MOSL: PIRAMAL ENTERPRISES (Buy)-Builds up a head of steam in Financial Services

PIRAMAL ENTERPRISES: Builds up a head of steam in Financial Services; Focus more on profitability than growth; looks to be among top 10 HFCs

(PIEL IN, Mkt Cap USD8.2b, CMP INR3202, TP INR3685, 15% Upside, Buy)

• Piramal Enterprises (PIEL) hosted an analyst meet to discuss its Financial Services business in detail. Management believes that opportunities in corporate lending are aplenty, given that most public sector banks and some private sector banks are not so active in this space. Hence, while bulk of its loan book (~75%) is wholesale real estate lending, management expects the share of non-real estate corporate lending to expand meaningfully over the next three years.
• Before investing/lending in any segment, the company does a deep study of the sector, which usually takes around six months. To the company's advantage, several executives in the corporate lending team have good working experience in the respective industries. In addition, what differentiates PIEL from its peers is that its legal team is hands-on - it is involved in a transaction right from the start (structuring, etc.) and is not merely involved in documentation and other administrative tasks.
• Management has a clear intention to generate at least 20% RoE across businesses over the long term. PIEL does not have any 'growth' targets for its executives - the only targets are on RoE/profitability and asset quality.
• With a favorable operating environment (waning competition from PSU banks, better transparency due to RERA, etc.), strong management at helm of affairs and adequate capital, we believe PIEL is well poised to capture the growth opportunities that exist in the wholesale lending space. The company has demonstrated its track record of delivering value to shareholders across businesses. With a confluence of factors working to PIEL's advantage, we upgrade our FY19/20 EPS estimates by up to 4% (to factor in better growth) and roll over our SOTP to Sept'20. With better growth, we have also increased the multiple for the Financial Services business to 3.2x from 3x earlier. Our revised SOTP-based TP is INR3,685. Buy.