In the current environment, using the proceeds to support the core via lower leverage / higher liquidity would be prudent, in our view.
The sale of stake in Shriram Transport has generated proceeds of Rs 2,300 crore for Piramal, which is 20% of its March ’19 lending net worth. This could be used towards: a) M&A in housing finance, b) buttressing the core business, or c) M&A in healthcare. In the current environment, using the proceeds to support the core via lower leverage / higher liquidity would be prudent, in our view.
In the event of M&A, closing leverage will be key. M&A would dovetail with Piramal’s strategy of having 20% of loans in retail; also, the current market offers some businesses at distressed valuations. We consider possible acquisition scenarios in figure 1, assuming a purchase multiple of below 1x trailing net worth.
To illustrate we take two different sizes for a potential acquisition — one entailing Rs 10,000 crore in loans and the other Rs 40000 crore. We see closing leverage (loans / equity) rising to ~5x in the first case and 6.5x in the second, assuming SHTF proceeds are allocated to Piramal’s financial services division (will be higher by 1x if these are not allocated to financials). The market would be more comfortable with a 5x leverage in this environment. Piramal also has the option to monetize investments in other Shriram companies if needed.
As on March ’19, Piramal’s lending business leverage (loans/ equity) was 4.9x, which would fall further to 4x if the proceeds from Shriram stake sale were to be allocated to this. This is below most NBFCs in our coverage, and positive given the current environment and the recent downgrade to AA by ICRA on broader sector concerns.
A large part of Piramal’s growth in all segments of healthcare (viz. outsourcing, critical care, consumer) was acquired and we expect the inorganic focus to continue.