rs 3650 Cr from the rights issue to existing shareholders and Rs 1750 CR from preferential allotment to CDPQ.
  4. The company has reduced its debt to equity ratio to 1.2 times and a debt reduction of Rs 15000 Cr since March ’19.
  5. The ROE (considering Cash Tax and other synergies from the merger) for 9MFY20 was 15.9%.
  6. In Financial Services, the total loan book was at Rs 51429 Cr vs Rs 53,055 Cr a year ago. This is because of the company reducing single borrower exposures. The company currently has only one exposure that is higher than 15% of the net worth of the financial services business.
  7. The stage 2 & 3 loans now form 2.1% of the total loan book which is up 30 bps QoQ.
  8. The housing finance loan book grew 56% YoY and now forms 12% of total loan book vs 7% a year ago.
  9. The Segment breakup of revenue growth is as follows:
    • Financial Services: Up 7% YoY
    • Pharma: Up 13% YoY
    • Healthcare Analytics: Up 9% YoY
  10. Gross NPA ratio stands at 1.8% vs 0.9% in Sep ’19. The increase is mainly due to the rise in stage 2 & 3 loans in the quarter.
  11. Pharma revenues grew 15% YoY and 9M EBITDA margins were consistent at 23%.
  12. Consumer Healthcare division saw growth of 37% YoY in 9M revenues.
  13. Despite trying industry conditions, the financial services division grew 16% YoY in the 9M period.
  14. Book value per share for the company was at Rs 1457 in Dec ’19.
  15. Alternative assets under management grew 20.3% YoY.
  16. The company is also co-investing with IIFL on an AIF platform to fund late-stage and last-mile real estate projects. The AIF target size is Rs 2000 Cr and has concluded deals amounting to Rs 1000 Cr already.
  17. The company also maintains a healthy CAR of 32% in Dec ’19. It has also reduced the debt of the financial services division to equity of 2.8 times vs 4.6 times a year ago.
  18. The company has maintained a positive gap in ALM mismatch across all maturity brackets.
  19. Overall, the company maintained a healthy average yield of 14.3% while keeping the borrowing costs at 11.1% and maintaining a cost to income ratio of 19.9% in the 9M period.
  20. The company is planning to bring Pharma businesses under a subsidiary and raise funds by issuing a minority stake to potential investors.

Investor Conference Call Highlights

  1. In retail financing, the company is partnering up with a large telecom player to offer tailored financial products and solutions to customers. The company will restructure the retail lending business under a 100% owned subsidiary.
  2. The company has appointed Jairam Sridharan, the former CFO of Axis Bank, as the CEO of Retail Financing. The company has also appointed McKinsey & Company to prepare a strategic plan to build a complementary lending business across the risk-return spectrum, comprising of retail housing finance, consumer and small businesses.
  3. In the CDMO business, the company is planning to expand production capacities at multiple sites. The company has increased market share in the inhalation anesthesia portfolio and has added Desflurane to its product portfolio.
  4. Within the 3 deals added to stage 3 in the quarter, 2 deals are with Ornate and Delhi Baroda whom the company is taking to NCLT to take over their assets. The third is ILD where the company went for a onetime settlement and write off Rs 34-35 Cr.
  5. The management has assured that the transaction for the sale of the Healthcare Analytics division will be completed soon and the company will receive the proceeds before the end of March 2020. Most of these proceeds will be used to repay company debt.
  6. The management has mentioned that the pharma business does not need any allocation currently and it is yet to be decided how much is to be allocated to the financial services division.
  7. The company will start in consumer finance in the coming year and it is also looking for possible acquisition opportunities in this field.
  8. The management has clarified that Delhi Baroda is not a real estate company but a truck financing company that was part of the ECL portfolio.
  9. The management has clarified that the AIF with IIFL is for senior secured lending only and it is different from the CPPIB and Ivanhoe tie-ups as the latter ones involve equity investments into real estate projects.
  10. The company’s securitization book is now more than Rs 4000 Cr out of which Rs 1200 Cr is from the retail book while the rest is from wholesale real estate book.
  11. The company will not engage in an inorganic transaction with the Shriram group for the consumer finance division.
  12. The management has stated that most of the refinancing and selling down of its exposures is being down by the public sector and private sector banks.
  13. The company is focussed on building brands in the consumer pharma business and it has seen this business turn EBITDA positive with EBITDA of Rs 30 Cr in 9MFY20 vs Rs (30) Cr in 9MFY19.
  14. The management has assured that the consumer finance division will be fintech and analytics-driven and the company will be building its proprietary fintech platforms. It may also look for acquisition opportunities in this space.
  15. The management has stated that it has taken the decision to consciously to run down loans and to avoid areas where housing finance is already being done by banks. The average ticket size is between Rs 15 to 25 Lacs and the cost of funds is expected to stay between 8.5-8.75%. The management also expects the HFC book to rise to 16% in revenue contribution in FY21 from its current level of 12%.
  16. The management has also stated that because of the above-mentioned recalibration, disbursements are expected to fall to Rs 150 Cr to 200 Cr per month from average levels of Rs 300 Cr to 350 Cr.
  17. The company’s exposure to Lodha is now down to Rs 3000 Cr out of which Rs 2500 Cr is completed assets. The company also has a cover of Rs 6000 Cr for this exposure. The company also expects Rs 1000 Cr of assets to be completed in the next 6 months. The company will further refinance and shave off Rs 400-500 Cr by April to bring down the total exposure to around Rs 2500 Cr at the time.
  18. The total provisioning for the company remains at Rs 1000 Cr.

Analyst’s View

Piramal Enterprises has been one of the premier conglomerates in the country. They have built a robust and rigorous financial services business while slowly growing and building their pharma and health analytics businesses. The company continues to provide resilient performance despite tough industry conditions. It has done well to raise capital through various means showing the company’s money-raising abilities. The company also concluded the sale of the Healthcare Analytics division which was sold at a good exit valuation of 5 times EV to sales and 20 times EV to EBITDA. The company has also been proactive in developing its housing finance division consistently and in reducing large borrower exposures steadily. The company’s decision to expand into consumer finance using fintech and analytics platforms in the near future looks very promising. The company’s pharma division is also growing well with the consumer products division turning EBITDA positive this year. It remains to be seen how long will the current real estate depression keep the pressure on the company and how the path for the consumer finance and pharma divisions pans out for the company. Nonetheless, given the company’s track record of consistent performance and the management history of making good pivot decisions, Piramal Enterprises remains a good stock to watch out for every investor.


Q2 2020 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q2FY20 Q2FY19 YoY % Q1FY20 QoQ % H1FY20 H1FY19 YoY%
Sales 1630.1 1198.53 36.01% 941.68 73.11% 2571.77 2248.87 14.36%
PBT 648.13 444.63 45.77% -98.1 760.68% 550 -612.1* 189.85%
PAT 635.68 358.26 77.44% -38.84 1736.66% 596.84 -732.31 181.50%
Consolidated Financials (In Crs)
Q2FY20 Q2FY19 YoY % Q1FY20 QoQ % H1FY20 H1FY19 YoY%
Sales 3666.24 3220.41 13.84% 3573.14 2.61% 7239.39 6171.36 17.31%
PBT 828 643.2 28.73% 667.6 24.03% 1481.59 755.41** 96.13%
PAT 554 480.42 15.32% 450 23.11% 1004.11 410.61 144.54%

 

*Containing an exceptional item of a loss of Rs 1287.9 Cr

**Contains exceptional item of loss of Rs 452 Cr

Detailed Results

  1. The company has shown good growth for the quarter with consolidated revenues growing more than 14% YoY and net profit excluding exceptional items also growing 18% YoY.
  2. In Financial Services, the total loan book was at Rs 53305 Cr and a reported ROE of 17.3% considering the cash tax and synergies from the merger.
  3. The housing finance loan book grew 2 times YoY and now forms 12% of total loan book vs 4% a year ago.
  4. The Segment breakup of revenue growth is as follows:
    • Financial Services: Up 13% YoY
    • Pharma: Up 19% YoY
    • Healthcare Analytics: Up 14% YoY
  5. Gross NPA ratio stands at 0.9% with provisioning at 1.8% of the loan book.
  6. In Housing Finance, the company has disbursed Rs 1100 Cr in the current quarter while it has approved of Rs 2500 Cr of yet to be disbursed loans.
  7. Wholesale loans are now at 48% of loan books with around 66% of these loans in mid/late-stage and completed projects.
  8. The company has significantly reduced its CP exposure to Rs 1480 Cr from Rs 18000 Cr last year.
  9. Total disbursements in the quarter were at Rs 7900 Cr with Rs 11,800 Cr in repayments/prepayments in H1FY20.
  10. The company has also successfully raised Rs 24,000 Cr of long term funds in the past year. Rs 8400 Cr from this were through bank term loans while Rs 14700 Cr were through NCD issues.
  11. The company has maintained a positive gap in ALM mismatch across all maturity brackets.
  12. In the India RF Platform (JV with Bain Capital Credit), the company concluded 3 investments which are:
    • USD 156 million invested in marine chemicals business in Nov-2018
    • USD 144 million invested in pharmaceutical & vaccines player in Apr-2019
    • USD 51 million in debt purchase of downstream steel player
  13. Overall, the company maintained a healthy average yield of 14% while keeping the borrowing costs at 11% and maintaining a cost to income ratio of 19.7%.
  14. The company’s pharma division passed 3 USFDA inspections in H1FY20 and 75 customer inspections in the same period.
  15. The pharma division also added 30 new customers and now boasts of >15 million-dollar biotech customers.
  16. The company also had 7 key launched in H1FY20 out of which 3 were in Q2FY20.
  17. The company also improved upon their EBITDA margin which grew 400 bps YoY to 24% in H1FY20.
  18. The India Consumer Products has shown a good growth of more than 53% YoY in H1FY20.
  19. Healthcare Insights & Analytics also showed good growth with revenues rising 14% YoY in H1FY20 and EBITDA margins improved to 24% in Q2FY20.

Investor Conference Call Highlights

  1. The management states that the top 10 exposures to the loan book have been brought down to 30% and they plan to reduce it to <20% before the end of FY20.
  2. The management expected significant consolidation to take place in the NBFC industry and the company to be able to properly capture the opportunity arising from the industry shifts.
  3. The management has maintained that they are raising equity despite their comfortable balance sheet position because they want to maintain enough liquidity to be able to bear further shocks to the system and stay on the lookout for possible acquisitions in the undervalued NBFC sector.
  4. The management has stated that out of the 18 deals that were under stress, the company has resolved almost all of them and only 4 deals are remaining which should be resolved in the next 30 days. These 4 deals account for less than Rs 600 Cr.
  5. The yields on structured real estate deals are around 16% while in construction the yield is >14%. In CFG, yields are between 16%-18% and the yield on senior debt is around 13.5%-14%. The housing finance business produces a yield of around 9%.
  6. The management has clarified that the cost of funds of housing finance is around 8.5% and they remain committed to keeping the cost of funds lower than yield.
  7. The company has allocated Rs 1700 Cr into financial services from the Rs 2300 Cr obtained from the stake sale in Shriram Transport Finance. The primary reason for this allocation was to bring down the debt-equity ratio below 3 for the financial services division.
  8. The management has maintained that they will probably stay flat in terms of AUM for the year in the financial services division and their focus in this area is to maintain liquidity. In pharma, they expect revenue growth to be above 15% and margins to be close to 24%.
  9. The company is still evaluating the opportunity from the change in tax rate and will decide in the near future about what action to take in this area.
  10. The company has had a good response to its securitization deal of wholesale loans. The underlying loans here are a mix of real estate and non-real estate loans the total pool is around Rs 3300 Cr with 20% cash rate enhancement. The company has already raised funds of around Rs 2400 Cr with a coupon of 10.5% from this deal. The issue has been provided an AA+ rating from CRISIL. This is also the first time a real estate loan pool has been rated AA+.
  11. The management guides that the exposure to Lodha will see a reduction of 450 to 500 Cr in the next 3-4 months.
  12. The company is focussing on the retail housing finance business to understand consumers in greater detail so that they may be able to launch other retail lending products in the future.
  13. The company remains committed to its dividend policy and has no plans to withhold dividends to convert to capital.
  14. The company is looking into acquisition opportunities to reenter the domestic pharma market in the OTC space.
  15. The management has clarified that their exposure to Omkar is only on 2 projects, one of which is run by L&T Realty and the other is run by Piramal Realty. The Piramal Realty project exposure is only of Rs 100 Cr and this commitment has been met by Omkar.
  16. In the housing book, around 50% are inactive developer projects. Geographically Mumbai Metropolitan Region accounts for 45% of the housing book and the rest is distributed across Bangalore, Pune, Hyderabad, and other Tier 1 cities.
  17. The management has maintained that with the current infrastructure, the company can service loan books of up to Rs 1000 Cr per month.
  18. The management expects demand to provide opportunities for the company as fewer competitors after consolidation shall result in higher NIMs.
  19. The management maintains that they are committed to growing the healthcare insights and analytics business organically and they will only step in for acquisitions for this division if they find some very attractive technology or expertise.

Analyst’s View

Piramal Enterprises has been one of the premier conglomerates in the country. They have built a robust and rigorous financial services business while slowly growing and building their pharma and health analytics businesses. The company has suffered from the slowdown in the NBFC space and despite the current environment, they have provided steady revenue and profit growth while reducing their exposure to wholesale real estate. The company remains committed to maintaining liquidity in its financial services business in the hopes that once the industry looks up, they will be in pole position to take advantage of it. The pharma division, on the other hand, has shown good growth and is expected to maintain its steady growth in the near future. The Healthcare Insights & Analytics business is also looking up and starting to deliver on its potential. It remains to be seen how the NBFC slowdown pans out for the company and how long this environment will last. Nonetheless, based on their robust and rigorous financial services business and their pharma and healthcare insights divisions which have begun to deliver, Piramal Enterprises remains a good stock for any investor looking into these particular themes.


 

Notes from Annual Report FY18-19

Financial Services

Industry Overview

The past year has been a turbulent one for NBFCs and other financial services companies due to the liquidity tightening from the ILFS debacle. MFs reduced their exposure to NBFCs / HFCs by nearly ~₹67,000 Crores between September 2018 and April 2019 signifying the stress in the sector. The combined loan book growth of NBFCs and HFCs slowed down significantly in Q3 and Q4 FY19 to 18% YoY and 13% YoY respectively, from around 23% in H1 FY19. Post-September ’18, HFCs’ monthly average disbursement has fallen to ₹13,500 Crores from ₹25,000 Crores per month in the past four quarters (before Sep ’18). Few players, who were not getting enough liquidity, have had to resort to portfolio sell-downs, which resulted in a subdued performance of the overall sector.

Since then, lenders started to classify NBFCs into three broad categories based on their (i) performance track record of growth, asset quality and return profile, (ii) promoter’s reputation and commitment and (iii) balance sheet strength. The first category, of ‘best-in-class’ NBFCs, across the parameters, mentioned earlier, continued to receive funds, although their cost of borrowing increased marginally. For the second category of NBFCs, which were relatively good, but not among the ‘best-in-class’, liquidity was available, but only selectively.

As a result of these funding constraints, only a few top-quality NBFCs could grow their loan book in H2 FY2019. Subsequently, interventions by the Reserve Bank of India (RBI) and the government helped relatively ease system-wide liquidity to a certain extent, particularly for good quality players.

Over the past couple of years, NBFCs have played a critical role in India’s economic growth, as they have been instrumental in extending credit to Micro, Small and Medium Enterprises (MSMEs), real estate and retail consumers. MSMEs account for 31% of GDP, 40% of exports and hire 25% of the labor force. Banks’ lending to MSMEs has declined significantly and it is estimated that NBFCs will have to lend around ₹2 Lakh Crores, or nearly 75% of the incremental credit demand, to MSMEs in the next 3-4 years. The real estate sector, which contributes more than 5% to GDP and hires 17% of the labor force directly or indirectly, is also dependent on NBFCs and Housing Finance Companies (HFCs) for funds.

It is clear to see that despite the hit that the NBFC and HFC sectors have taken, they are crucial to the nation’s growth and financial strength and stability. Thus top players like PEL stand well-positioned to capitalize on their inherent advantages to set themselves apart from the industry and reap the benefit once the industry rises again.

 

Financial Services Business Performance

The Financial Services division has done well to deliver strong performance and a robust balance sheet despite the ongoing tight liquidity situation. The company’s total loan book grew to ₹  56,624 Cr which is a rise of 34% YoY on 31st March 2019. The total assets under management for the firm were at ₹ 74,000 Cr. The AUM break up is as follows:

 

The company maintained a GNPA ratio of 0.9% with provisioning at 1.9% of the loan book.

The company has continued to reduce its dependence on wholesale real estate loans and are moving away from securing funds using commercial paper. Exposure to CPs has reduced to Rs 8,900 Cr in March ’19 from Rs 18,000 Crores in September ‘18. The following graphic shows how the company’s loan book evolved and how dependence on wholesale real estate is being reduced:

 

Operational Performance in Real Estate Developer Finance

The company has seen good growth, healthy consolidation and increased transparency in this sector as a result of the reforms of the past few years like RERA and GST and changes in accounting standards. The company expected consolidation to happen in the rea estate space with compliance getting tighter. This consolidation seems to have accelerated due to the recent liquidity tightening since Sep ’19. There are a few trends picking up pace in this sector. They are:

  • Distressed developers are either partnering with or exiting to stronger players
  • Rising interest of Private Equities (PEs) as they are trying to fill the space vacated by struggling NBFCs
  • The market is shifting towards quality developers, amid faster consolidation in the real estate sector

PEL has positioned itself well with respect to the sector due to its developer selection criteria. This has helped the company create a resilient asset base despite the headwinds in this sector. Going forward as the real estate sector starts to pick up, PEL looks relatively better positioned to benefit from the pick-up in residential real estate sales, as their clients have a track record of superior project performance and a relatively high share in overall sales in the markets they operate.

The real estate developer financing loan book grew 26% YoY to ₹40,160 Crores on 31st March 2019 In FY19, the Company’s incremental disbursements stood at ₹20,992 Crores, of which ₹6,692 Crores was disbursed in H2 FY19. Also, ₹13,357 Crores was refinanced during the year, equivalent to 42% of the opening loan book as of April 1, 2018, of which ₹5,893 Crores was in H2 FY19.

Construction finance contributed nearly 64% to the real estate loan book and lending to commercial real estate, which includes construction finance, hospitality loans, and LRD, now constitutes 17% of the real estate loan book. LRD was at ₹2,318 Crores, constituting 6% of the real estate loan book. In FY18, the Company forayed into the hospitality sector, given the opportunities to invest in quality assets at good locations, which have thrived across business cycles. As of March 2019, PEL had committed nearly ₹2,109 Crores across marquee hotel assets in Gurugram, Bengaluru, and Pune.

The company has done well to reduce its total exposure to the top 10 developers less than one-third of the overall loan book. This has helped lower the risk profile of the loan book and reassure investors and lenders that they are doing their best to reduce single borrower exposure.

The company’s endeavor to reduce developer concentration, while continuing to participate in deals by these quality clients, it has created a pool of like-minded partners, such as foreign banks and pension funds, who will co-lend with PEL in the future. PEL will also generate fee income through such co-investment deals, as it would take a lead in these transactions in terms of underwriting, asset monitoring, and loan servicing.

 

Operational Performance in Corporate Finance Group

In India, corporate lending covers a wide range of financing requirements, which were traditionally served by the banking system. However, over the last few years, with rising NPA levels especially in public sector banks, NBFCs have stepped in to fill the void.

Going forward, credit demand is expected to increase as the government plans to boost infrastructure spending by targeting $1.4 Trillion of capital investment in infrastructure by 2024. PEL’s CFG appears well-positioned to capture this growth opportunity and will likely benefit from its ability to offer customized solutions to customers and expand its product portfolio and sector coverage.

CFG successfully exited or down-sold deals amounting to ₹2,021 Crores in FY19. The exited investments have ranged from ₹50 Crores to ₹1,000 Crores and spanned across sectors such as renewables, infrastructure, cement, warehousing, and building materials. CFG down-sold/syndicated sanctions to other NBFCs, banks and other financial institutions amounting to ₹627 Crores.

Overall, CFG’s loan book grew by 20% YoY to ₹9,889 Crores in FY19. The business unit has gradually diversified its risk profile, from high‑yield structured credit solutions to the infrastructure sector, and now offers multiple solutions-, with Internal Rate of Return (IRR) ranging from 11% to 18%. The product suite has expanded from mezzanine and structured debt to promoter funding, Capex financing, acquisition funding, senior corporate lending, project financing and loan against shares.

 

Operational Performance in Emerging Corporate Lending

The ECL unit has been in existence for only one year but they have adopted a regional origination and a centralized underwriting model. Origination efforts are led by Senior Relationship Managers based out of Mumbai, Delhi, Chennai, Ahmedabad, Hyderabad, and Pune, while the centralized underwriting team operates out of Mumbai. The key differentiators for the business unit are:

  • Regional origination: Has helped improve turnaround time for loan approvals and disbursals
  • ‘Solution’ versus ‘Product’ approach: Provide customized solutions based on client requirements while maintaining a rigorous underwriting process
  • Robust risk management is driven by centralized underwriting

The ECL loan book stood at ₹1,383 Crores as on 31st March 2019 and the division executed a total of 36 deals in FY19.

 

Operational Performance in Retail Housing Finance

As mentioned at the start of this report, the past year has been very turbulent for NBFCs and HFCs with tight liquidity conditions and big headwinds in the sector. Housing loan portfolio growth of HFCs/NBFCs reduced to 13% y-o-y for the period ended December 31, 2018, versus 18% for the same period the previous year.

PEL’s HFC loan book more than quadrupled YoY to ₹5,188 Crores as of 31st March 2019. loans that are sanctioned but not yet disbursed stood at nearly ₹2,500 Crores as of 31st March 2019. During FY19, the HFC business acquired ₹500 Crores of loan portfolios from other NBFCs/HFCs, capitalizing on the opportunity created by the tightening liquidity situation. As of March 31, 2019, the HFC loan book accounted for 9% of the overall loan book versus only 3% a year ago. The division has now established its presence in 15 cities across India through 16 branches.

As of March 2019, the average ticket size of home loans within the HFC business was ₹70 lakhs, with 59% of customers comprising of salaried individuals and 41% comprising of self-employed individuals. During FY19, two new products were launched – AdvantAGE Loans and Bridge Loans.

PEL is looking at this business division to be the next big winner from their stable and are working hard to grow in this sector. The company is rolling out a new-age IT system that will be rolled out during H2 FY20 under Project Elixir. The system will enable them to underwrite a loan with minimal human intervention; e-loans will be operational in FY20. The new system will enhance customer experience, facilitate productivity and improve cost efficiency.

The prime focus areas for the company in this sector are:

  • Significant opportunity from existing developer relationships.
  • Leveraging Brickex which is the in-house arm for B2B aggregation platform focusing on sales and marketing of Real Estate and Financial Services products with a network of 10,000+ distributors across Tier I cities.
  • Focusing on Tier II and Tier III cities by partnering with grade ‘A’ developers and opening 50% of our branches in these markets in the coming year.
  • Extending loans to self-employed individuals

 

Strategic Partnerships & Alliances

Last year in November, the India Resurgence Fund or IndiaRF (PEL’s 50/50 JV with Bain Capital Credit of $200 million) concluded its first transaction by investing $156 Million along with its affiliates in a company in the marine chemicals business, in the form of debt and equity. The fund is working closely with the investee company’s management to implement the turnaround plan

IndiaRF, along with its affiliates, invested $144 Million in a pharmaceutical and vaccines player through non‑convertible debentures and share warrants in April 2019. It is also working with the promoters and management team to provide long-term strategic solutions that would enable an effective turnaround driving sustainable revenue growth and improvement in profitability.

In February 2019, Piramal and Ivanhoé Cambridge announced an equity investment of ₹500 Crores in a smart city being developed by a large developer, located in the Mumbai Metropolitan Region. This was the first deal through the Piramal-Ivanhoé Residential Equity Fund. The investment was made towards enabling the development of the second phase of the project, an established integrated smart city near Mumbai with over 4,500 acres of land under development across phases. Phase II is spread across 700 acres and is currently under development with a potential saleable area of 57 million sq. ft. The fund is evaluating several other deals with Tier I developers across Mumbai, Bengaluru, NCR, Pune, and Chennai.

PEL and APG Asset Management (a Dutch pension fund asset manager) have a strategic alliance for investing in rupee-denominated mezzanine instruments issued by India’s infrastructure companies and focus on operational and near-completion projects with limited execution risks and high visibility of cash flows coming from a portfolio of projects.

Under this 50/50 strategic alliance, PEL and APG jointly committed ₹4,745 Crores as on March 31, 2019. Of this, ₹3,799 Crores were disbursed jointly by APG and PEL across five deals in the renewable energy and infrastructure sectors.

PEL has also entered into a strategic alliance with CPPIB Credit Investments Inc., a wholly-owned subsidiary of CPPIB, to provide rupee debt financing to residential projects across India’s major urban centers. Under this alliance, PEL and CPPIB have jointly invested in one transaction in the NCR, which has been fully exited.

 

Financial Performance of the Financial Services Division

  • Revenues for the division grew 42% YoY to Rs 7,063 Cr for FY19.
  • Total Loan book grew 34% YoY to Rs 56,624 Cr.

  • This segment has recorded an ROE of 19%.
  • Gross NPA stood at 0.9%, with provisioning at 1.93% of the loan book.
  • Wholesale real estate declined to 63% from 83% last year.
  • Housing loan book has grown 32% YoY to Rs 5188 Cr which counts for 9% of the total loan book.
  • The company has radically shifted its asset mix over the last year with floating assets counting for 68% as compared to 34% last year.
  • The company has reduced commercial paper borrowings by 50% to Rs 8900 Cr.
  • The company has raised Rs 16,500 Cr through NCDs and bank loans in the last 6 months.
  • It also has nearly Rs 5400 Cr in cash and credit lines.
  • The ALM Profile for the financial services division is as follows:

  • The largest exposure to a single borrower is at 7% as of 31st March 2019.
  • The company recovered Rs 107 Cr from two of their NPA marked deals.
  • PCHFL maintained a Tier I CAR ratio was 27.2%.
  • The important metrics for the financial services division are as follows:

 

Strategic Initiatives and Focus Areas for Financial Services Business

Pharma Division

Industry Overview

According to Deloitte, global healthcare spending is expected to increase to more than $10 Trillion by 2022. Pharma spending is expected to hit $1.2 Trillion by 2022, growing at a CAGR of above 6%. This acceleration is likely to be driven by growth in specialty medicines such as oncology and autoimmune biologics, the rising share of emerging markets, novel therapies that address key unmet needs and increased access to medicines as a result of new pricing policies around the world.

One particular sector expected to be on the rise in the pharma industry is CDMO (Contract Development and Manufacturing Organizations). These CDMOs are expected to be on the rise due to the increasing trend of outsourcing in the pharmaceutical industry. CDMOs are also expected to benefit from the strong funding environment in Biotech in the developed world. CDMOs serving API clients are likely to benefit due to sector consolidation and erratic API suppliers from China.

Through its recent acquisitions of sterile injectable and HPAPI facilities in the US, PEL has proactively set itself to create a one-stop-shop CDMO for its customers. This has resulted in make its value proposition much stronger and attractive for the big pharma companies to not only continue outsourcing but to also consider PEL as a strategic partner for new/existing initiatives.

In the Global Pharma Products Business, PEL has carefully maintained its product portfolio so that the Company experiences lesser competitive pressures than most peers. PEL serves the institutional market, with a diverse set of buyers. The company is predominantly in injectable and inhalation anesthesia dosage forms, which are difficult to manufacture and in the case of inhalation anesthesia, the manufacturing as well as delivering requirements are unique.

According to the IBEF, the Indian OTC market to grow at around 9% annually to reach ₹44,000 Crores by 2026. The primary factors behind this are:

  • Growth in GDP and purchasing power
  • Propensity for self-medication
  • A rise in geriatric population
  • Likely new regulations leading to liberalization of OTC drug sales
  • Increased use of media, particularly digital, to reach and educate consumers (in certain categories)

In the past couple of years, the Indian OTC industry has been impacted due to the GST rollout and demonetization. Channel partners started down-stocking as the GST deadline approached, leading to shrinking of the wholesale channel. The companies that were able to optimize their supply chain and rationalize CFAs and distributors stand to benefit from the reduced compliance burden.

PEL undertook key initiatives both at strategic and operational levels in preparation for and after GST implementation. The Company supported its channel partners with additional credit, held extensive interaction to educate and understand their concerns and invested in capability building and people development to create sustained advantages.

The company is successfully using e-commerce and technology to grow its India Consumer Products Business (OTC Drugs Business). It is tapping e-commerce, exports, and institutional sales to widen the distribution network and focusing on further growth by increasing the number of SKUs listed in this channel.

The company is using technology in unique ways across operations like

  • Using Analytics for making business decisions such as trade schemes and distributor credit limits
  • Training the field force that is spread pan-India
  • Real-time tracking and reporting of sales data

The company has already partnered with a number of e-commerce players ranging from all-weather e-commerce sites like Flipkart and Amazon to specialized e-commerce portals like Nykaa, Netmeds, and Firstcry.

 

Pharma Industry in India

The pharma industry in India faced significant performance issues due to lapses surfacing during inspections at the premises of major pharma players in the country. Over the past few years, almost all leading Indian pharma players have faced USFDA issues. Seven of the top ten Indian pharma companies have been issued import alerts or warning letters by the USFDA. The USFDA made a total of 483 observations in 2018 of which critical data integrity issues were the most common at 17% of total observations.

PEL’s strategic choices and consistent execution enabled it to emerge stronger despite challenging circumstances. It maintained a strong focus on robust regulatory compliance, stringent quality control, and providing reliable services to its clientele.

PEL has successfully maintained a strong track record of inspections and has cleared 33 US FDA inspections, 143 other regulatory inspections and 989 customer audits in the last 8 years.

Consolidation and integration of purchasing organizations have adversely affected pharmaceutical manufacturers and increased the product pricing pressures for generic manufacturers. Buyer consolidation in the US has left just three distributors controlling 85% of the market. Most peers are increasingly realizing the importance of establishing presence in Specialty Pharma therapies.

PEL has done well to stay away from the generics business and focusing on the niche specialty business which has seen the division shrug off the headwinds faced by other pharmaceutical majors in India who primarily deal in generic drug-making and selling. Over 90% of revenues for the division are derived from niche businesses of complex generics and CDMO, as compared with less than 5% for most Indian pharma companies.

Operational Highlights of the Pharma Division

Global Pharma Services Business

  • Substantial growth in the order book in FY2019: – 50 new customers during the year and >75% order book from existing customers
  • >70 integrated projects till date; 28 integrated projects in FY2019
  • Completed a High Potency API plant annexed to the Riverview facility
  • Completed a major API investment in support of a key innovator customer at Morpeth site

 

Global Pharma Products Business

  • The year saw the launch of Sevoflurane Integrated Closure variant in select European markets
  • The Company also launched marquee products such as MITIGO, which is an opioid agonist indicated for the management of intractable chronic pain
  • Integration of key acquired products from Janssen and Mallinckrodt remains on track. The acquired products have high entry barriers as they are complex in terms of manufacturing, selling or distribution, resulting in limited competition

 

India Consumer Products

  • Added key brands in the Vitamins, Minerals and Nutrients categories
  • Successfully initiated national distribution and sale of Digeplex. Products sold under Digeplex brand names are digestive enzymes used as remedies for digestive disorders
  • E-commerce channel was established in FY2019. The Company is tapping e-commerce, rural, exports and alternate opportunities in order to widen the distribution network
  • Increasingly using technology and analytics for making decisions in sales and operations

 

Financial Performance of the Pharma Division

 

  • Pharma revenues were up 11% YoY at Rs 4786 Cr in Fy19.
  • EBITDA margins grew to 23% for the last financial year.
  • The company also cleared 44 regulatory checks and 163 customer audits in the last year.
  • Over 93% of pharma revenues are sourced from complex generics and contract manufacturing.

 

Strategic Priorities and Focus Areas for the Pharma Division

 

Healthcare Insights & Analytics

Market Overview

The addressable market for business information services in the life sciences, healthcare provider and payer industries, is in excess of $16 Billion across various solution areas, and it is expected to reach $24.7 Billion by 2021. Healthcare businesses increasingly need up-to-date and easily-accessible solutions leveraging complex data sets and advanced analytics and therefore, there is increased demand for high-quality analytics and decision support tools and services.

 

 

Operational Highlights

The company has positioned itself very well in this industry. They have focused on long term revenue visibility with nearly all leading life sciences companies as their clients including

  • 48 of the top 50 life sciences companies
  • 18 of the top 20 medical device companies
  • 8 of the top 10 US payers and top US health systems

The company’s business is also derisked and distributed carefully to avoid dependence on a single client. The details of this arrangement is as follows:

  1. Top 10 relationships comprise of <30% of revenues
  2. >10-year relationships with top 10 customers
  3. 96% client retention by value
  4. 70% of total revenue highly recurring in nature

 

During the year, PEL undertook several steps to strengthen its offerings:

  • A noteworthy key launch was Healthbase, a platform that provides customers with both granular data and the ‘big picture’ analyst view on integrated delivery networks.
  • The company launched a learning division, which connects expert insights, proprietary data, and analytics with experienced learning architects, instructional designers, and educational technologists.
  • Additionally, PEL expanded the Global Market Access Solution (GMAS) platform to include the first and only available Managed Entry Agreement (MEA) database in the industry.
  • The company doubled the size of data repository (healthcare claims, outcomes, formulary and insurance coverage) to 100 Terabytes.
  • PEL partnered with EUnetHTA and other Health Technology Assessment (HTA) support projects to ensure seamless client submissions.

 

Financial Performance of the Healthcare Insights & Analytics Division

 

  • The Division saw a revenue growth of 10% YoY to Rs 1332 Cr in FY19.
  • Revenue growth was primarily driven by strong growth in Life Sciences Data & Analytics and Consulting Services.
  • Operating Profit Margin for the division came in at 17% in FY19 which was up 3.13% up YoY from 13.87% in FY18.

 

Strategic Priorities & Focus Areas for Healthcare Insights & Analytics Division

 

Drivers for Growth for PEL in the Near Future

Analyst’s View

Piramal Enterprises has been one of the premier conglomerates in the country. They have built a robust and rigorous financial services business while slowly growing and building their pharma and health analytics businesses. The company has suffered from the slowdown in the NBFC space but despite the current environment, they have provided steady revenue and profit growth.  The management has acknowledged that the current tough environment is likely to persist and thus have refrained from providing any revenue growth guidance as their primary focus in this tough period is to maintain liquidity and not take undue risks to maintain their top-line numbers. PEL is committed to bringing in equity infusion in the range of INR 8000 to 10000 Cr. It remains to be seen how the industry and PEL shall come out of the ongoing NBFC crisis but PEL is a stock to look out for in this segment, solely on the basis of their past performance and their focus on maintaining asset quality and their rigorous risk management even in the time of a severe  slowdown in the NBFC sector.


Q1 2020 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q1FY20 Q1FY19 YoY % Q4FY19 QoQ %
Sales 941.68 1050.34 -10.35% 1042.22 -9.65%
PBT -98.12 -1056.78* 90.72% -81.17 -20.88%
PAT -38.84 -1090.57 96.44% -62.2 37.56%

 

Consolidated Financials (In Crs)
Q1FY20 Q1FY19 YoY % Q4FY19 QoQ %
Sales 3573 2971 20.26% 3765 -5.10%
PBT 667.59 111.21** 500.30% 680.53 -1.90%
PAT 450 -69.8 744.70% 456 -1.32%

*Containing an exceptional item of a loss of Rs 1287.9 Cr

**Contains exceptional item of loss of Rs 452 Cr

Detailed Results

  1. The company has shown good growth for the quarter with consolidated revenues growing more than 20% YoY and net profit excluding exceptional items also growing 21% YoY.
  2. In Financial Services, the total loan book grew 20% YoY to Rs 56605 Cr and a reported ROE of 20% considering the cash tax and synergies from the merger.
  3. The housing finance loan book grew 4 times YoY and now forms 11% of the total loan book.
  4. The Segment breakup of revenue growth is as follows:
    • Financial Services: Up 29% YoY
    • Pharma: Up 12% YoY
    • Healthcare Analytics: Up 15% YoY
  5. Gross NPA ratio stands at 0.9% which is the highest since FY16. Stage 2 loans have declined 63% QoQ from Rs 838 Cr to Rs 309 Cr and now count for only 0.5% of the total loan book.
  6. In Housing Finance, the company has disbursed Rs 1100 Cr in the current quarter while it has approved of Rs 2500 Cr of yet to be disbursed loans.
  7. Out of the 232 deals the company is involved in, 214 have cleared their sensitivity analysis and 18 deals have been identified for corrective measures out of which 10 have already had corrective actions done on them.
  8. According to the rigorous sensitivity analysis, financial closure for 84% of all deals can be secured by selling 30% of unsold inventory. Financial Closure here means repaying the loan and interest amount that the company borrowed to pursue the deal.
  9. The company has significantly reduced its CP exposure to Rs 7300 Cr from Rs 18000 Cr last year.
  10. The company aims to raise Rs 20000 to 25000 Cr of long term funds by the end of the current financial year. It has also received the first ECB tranche of $75 million from the total committed $125 million from IFC.
  11. The company has maintained a positive gap in ALM mismatch.
  12. In the Pharma segment, the India Consumer Products has shown a good growth of more than 70% YoY and an EBITDA margin of 22%.
  13. The company has added 15 new customers in the last quarter for the Pharma business.

Investor Conference Call Highlights

  1. The company is confident that the measures taken by the government and RBI to boost liquidity for financially sound NBFCs should be helpful but they are still awaiting final guidelines form the government on some of these measures.
  2. In the current period, the company is prioritizing caution and liquidity preservation rather than chasing growth. The company is focused on strengthening their assets and their liabilities in this time.
  3. The company shall continue to raise long term funds through ECB issuance, dollar bonds, additional bank lines, and NCDs.
  4. The management believes that the major reforms undertaken by the government should bring consolidation in the NBFC space and the company is primed to take advantage of it.
  5. The company has maintained its asset strength by keeping the debt to equity lower than 4.
  6. The company also sees the current period as a time to take opportunities for acquiring valuable assets from banks and NBFCs.
  7. The company is committed to bringing in further equity of Rs 8000 to 10000 Cr into the Financial Services business in the current financial year.
  8. In the current quarter, the company disbursed around Rs 4800 Cr mainly in their construction finance and also did down selling of Rs 4900 Cr.
  9. The company has also down sold Rs 3100 Cr in the last 9 months to reduce single borrower exposure.
  10. The management wants to clarify that investors should not believe the rumors going on in the market such as the default of Lodha.
  11. The management also wants to clarify that they have not sold off their stake in Shriram Transport Finance to ease liquidity issues but have other rationales behind this decision and they had made their position clear before exiting the transaction.
  12. The company has seen a big jump in floating rate assets in the last year because they transitioned a lot of their existing fixed assets to floating and all of their incremental assets is also floating.
  13. The company plans to house all of their infra loans under the PHL FIninvest entity for which they have already applied to the RBI for an IFC license.
  14. On the matter of the merger with Piramal Phytocare, the process already has gained shareholder approval and they are waiting on approval from the NCLT.
  15. The NPAs in the wholesale residential real estate segment is around 0.6% and none in the commercial real estate segment.
  16. The company has been easily able to pass on the increased cost to their borrowers.
  17. The management has refrained from providing any guidance on growth.
  18. Currently, incremental borrowing costs have gone up by 1% and this is not expected to persist as the management expects incremental costs to go down post the proposed equity infusion into the financial services business later in the financial year.
  19. The company gets a yield of 9.4% on the housing loan book.
  20. In their 3 big loan exposures of Lodha, Wadhwa, and Omkar, the company is on track to bring all of them below 15% each in the current year. In Wadhwa, the company expects to drop below 15% exposure in the next quarter itself.
  21. The overall provisioning remains at 1.8% of the total loan book.
  22. In the 8 deals highlighted above for corrective actions, the total size is of around Rs 1000 Cr and 6 of these deals are in the final stages of getting resolved while 2 of them have been recognized as NPAs already.
  23. The company expects to see the ROEs from the housing finance division to improve in the near future as the cost-to-income ratio comes down.
  24. The company is looking to separate Pharma and Financial Services sometime in the future.
  25. The management has requested investors to not believe any rumours floating in the market and to seek clarification directly from the company whenever any need arises.

Analyst’s View

Piramal Enterprises has been one of the premier conglomerates in the country. They have built a robust and rigorous financial services business while slowly growing and building their pharma and health analytics businesses. The company has suffered from the slowdown in the NBFC space but despite the current environment, they have provided steady revenue and profit growth. The management has acknowledged that the current tough environment is likely to persist and thus have refrained from providing any revenue growth guidance as their primary focus in this tough period is to maintain liquidity and not take undue risks to maintain their top-line numbers.  It remains to be seen how the industry and PEL shall come out of the ongoing NBFC crisis but PEL is a stock to look out for in this segment, solely on the basis of their past performance and their focus on maintaining asset quality and their rigorous risk management.


 

Q4 2019 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q4FY19 Q4FY18 YoY % Q3FY19 QoQ % FY19 FY18 %  Change
Sales 1042 1265 -17.62% 827 26.06% 4118 3937 4.60%
PBT -81 -98 17.39% 371 -121.86% -792* 753 -205.06%
PAT -62 -67 7.81% 245.11 -125.38% -862 518 -266.25%

 

Consolidated Financials (In Cr)
Q4FY19 Q4FY18 YoY % Q3FY19 QoQ % FY19 FY18 %  Change
Sales 3765 3028 24.35% 3592 4.82% 13528 10899 24.12%
PBT 562 472 19.26% 829 -32.13% 2012** 1964 2.45%
PAT 338 3852** -91.22% 536 -36.88% 1151 4840*** -76.23%

*Containing an exceptional item of a loss of Rs 1287.9 Cr

**Contains exceptional item of loss of Rs 466 Cr

***Deferred tax addition of Rs 3569 Cr on account of merger of subsidiaries

Detailed Results

  1. The company saw a good YoY growth of 24% in both Q4 and yearly revenues on a consolidated basis.
  2. The normalised net profit on consolidated basis grew 25% YoY both for Q4 and the whole financial year.
  3. The company has now delivered 20%+ growth in revenues and profits for 15 consecutive quarters and have maintained a revenue CAGR of 28% over the past 7 years.
  4. The board has decided to award a dividend of Rs 28 per share to all shareholders.
  5. The segment revenue growth breakup for the last quarter and last financial year is as follows:
    • Financial Services:                   Q4          Up 39% YoY        FY19       Up 42% YoY
    • Pharma:                                     Q4          Up 11% YoY         FY19        Up 11% YoY
    • Healthcare Analytics:              Q4          Up 16% YoY        FY19        Up 10% YoY
  6. In Financial Services, Total Loan book grew 34% YoY to Rs 56,624 Cr.
  7. This segment has recorded an ROE of 19% according to the company.
  8. Gross NPA stands at 0.9%, with provisioning at 1.93% of loan book.
  9. Wholesale real estate declined to 63% from 83% last year.
  10. Housing loan book has grown 32% YoY to Rs 5188 Cr which counts for 9% of total loan book.
  11. The company has also embarked on a JV with Ivanhoe Cambridge with an investment of Rs 500 Cr.
  12. The company has radically shifted their asset mix over the last year with floating assets counting for 68% as compared to 34% last year.
  13. The company has reduced commercial paper borrowings by 50% to Rs 8900 Cr.
  14. The company has raised Rs 16,500 Cr through NCDs and bank loans in last 6 months.
  15. They also have nearly Rs 5400 Cr in cash and credit lines.
  16. In Pharma segment, the EBITDA margins grew to 23% for the last financial year.
  17. The company also cleared 44 regulatory checks and 163 customer audits in the last year.
  18. Over 90% of pharma revenues are sourced from complex generics and contract manufacturing.
  19. In Healthcare Analytics segment, revenues grew 16% YoY for the last quarter.

Investor Conference Call Highlights

  1. Despite easing of borrowing costs at the start of the year, the NBFC sector has seen tighter liquidity and have struggled to raise funds from institutional investors.
  2. In order to better adapt to current situations, the company has identified diversifying their borrowing mix to be their first strategic priority. The company has already reduced CP borrowing by half and are raising funds using NCDs and other mechanisms.
  3. The company is also looking to raise funds through dollar bond issues.
  4. The company has also reduced their RE exposure to 63% and have also reduced single borrower exposure significantly. Now, the largest exposure to a single borrower is at 7%.
  5. The company has been proactive in conducting rigorous sensitivity analysis on their real estate deals to identify potential weaknesses and have already initiated measure to address them.
  6. Further, the company has also been able to recover Rs 107 Cr from two of their NPA marked deals.
  7. The company remains committed to deliver 18% to 20% ROE in the future.
  8. In pharma segment, the company is seeing branded generics business slowing down due to pricing controls. Thus it is pushing for complex generics and specialized products in this area.
  9. The pharma business has maintained EBITDA margin of 23% despite the headwinds mentioned above.
  10. The sequential drop in profit has been due to high build up from the DRG business in the Q3.
  11. The company is guiding that margins for the coming year would be higher in the health analytics business.
  12. The company is guiding that by the end of next year, the retail housing finance segment should account for 15% to 18% of their loan book. Currently it accounts for 9%.
  13. The company is down-selling some of their Lodha exposure to bring it below the RBI mandated 20% exposure mark.
  14. The company has reiterated their statement of consolidation to take place in the NBFC space and that despite venturing into other areas of consumer lending, the company shall maintain a conservative debt to equity ratio of less than 4 times in the long term.
  15. The management has confirmed that they are looking for ways to consolidate the different operations of the Shriram group into different consolidated entities. They are also looking for ways to create value by exiting this investment. But they have also stated that they will consider exit only if they find the right value for it.
  16. The management have also clarified that the negative outlook that ICRA has given to them is actually reflecting the negative outlook on the NBFC industry rather than them as a company. The company continues to borrow at the same rate as before the rating thus showing that it had minimal impact on the company’s borrowing program.
  17. The company is set announce their own pension fund in the near future.
  18. The structured debt portion of the company accounts for only 15% of loan portfolio.

Analyst’s View

Piramal Enterprises have been one of the most stable NBFCs in India for a long time. They have been consistently providing good performance which is evident from their strong growth record and comfortable NPA numbers. However, NBFC sector is going through a very difficult time. A lot of the players in the industry are facing a challenge to raise funds at the moment. Raising funds is like a raw material for an NBFC. If an NBFC fails to raise funds at the right time, the whole business cycle breaks and makes it difficult for the NBFC. As of now, PEL has been able to manage the fund raising plans well.  But, it remains to be seen whether the company will be able to maintain their stellar growth record going forward in such a bleak environment. Despite all the negativity around the NBFC space, PEL appears to be the best bet in this sector if we consider the fact that at around 40,000 Cr market cap, it generates a profit of around 2000 Cr and cash flows of around 2600 Cr. The long term tailwinds of the financial industry coupled with strong management track record makes PEL worth a look for all investors.

Q3 2019 Updates

Financial Results & Highlights

Consolidated Financials

Q3FY19 Q3FY18 YoY Q2FY19 QoQ
Sales 3489 2858 22.08% 3144 10.97%
PBT 828.68 651.46 27.20% 569.81 45.43%
PAT 603.27 490.47 23.00% 480.42 25.57%


Detailed Results

  1. Revenues have grown 22% YoY and 11% QoQ. PBT and PAT have both grown 27% and 23% respectively in YoY terms.
  2. This is the 14th consecutive quarter where the company has delivered more than 20% growth in both revenues and profits in YoY basis.
  3. Financial services segment has grown 40% YoY and accounts for 53% of total revenues today.
  4. Pharmaceuticals segment has grown 13% YoY and accounts for 33% of total revenues today.
  5. Healthcare Insight & Analytics has grown 5% YoY and accounts for 14% of total revenues today.
  6. Maintaining an ROE of 19.4% for 9M FY2019 despite lowering overall risk profile.
  7. Gross NPA ratio remains stable at 0.5%, total provisioning maintained at 1.8%.
  8. Loan book growth for Developer Financing segment has been 31% YoY to Rs. 40,080 Cr currently, with more than Rs. 2,094 Cr towards top-tier brands in hospitality.
  9. Housing Finance loan book has grown 69% QoQ and 800% YoY despite the current volatile environment.
  10. Corporate Finance loan book grew 53% YoY with successfully exited transactions worth around Rs. 1,135 Cr.
  11. Emerging Corporate Lending loan book grew 133% YoY to Rs. 1,447 Cr vs Rs. 619 Cr last year
  12. Overall Loan book has grown 45% to Rs. 55,255 Cr vs Rs. 38,036 Cr last year.
  13. Maintaining robust liquidity of Rs. 5,400 Cr in cash and credit lines.
  14. Raised Rs. 10,000 Cr via NCDs and bank loans.
  15. Additional measures / proposals to boost liquidity:
    • Secure additional bank lines.
    • Issue NCDs with a longer-term tenure.
    • Received in-principal approval for an ECB lines.
    • Set-up a Euro medium-term note (EMTN) programme.
  16. Within the Pharmaceutical segment, Global Pharma has grown 14.4% YoY and 15 new customers added in current quarter.
  17. Indian Consumer Products has grown 23% QoQ thus indicating healthy ramping post GST.
  18. Within Healthcare Insights and Analytics, the Analytics business has grown 26% YoY and the Learning business has grown 42% YoY, highlighting significant potential in these subsectors for the company.

Investor Conference Call Highlights

  1. NBFCs will be increasingly important in the near future as part of the Indian growth story.
  2. RBI expects that MSME shall require incremental credit of Rs. 13.6 Lakh Cr in the next few years. This demand for credit is likely to be fulfilled by NBFCs as bank credit is expected to stay muted.
  3. The tightened liquidity environment has led to higher cost of funds which has hurt overall demand and impacted growth of the lending market.
  4. Despite the above conditions, PEL has successfully opened new credit facilities in order to raise liquidity to adequate levels.
  5. One major point for contention is that many first time lenders approached Piramal and conducted a thorough analysis of their internal processes and have started lending to the company.
  6. In the medium to long term, the company expects consolidation to take place in the NBFC and real estate sectors, which the recent credit crisis has hastened to some extent.
  7. The strategy of working with Tier 1 developers has proved beneficial to the company.
  8. In order to stay ahead of the curve, the company is focussing on:
    • Effectively manage and further strengthen the company’s liquidity position.
    • Continue to diversify the loan book to go further down in risk profile.
    • To maintain their best in asset quality and deliver healthy ROE despite lowering overall risk of loan book.
  9. Have significantly lowered CP exposure and are moving towards longer term borrowing.
  10. Additionally, they are looking to issue ECB and Euro term loans to further diversify their borrowing mix.
  11. The share of Real estate loans has come down to 71% of total loan book, and this expected to decline further as other avenues continue to grow.
  12. Expecting the Housing Finance share of revenues to continue to grow and go from 7% currently to 10% by next quarter.
  13. Focus on risk adjusted returns is back as unhealthy competition from smaller players has reduced.
  14. In the Pharma segment, the company’s differentiated business model has helped them avoid the competition in the US generics market and deliver better than most pharma majors.
  15. They will continue to acquire lending portfolios from other NBFCs who are looking to sell them to raise liquidity.
  16. They aim to be in the top 15 in the housing finance space by March 2019 and top 10 by March 2020.
  17. They want to emphasize that overall real estate sector has been on the rise and the problems in Mumbai real estate should not be taken as indicative of the market all across India.
  18. The average age of unsold inventory in their RE portfolio is almost one third the average age of unsold inventory across the sector, further emphasizing the quality and saleability of their holdings.
  19. Except Lodha, none of their RE developers constitute more than 5% of overall loan book. Even in Lodha, the exposure is going down with the number reducing to Rs. 3800 Cr from Rs. 4300 Cr last quarter.
  20. PEL is also seeing a surge in borrowers looking to borrow at its rates as developer are looking for lenders who have strong enough balance sheet and liquidity to be able to support them through the life cycle of each project.
  21. Yields are going up because of reduction in competitive pressure.
  22. PEL has started work on an asset aggregation platform, acquired a merchant banking license and have received SEBI approval for setting up an AIF. All of this is expected to increase free income in the future and reduce dependence on their lending operations.
  23. Reducing single borrower exposure by entering into co-investment and co-lending deals.
  24. They are also developing products for real estate redevelopment financing.
  25. Ultimately aiming to bring down RE exposure of loan book from the current 73% to less than 50% in the future.

Analyst’s View

Piramal Enterprises has consistently performed well with 14 consecutive quarters of more than 20% growth in both revenues and profits. They have been doing well despite the current climate of tightening in lending market and have come out as one of the most dependable players in the NBFC sector. Coupled with their commitments to keep delivering robust ROE while bringing risks down, they also boast of best in class underwriting and risk management practices. Their forward looking outlook and commitment to always stay ahead of the curve is also something that helps differentiate them from the rest of the market. Their efforts to diversify their revenue sources, the consistent improvement in those segments and their diversification of both borrowing and lending sources highlights how they are putting their money where their mouth is and cementing their position as one of the best NBFCs in the market today. However, the NBFC sector remains under a lot of pressure at the moment. It would be interesting to see how PEL would perform given the stress in the NBFC sector.

Disclaimer

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