PEL has made steady progress in each business by enhancing offerings and moving up the value chain. The NBFC is more diversified and, while management has consciously moderated risks/returns, return ratios remain ahead of peers. The high investment phase in other businesses also appears behind the company and operating leverage should help going forward. Stock valuations reflect these and we stay Neutral, albeit with a new target price of Rs 3,060/share.
Moderating returns and risks
PEL seems to be consciously lowering risk in its lending portfolio, moving towards construction finance/LRD/retail housing in real estate and senior lending in corporate finance. While this will lower yields (15% currently vs. 17% in FY16) and returns (4.2% ROA vs. 7% in FY16), the management is confident of maintaining steady state RoEs at 20%+ levels.
Financial services: strong growth continues
PEL’s loan portfolio has grown at 92% CAGR (2QFY16 to 2QFY18) to Rs 333 bn, making it the second largest NBFC in the real-estate developer funding market. Construction finance and corporate finance have ramped up well and the corporate finance book is shifting in favour of senior lending vs. mezzanine debt earlier. The recently launched retail housing finance business has disbursed
c.Rs 2 bn so far in the Mumbai region.
Pharma business has ample headroom to grow
The business has been buoyed by two acquisitions (Janssen, Mallinckrodt) in FY17. PEL has headroom to grow in each segment, post inorganic moves and capacity debottlenecking/expansion; good execution should drive margin gains over the medium term. CMO order book is strong and US desflurane launch could be a key near-term catalyst. Organic growth trends have however been sluggish and we would like to see this pick up.
Change forecasts and TP
We incorporate recent fund raise (`50 billion, convertible debentures, mainly deployed in financial services) and make some adjustments to our forecasts in its three businesses. We cut FY18E/19E EPS by 18/25%. We also roll over to March ’19E to arrive at our new TP of Rs 3,060/share
We have a Neutral rating on Piramal Enterprises, with a target price of Rs 3,060/share. The company has improved most of its businesses over the last year, with meaningful strides particularly in financial services and OTC. Its strategic investment in the Shriram Group companies has also appreciated in value. We expect this trend to continue going forward. At the same time, valuations appear to price this improvement in to a large extent. We believe further re-rating would depend on more clarity on the company’s plans to unlock value by separating its three key businesses.
Our target price of Rs 3,060/sh is based on a sum-of-the parts (SoTP) valuation, given that the company has now deployed its cash in several areas and we have more clarity on future growth and margin prospects for different business lines. Our per share valuation is as follows: (a) Healthcare at Rs 965/sh. We assume cRs 27 billion debt is allocated to this business. We value pharma solutions, critical care & consumer separately – (i) Pharma Solutions: 15x EV/Ebitda (in-line with peers); (ii) Critical Care: 15x EV/Ebitda (in-line with EV/Ebitda multiple for pharma stocks under coverage); (iii) OTC & Consumer: 30x EV/Ebitda (b) Fin. Services & Strategic Investments at Rs 1,885/sh – (i) Financial Services: 3.5x Mar’19E Book Value; we assume RoA of 4%/3.5% for FY18E/FY19E and Loan Book growth of 60%/40% in FY18E/ FY19E; (ii) Strategic Investments: Shriram Transport is based on Citi target price & Shriram Citi Union Fin based on market cap, 10% holdco discount. (c) Info Services at Rs 210/sh – 20x EV/Ebitda in line with other listed comparable; We assume `30 billion debt for this business.
Piramal Enterprises is present in Outsourcing, healthcare information segment (through Decision Resources Group-DRG) R&D, OTC & Ophthalmology (in India), critical care (anaesthetics) & financial services (NBFC & India ReIT) businesses. After divestments of its two key businesses (India Formulations & Diagnostics), it has diversified outside the healthcare space. It has also acquired stake in Shriram Capital, Shriram Transport and Shriram City Union Finance and continues to look for inorganic options in healthcare and other areas.