Analyst corner: ‘Buy’ Piramal with TP of Rs 3,050

The recent DHFL deal helps Piramal rebalance its portfolio and offer a strong growth platform in housing.

Key takeaways: The recent DHFL deal helps Piramal rebalance its portfolio and offer a strong growth platform in housing. Favourable property cycle, strong growth in retail and recoveries from DHFLs marked down book should drive 14% profit CAGR in lending business over FY22-24e. In Pharma, CDMO projects & hospital generics recovery should drive 29% Ebitda CAGR over FY22-24e. Grp. profits should grow at 22% CAGR over FY22-24e. We initiate coverage at ‘buy’ and PT Rs 3,050.

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Reorienting portfolio from wholesale to balanced: PEL’s recent DHFL deal has raised its retail mix to 36% from 12%. A wide distribution with branch-reactivation and strong housing demand should drive 28% CAGR in retail loans over FY22-24e lifting retail loans’ share to 50% of total by FY24. Unwinding of wholesale book will weigh on overall loan growth in the near term; we see loan growth accelerating from 8% y-o-y in FY23 to 14% in FY24e.

Asset quality issues peaking out, provision buffer provides comfort: PEL’s stage 3 loans at 4.6% (pre-merger) have been stable for the past three quarters and post merger have fallen to 3.1% with coverage of 51%. Provisions at 6.7% of corp. loans may help absorb stress from restructured loans (2.1% of loans). PEL should gain from a pick-up in builder sales. Recovery from de-recognised pool of Rs 75bn of NPLs of DHFL (carry nil-value in books) can lift profits.

Multiple catalysts in lending business: Scale-up of retail book and recoveries from DHFL’s de-recognised book should drive 14% CAGR in financial business profits over FY22-24e. We see RoA of 2.2-2.3% over FY23-24e. We forecast 3% recovery each in FY23, FY24 in our base case; a 500bps higher recovery could lift FY24e by 15% and ROE by 120bps. Potential rating upgrade in the medium term can reduce funding cost and enhance ability to derisk the book without compromising returns.

A strong pipeline and CDMO investments to drive Pharma growth: CDMO segment should emerge as key growth driver for pharma business. PEL differentiates itself with diversified manufacturing footprint including in western geographies, closer to the client. Piramal CDMO has 36 molecules in Phase-III which puts them in a comfortable position on revenue visibility. Complex hospital generics continues on the path to recovery post-pandemic. India consumer healthcare business looks to attain scale of Rs 10bn revenue p.a before striving to turn profitable.

De-merger to simplify corporate structure, unlock value: Proposed demerger of pharma & financial business could simplify corporate structure, sharpen mgmt focus, improve transparency around financials for the two verticals and drive re-rating as conglomerate discounts falls.

SOTP-based valuation of Rs 3,050 implies 21% potential upside: A combination of healthy growth, rebalancing of portfolio and vertical-split can aid re-rating. Key risks are a) slower retail ramp-up; b) lower recoveries; c) slowdown in CDMO opportunities; d) adverse impact of Covid; e) segmental disclosures. Our SOTP based PT values lending business at 1.4x BV/1.5x ABV (Dec 23e) and core pharma at 18.4x Dec 23E EV/Ebitda (implies 32% CAGR to PE investment valuation in 2020).