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MOSL: PIRAMAL ENTERPRISES (Buy)-Stable quarter-loan growth moderates; asset quality improves sequentially

PIRAMAL ENTERPRISES: Stable quarter; loan growth moderates; asset quality improves sequentially

(PIEL IN, Mkt Cap USD5.2b, CMP INR1787, TP INR2400, 34% Upside, Buy)

 

• Piramal Enterprises (PIEL) reported 1QFY20 PAT of INR4.5b (core PBT up 20% YoY). The quarter was characterized by a moderation in loan growth (flat QoQ and 20% YoY v/s 30%+ earlier), an improvement in asset quality (GNPA flat QoQ; stage 2 loans down to 0.5% from 1.5% in 4Q) and an expansion in the Pharma EBITDA margin to 22% (+200bp YoY).
• Financial Services: Loan book was stable QoQ at INR566b. Retail housing book grew 18% QoQ to INR61b and accounts for 11% of total loan book (v/s 9% QoQ). Real estate/corp. fin loan book declined 1%/4% QoQ.
• NIM fell 70bp QoQ (-140bp YoY) to 5.7%. Outstanding provisions stood at 1.85% of loans (v/s 1.93% in the prior quarter).
• During the quarter, PIEL sold its entire 9.96% stake in Shriram Transport Finance. Consequently, it realized gain of INR6.2b, which was transferred from OCI to retained earnings. Fair value of SHTF as of FY19 was INR28.9b, which came down to INR22.6b (INR16.36b cost+ INR6.17b of FV gain) at the time of sale. Hence, it recorded an MTM loss of INR7.9b in OCI (including INR1.6b on SCUF).
• Pharma Services: Revenue increased 10% YoY to INR11.7b, led by growth of 9% YoY in Global Pharma segment and 70% YoY in India segment (off low base). EBITDA margin rose 200bp YoY to 22%.
• Key takeaways from concall: (a) Management is looking to raise INR80-100b of capital for sustaining growth in the financial services business. (b) PIEL guides to trim its exposures to Lodha, Wadhwa and Omkar to below 15% of net worth by end-FY20. (c) Standalone loan book exposure of INR33b (from INR45b as of FY19) to run down by Dec'19.
• Valuation view: In the current environment, PIEL is focused on (a) reducing its key large exposures such as Lodha, Wadhwa and Omkar, (b) lowering the share of short-term borrowings and (c) diversifying the loan mix to retail / lower risk assets. The company also plans to raise capital to reduce leverage. Moderating the growth estimates and higher costs, we cut our core PBT estimate by 15-18% for FY20/21. Key risk to our estimates could stem from changes in regulatory norms for NBFCs and outlook for real estate. Our revised SOTP based TP is INR2,400.