Piramal Enterprises (PIEL) hosted an analyst meet to discuss its financial services business. 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.
With a favourable 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 upto 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 Rs 3,685. Buy.
Over the past three years, the share of mezzanine lending in overall loan book has declined from 65% to 19% and that of construction finance has increased from 20% to 46%. While this has impacted yields (-300bp to 14%), management is comfortable, as this has moderated the risk profile and deepened the relationship with developers.
Corporate finance — a business started two years back — has already grown to a loan book size of `100b+ (22% of loans) and is expected to further gain share. Also, about a year back, PIEL received a housing finance license from the NHB and started retail home loans. Thus, PIEL has demonstrated its ability to successfully continue diversifying its loan book mix and maintain growth.