piramal enterprises buy - business standard€¦ · piramal enterprises is the parent company with...

Please refer to important disclosures at the end of this report

Market Cap Rs343bn/US$4.8bn Year to Mar FY19 FY20E FY21E FY22E

Reuters/Bloomberg PIRA.BO/PIEL IN Revenues (Rs mn) 1,31,816 1,47,628 1,42,275 1,61,485

Shares Outstanding (mn) 225.5 Net Income (Rs mn) 14,701 33,548 32,736 38,284

52-week Range (Rs) 2697/1332 EPS (Rs) 79.7 140.5 137.1 160.3

Free Float (%) 53.9 % Chg YoY -71.9 76.3 -2.4 16.9

FII (%) 30.0 P/E (x) 19.2 10.9 11.2 9.5

Daily Volume (US$'000) 39,455 P/BV (x) 1.0 1.0 0.9 0.9

Absolute Return 3m (%) (10.6) GNPA (%) 0.9 2.0 2.3 2.5

Absolute Return 12m (%) (27.4) Dividend Yield (%) 1.8 1.8 2.1 2.2

Sensex Return 3m (%) 1.6 RoA (%) 1.9 4.1 4.0 4.2

Sensex Return 12m (%) 16.5 RoE (%) 5.5 10.5 8.6 9.4

Equity Research February 19, 2020

BSE Sensex: 40894

ICICI Securities Limited is the author and distributor of this report

Initiating coverage

Financials

Target price: Rs2,025

Shareholding pattern

Jun '19

Sep '19

Dec '19

Promoters 46.1 46.1 46.1 Institutional investors 37.6 38.6 39.3 MFs and others 0.5 0.4 0.4 FIs/Banks 0.0 0.0 0.3 Insurance 7.9 8.9 8.6 FIIs 29.2 29.3 30.0 Others 14.3 14.3 14.6

Source: CMIE

Price chart

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Piramal Enterprises BUY

Firming up, to up the game; initiating with BUY Rs1,530

Research Analysts:

Abhijit Tibrewal, CFA [email protected]

+91 22 6637 7230

Vinay Bafna [email protected]

+91 22 6637 7339

Sriraam Rathi [email protected] +91 22 6637 7574

Adhidev Chattopadhyay [email protected]

+91 22 6637 7451

Piramal Enterprises (PEL) has niche capabilities in asset monitoring and resolution of stressed assets. While most investors today remain skeptical about anything ‘wholesale’ and anything ‘real-estate’, we feel PEL would be able to watchfully navigate the current tough environment. Foray into consumer finance in partnership with a telecom partner has considerable optionality value knowing that PEL has successfully incubated new businesses in the past. In order to diversify, PEL has uniquely positioned itself in the pharma industry with its CDMO services and critical care products. This is expected to provide a steady pharma revenue CAGR of 12.2% over FY20E-FY22E. Inability to achieve resolutions in high/concentrated exposures could lead to risks on the asset quality of its loan-book. We initiate coverage on PEL with a BUY recommendation and an SoTP-based target price of Rs2,025.

Robust risk management will help PEL navigate the current turbulence: We do acknowledge that there is considerable stress in residential real estate and that the financial health of the developers is indeed worrying. However, PEL’s superior client selection, conservative underwriting, asset monitoring capabilities and ability to find resolutions in stressed projects gives us confidence that it will emerge stronger from the current phase of turbulence. PEL is strengthening itself to remain relatively insulated in case of further deterioration in the financial health of developers (Pg 10).

Consumer financing is a massive opportunity with only a select few dominating the space: PEL’s foray into consumer and SME finance using a digital analytics platform in partnership with a telecom partner has potential to disrupt the conventional lending landscape. Of course, entry in this segment will have a gestation period since the incumbents have wide presence at all the points of sale.

Concentration out, granularity in: PEL is taking strong measures to reduce its large single-borrower exposures. Many of the newer sanctions in real estate will be through the fund structure/co-origination model and will earn fee income. Company has a newer and improved strategy in place in housing finance. Both retail segments – consumer and housing – will bring in granularity and give comfort to investors.

Unique pharma positioning: Requirement for development services, especially with increasing complex regulatory processes, remains high with increasing demand for newer drugs. Differentiating itself from its peers is its portfolio of institutional branded generic products, which are inherently used for critical care and are complex to manufacture. Thus, PEL has carved a unique space for itself in the pharmaceutical industry with its CDMO services and critical care products.

Valuations and risks: The stock is currently trading at 0.9x FY21E P/BV (including the equity capital raise). While FY20-TD has been more of a period of consolidation, we estimate the company to grow its loanbook at a CAGR of ~18% and achieve consolidated RoA of 4.0%-4.2%, over FY21E-FY22E. We have an SoTP based target price of Rs2,025 on PEL (page 3). Initiate with BUY. We discuss risks to our investment hypothesis in greater detail in a subsequent section of the report. (pg 34).

INDIA

Piramal Enterprises, February 19, 2020 ICICI Securities

2

TABLE OF CONTENT

Company overview and SOTP Valuation ....................................................................... 3

Firming up, to up the game in the times to come ......................................................... 4

Testing times indeed for real estate lenders but a quality franchise is equipped to

navigate the current turbulence ...................................................................................... 4

Huge emphasis on reducing single-borrower exposures ................................................ 5

Precarious times indeed but ones with robust risk management and deep sectoral

understanding likely to flourish ........................................................................................ 7

Deep-dive into the asset monitoring practice ............................................................... 8

Strengthening itself to remain relatively insulated in case of any further deterioration in

real estate sector ........................................................................................................... 10

Housing finance: Set for an overhaul .......................................................................... 11

Consumer Lending: A massive opportunity and only a handful of lenders who

dominate the space ....................................................................................................... 12

Consumer finance: Large underpenetrated opportunity ........................................... 13

Financial services: Business overview ....................................................................... 16

Expect growth mode to be restored after current phase of consolidation .................... 19

Both spreads and margins to improve with changing product mix ............................... 20

Investments in technology/analytics will keep cost ratios elevated for the next two years

...................................................................................................................................... 21

Asset quality could witness some deterioration but write-offs will be minimal .............. 22

Real estate: Sector overview ........................................................................................ 23

Inventory levels have soared in the last decade ........................................................... 23

~50% of the inventory lies in stuck/stalled projects ...................................................... 23

Customer preference has shifted to ready projects ...................................................... 24

Number of developers shrinks by 51% over CY11-18 .................................................. 25

Affordable housing driving majority of sales ................................................................. 25

Incremental supply also coming in affordable housing segment .................................. 26

Pharma – strong presence in CDMO and critical care ............................................... 27

Global Pharma .............................................................................................................. 27

India consumer products ............................................................................................... 31

Healthcare insights and analytics ................................................................................ 33

Risks to our investment thesis ..................................................................................... 34

Annexure 1: Consolidated financials in charts........................................................... 35

Annexure 2: Price chart and top public shareholders ............................................... 37

Annexure 3: Financial summary................................................................................... 39

Annexure 4: Index of Tables and Charts ..................................................................... 42


3

Company overview and SOTP Valuation

Piramal Enterprises is the parent company with interests in financial services, pharma

(Global Pharma and India Consumer Products) and financial stakes in retail lending

and insurance business of Shriram group (~10% in Shriram City Union Finance and

~20% in Shriram Capital).

We use an SoTP-based valuation methodology to arrive at a fair-value target price of

Piramal Enterprises. In the table below, we present different segments and

investments, which have been independently valued to arrive at the target price of the

company.

Table 1: SOTP valuation

SOTP Value

(Rs bn) Value

(USD bn) Price

(Rs/share) % of total

Rationale

Financial Services (ex Shriram) 268 3.8 1,124 55

We value this business at 1.2x Dec'21 P/BV; loanbook CAGR of ~18% over FY20E-FY22E; RoA between 4.0%-4.2% over FY21-FY22. RoE will improve with leverage.

Shriram Investments 45 0.6 188 9 ~10% stake in Shriram City and ~20% stake in Shriram Capital

Pharma 170 2.4 713 35

We value the Global Pharma business at 12x Dec'21 EV/EBITDA and the India consumer products business at 3x Dec'21 EV/Sales

Target value 483 6.8 2,025

Source: Company data, I-Sec research

We have built-in the recently concluded equity capital raise (in Jan 2020) in our

forecasts. We have assumed that PEL will adopt the new corporate tax rate and there

will be a one-time adjustment in the deferred tax asset (DTA) on the company

balance-sheet.

The stock is currently trading at 0.9x FY21E price/consolidated BV. Specialised

underwriting and rigorous asset monitoring capabilities provide PEL with competitive

moats in wholesale real estate lending. The company’s intent to foray into

consumer/SME financing will provide the much-needed granularity in its loanbook and

gives a big optionality value to the company.

Consumer finance is a huge under-penetrated opportunity dominated by a handful of

financiers. Piramal, collaborating with a large telecom service provider, can get

immediate access to a big ecosystem of customers with a digital footprint. Mr. Jairam

Sridharam (ex-CFO, Axis Bank) was appointed as the CEO of PEL’s retail lending

business. Mr. Sridharan has rich experience in building large retail franchises in his

prior stints at Axis Bank, Capital One Financial and ICICI Bank. He has also headed

business intelligence functions in his earlier stints and will be instrumental in

developing the analytical capabilities of Piramal in retail lending.

We expect PEL to deliver healthy normalised RoA/RoE of 4.2%/9.4% in FY22E. RoE

will improve with improvement in financial leverage. We initiate coverage on the

company with a BUY recommendation and an SoTP-based target price of Rs2,025.

This is a potential upside of ~32% on the current market price of the company.


4

Firming up, to up the game in the times to come

Though history is not a correct representation of what the future holds in store, Piramal

Enterprises has time and again exhibited the resilience to evolve its business model

(at times even completely exit current business segments or enter absolutely new

ones) when the external environment/circumstances warranted an evolution. One

such evolution is again underway now.

From being labelled as a “wholesale real estate” lender, with highly concentrated

exposures, Piramal Capital and Housing Finance (PCHFL) is now embarking on its

next ambitious evolution. The company has plans afoot to expand its retail franchise

by entering consumer lending and scaling-up its housing finance business. The

consumer lending business will be driven by technology at the centre stage and ably

supported by strategic partnerships with other partners/fintech vendors in the

ecosystem. Alongside, it will be looking to increase the share of housing finance in the

overall loanbook. This, it plans to achieve by tapping newer markets in tier2/3 cities

and increasing the proportion of self-employed customers in its mix (for higher yields).

The company expects to have a healthy balance between retail and wholesale assets

over the next 4-5 years. While its incremental on-book lending will be more favourably

disposed towards retail, it will continue to selectively tap opportunities in wholesale

real estate lending. Going forward, it would be doing a large part of its wholesale

lending under the fund structure with partners or co-origination with banks. This would

ensure the company continues to earn fee income and at the same time reduces

concentration in its loanbook. In addition, it would be doing last-mile funding to late

stage projects. While being higher yielding, it would also be low risk since all the

necessary clearances would be in place.

Testing times indeed for real estate lenders but a quality franchise is equipped to navigate the current turbulence

Even with all the negativity surrounding the real estate sector and frequent media

articles drawing attention to the slowing sales velocity and stretched balance sheets of

the developers – we feel we are in the middle of an extended consolidation phase.

This consolidation will happen both in the developer space as well as within the real

estate lending space. PCHFL, we feel, is equipped to navigate through this

consolidation phase given its deep-rooted expertise in loan origination, underwriting

and monitoring of assets in wholesale residential real estate space.

There is no denying the fact that residential real estate developers have found the

going tough over the last 12 months. This was compounded further with slowing sales

velocity (especially in high-ticket sized luxury projects) and the risk aversion of the real

estate lenders leading to a funding shortfall. This funding shortfall has led to stalled

projects and homebuyers shying away from under-construction properties and

showing preference only for completed projects.


5

However, it is important to note here that most of the projects where Piramal has

exposure continue to progress well on their construction milestones and remain well-

funded. A closer look at the developer sales in the projects where Piramal has

exposure suggests they continued to witness good sales velocity even over the last

three quarters.

Chart 1: Decent sale of units in projects where PEL has exposure…

Chart 2: …has led to strong repayments/pre-payments in the RE wholesale portfolio

2,545 2,754

2,636 2,808

2,680

-

500

1,000

1,500

2,000

2,500

3,000

Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20

Developer sales (No of units sold)

40,190 39,310 41,710

47,850

65,250

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20

Wholesale loan portfolio (Repayments/pre-payments) (Rs mn)


A decent sales velocity at projects, which are part of PEL’s loanbook, has ensured the

company has seen repayments/pre-payments (including re-financing) of Rs194bn over

the last four quarters as of H1FY20. In the same period, the company raised about

Rs240bn in long-term borrowings from banks and other financial institutions. Together,

the company raised ~440bn over the last four quarters as of H1FY20.

Huge emphasis on reducing single-borrower exposures

One of the biggest learnings the company had from the recent liquidity tightening in

the NBFC sector was that they ought to bring down their single-borrower exposures

meaningfully given the apparent discomfort its lenders expressed against Piramal’s

concentrated single-borrower exposures. The company has taken strong measures to

reduce single-borrower exposures and its larger exposures have further come down

either through refinancing or through co-origination. Not only has the company

gradually reduced the concentration in its loanbook, quarter over quarter it has guided

investors about the quantum of reductions it plans to achieve in its top-10 accounts

and has successfully delivered on that front. Our estimates suggest the top-10

exposures accounted for ~27% of its loanbook as of H1FY20. This reduction has been

possible because of cashflows from the completed projects of developers. Importantly,

as of Sep-2019, nearly ~66% of the company’s residential real estate (RRE) lending

exposure was towards mid-to-late stage or completed projects.

After the equity infusion into the financial services business, the company expects that the largest exposure would be below ~12% and all other exposures would be below ~7% of the net-worth of financial services business.


6

Chart 3: FY19 loanbook (Rs566.2bn) with top-10 developers constituting 31% of the total lending exposure

Chart 4: Only one exposure is above the 15% net-worth threshold and we expect there would be none by end-FY20

D1, 7%

D2, 5%

D3, 5%

D4, 3%

D5, 2%

D6, 2%

D7, 2%

D8, 2%

D9, 2%

D10, 2%

Other developers,

40%

CFG, 17%

Housing Finance,

9%

ECL, 2%

4 4

3 3

2

1

0

1

2

3

4

Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19

Exposures exceeding the 15% threshold


Though refinancing is not as easy in current environment, the space still witnesses some refinancing transactions

One of the many ways through which the company has been able to reduce its single-

borrower exposure is through refinancing of its existing exposures. Given the

company’s underwriting quality, about Rs99bn of loans were refinanced by banks,

mutual funds and other institutions (at par). Similarly, the company has been able to

sell-down part of its exposure to Lodha to the likes of Goldman Sachs without any

haircuts as these loans were given at similar terms as the ones when Piramal had lent

to Lodha.


7

Precarious times indeed but ones with robust risk management and deep sectoral understanding likely to flourish

While Piramal has de-emphasised growth in its wholesale real estate loanbook, it will

continue to participate in real estate opportunity largely through co-origination with

banks and co-lending under a fund structure. Given the sectoral understanding of

Piramal and its strong asset monitoring team, many banks/financial institutions will be

keen to partner with it for wholesale real estate loans. This will ensure that wholesale

concentration on Piramal’s loanbook would not increase while the company will earn

additional fee income in deals where it participates under a co-origination/co-lending

model.

The consolidation theme in the real estate lending space has indeed played out over

the last five quarters. We have fewer real estate lenders today who are actively

lending to residential developers. Under such a landscape, only lenders who have a

strong balance sheet and adequate liquidity will be able to thrive when an appropriate

opportunity presents itself. To this effect, the focus of Piramal management today is

not so much on achieving growth in loanbook but instead it is on strengthening the

balance sheet.

Some steps taken by the company to strengthen its balance sheet are enumerated

below:

Though not purely by choice, commercial papers (CP) in the borrowing mix of the

company have been largely run down. CPs, which stood at Rs180bn in Sep-2018,

were down to Rs18bn in Dec-2019, down 90% in the last 15 months.

It is not aggressively undertaking any new wholesale real estate lending deals

(even though the opportunity is huge) but instead ensuring that disbursements

happen against the committed sanctions so that the construction of the projects

where it has exposure stays on track. Case in point here is the Lodha exposure.

Piramal made an exception in Q2FY20 when it made a strategic decision of

allowing Lodha to not pre-pay in the quarter and instead allowed that fund to be

deployed to accelerate construction activities. Lodha has since then reported good

sales and the company expects a reduction of about Rs4.5bn-5.0bn in its Lodha

exposure over the next couple of quarters, either by way of re-payments or sell-

downs.

Even with an already low debt-to-equity ratio of 2.8x (Dec 2019, for financial

services – lending business), PEL decided to raise fresh capital of ~US$770mn

under a rights issue (~US$520mn) and preferential allotment (~US$250mn) of

compulsory convertible debentures (CCDs) to CDPQ. Both the preferential

allotment and the rights issue have been successfully concluded. This fresh equity

capital, which is fungible, will likely be deployed in its financial services business.

More importantly, this has given the company, the growth capital to aggressively

pursue retail lending (consumer/housing) organically as well as inorganically if an

excellent opportunity presents itself.


8

Deep-dive into the asset monitoring practice

What really differentiates one lender from another in this space is client selection and

how the deal was underwritten (with respect to estimated construction cost, sales

velocity, quality of collateral cover and control over escrow) and the subsequent

monitoring of the projects where it has exposure. In wholesale real estate lending,

basis continuous due-diligence and conservative sales/collection estimates, the lender

should be able to pre-empt and act on the early warning signals (EWS) by taking

corrective action. What makes Piramal standout is its ability to salvage some of the

deals (where it has lent) before things really turn ugly. This is where its asset

monitoring practice and relationships with developers become its competitive moats.

Chart 5: Asset-monitoring forms the core of wholesale RE lending business

Rigorous Appraisal Disbursement with high

security cover

Asset/Project

monitoring

Identification of EWSRegular site visits to

monitor project progress

Monitor timely

re-payments

Reconciliation of

monthly developer MIS

on sales, cash and

collections

Preventive action

ESCROW management

Conservative

Underwriting

assumptions

Resolution


Chart 6: Preventive actions (case-specific) initiated when the project is stressed

Ensure availability of

adequate funding for

project completion

Preventive Action

Get Project refinanced

Involve BRICKEX to

boost sales

Marry Distressed

developers with

stronger partners


We present below some of the key things Piramal does differently and does it right:

While Piramal has certain exposure to luxury projects, it does not structure deals

that are out-right exposures only to luxury projects. As part of a deal, it tries to mix

and match projects – typically luxury and mid-price projects. Alternatively, it tries to


9

mix and match under-construction and completed (or near-completed) projects as

part of a deal. This mix of luxury/mid-price projects or under-

construction/completed projects acts as a risk mitigant.

All the deals that are structured are based on very conservative underwriting

assumptions. When structuring a deal, Piramal ensures that it underwrites the

slow sales velocity (especially in luxury projects) as well.

All its JDA deals where it does land-owner funding – there are clear-cut

instructions to the developer that all the cashflow should flow through Piramal’s

escrow (like in all other wholesale real estate lending relationships). Piramal first

repays and pre-pays itself and then the remaining profit portion goes to the

landowner. In addition, Piramal does not enter into JDA deals with tier-2

developers. It does JDA deals only with top-tier developers so that sales velocity

concerns are largely mitigated.

Majority of the deals that it structures it does via cross-collateralisation. Most

developers that it lends to have multiple projects, sometimes even spread across

multiple cities. Piramal also takes one of the (near) completed projects as

collateral when financing an under-construction project. Importantly, the entire

wholesale lending book is secured with security cover of 1.5x-2.0x.

Strong monitoring of developer sales. Monthly MIS of developer sales are shared

with Piramal every month who then tallies it with escrow account to ensure there

are no leakages or diversion of funds.

All deals (without any exceptions) are executed under escrow account framework.

This gives Piramal complete visibility on the developer’s cashflows. Except for

money that is required for construction activity, Piramal sweeps out the escrow

account to repay/pre-pay itself.

All its lending to projects are covered under the ‘Early Warning Signals’ (EWS)

monitoring.

All its construction finance deals have not only construction milestones but also

milestones for sales as well as collections.

Chart 7: PEL’s underwriting moats



10

Strengthening itself to remain relatively insulated in case of any further deterioration in real estate sector

In real estate lending, while each lender closely monitors the project in which it has

exposure, what also becomes important is to closely monitor the financial health of the

developer/promoter group. There have been instances in the past wherein even

though the project to which the lender had exposure was doing well and was on track,

because of the deteriorating financial health of the builder group and/or difference

between partners in the promoter group, the developer group (along with all its

projects) has been taken to the IBC. To insulate itself from something like this,

incrementally, Piramal is trying to make its project exposures IBC-proof. Most of its

project exposures are now ring-fenced from the IBC.

Piramal has exhibited strong commitment to bring down its large exposures. It is

ensuring that it continues to churn the wholesale book. From what we understand,

Piramal has managed to largely run-down its low RoI (and therefore, relatively low

risk) LRD and hospitality (these were operating hospitals) loanbook by down-selling it

to large banks. The recent PTC transaction, where it securitised about Rs33bn of

wholesale assets (both real estate and non-real estate) with a 20% cash credit

enhancement, was rated AA+ by CRISIL. In this transaction, the company raised

Rs24bn at a coupon rate of 10.5%.

Early Warning Signals

Using its robust monitoring, Piramal is able to identify early warning signals in projects

where it has exposure. The idea of identifying early warning signals is to give the

company an opportunity to act early – much before a project turns stressed. This

exercise sometimes even involves convincing the developer that given the progress

on construction/sales in the project, it could become stressed at a future point in time.

Next step of course is devising an action plan to resolve a potentially stressed project

by working closing with the developer.

Despite all the monitoring and identification of early warning signals, there are

instances when the project/deal still gets stressed. Typically, when a project is

stressed, Piramal tries to resolve the stress through one or a combination of following

steps:

Work with the developer to get the project refinanced from some other lender

If sales velocity has slowed down considerably, Piramal tries to boost the sales in

the project by deploying its BRICEX team in those projects.

Taking additional security or monetizing the existing security.

Requiring the developer to infuse additional capital into the stressed project

Marrying distressed partners with others having capabilities to execute. If Piramal

identifies a project as stressed, it typically tries to resolve it by convincing the

developer to enter into a JV/JDA with a stronger developer. Important thing here is

that, as a lender, one has to be forceful in such distressed projects and be forceful

early in the day.


11

Housing finance: Set for an overhaul

PEL started its housing finance business as an extension to its end-to-end real estate

financing in fiscal 2018. Since then, it has expanded its branch presence (15 cities, 17

branches as of Sep-2019) predominantly into tier-1 cities. Housing finance forms

~12% of the loanbook of the company. Initially, housing finance was a B2B2C

sourcing model where loans were sourced from projects where the company had a

wholesale lending exposure. It initially targeted salaried customers with this segment

contributing ~62% to customer mix. Even the average ticket size (ATS) was higher at

~Rs7mn where it had to compete with banks.

Table 2: Change in strategy underway within housing finance

Housing Finance Existing model New Improved Strategy

Focus customer segment Salaried (~62% of the loan book) Self-employed

ATS Rs 7mn Rs 1.5mn - Rs2.5mn

Operating Model Non-centralized Centralized

Geography Tier 1 cities Also target Tier 2 and Tier 3 cities

Yields Between 9% - 10% Expect higher yields given focus on self-employed segment

Sourcing Primarily through developers tie-ups and BRICKEX

Lower cost and granular channels, DSAs etc


Investors have always questioned PEL’s rationale of doing housing finance with yields

of 9-10% when the blended cost of borrowings of the company itself was above 10%.

The company has re-looked at its housing finance strategy and implemented a new

improved strategy from CY2020. Primarily, it will now target markets and customer

segments where it will not have to compete with banks. This will be aided by

technology wherein the ATS of home loans will be much lower (between Rs1.5mn and

Rs2.5mn). Also, the focus will now be on the self-employed customer segment

because the company, over the last few quarters, has improved its underwriting

expertise to be able to effectively cater to this customer segment.

At lower ATS and self-employed customer segment, the yields are higher (we estimate

between 11%-12%). Also, PEL is now able to tap borrowings, specifically for retail

lending where costs are lower (between 8.5% - 8.75%). This would mean that housing

finance business will no longer be a drag on the profitability of the company.


12

Consumer Lending: A massive opportunity and only a handful of lenders who dominate the space

While Piramal would continue to grow its retail housing book, now it also has a

concrete action plan to enter the consumer lending space by going beyond the

conventional forms of lending. Instead, it plans to partner technology players to set-up

a digital consumer lending business and such partnerships could potentially give it an

immediate access to a large customer digital ecosystem. What such partnerships

could mean is that Piramal will not have to source customers from open markets and

this could also lead to lower cost of customer acquisition and provide higher

scalability.

Such partnerships with tech players will be critical for creating a sizeable and high-

quality retail lending franchise. Piramal can leverage the expertise of the technology

partner while the credit risk would largely remain on the company’s balance sheet.

Given the huge opportunity in consumer lending, multiple players can effectively

compete with each other. Also, there are multiple variants of loans (consumer durable

financing, working capital loans to SMEs) that can be explored given the credit

potential of the customers in the technology partner’s ecosystem.

To this end, Piramal is firming up to provide a seamless digital lending experience to

its retail customers. Piramal will do the underwriting using its proprietary risk models,

which will leverage advanced data analytics.

While there could be various loan variants, Piramal will broadly be looking to introduce

individual consumer loans and small business loans as primary lending products.

Individual consumer loans: These could be consumption loans generated either at

point-of-sale (POS, retail outlets) or through e-commerce channels. Such loans

typically have average tenures of less than a year.

Small business loans: By partnering with a tech player, Piramal can effectively

leverage data from PoS devices at stores to offer working capital loans to store

owners and retail consumption loans to their customers.

Piramal plans to overhaul its entire retail lending franchise with technology and

advanced analytics at its core. Comprising retail housing finance, consumer loans and

small business loans, the retail lending franchise will be a complementary (to

wholesale loans) business across the risk-return spectrum.

Appointment of CEO for its retail lending business: In December 2019, the

company appointed Mr. Jairam Sridharam as the CEO of its retail lending business.

Mr. Sridharan has rich experience in building large retail franchises in his prior stints at

Axis Bank, Capital One Financial and ICICI Bank. He has also headed business

intelligence functions in his earlier stints and will be instrumental in developing the

analytical capabilities of Piramal in retail lending.


13

Consumer finance: Large underpenetrated opportunity

Data from CRISIL Research suggests during FY15 and FY19, loan disbursements

from NBFCs for the purchase of consumer durables grew at a CAGR of 30%. This

was driven by increasing point-of-sale (POS) set ups and expanding distribution

network reaching newer cities.

Chart 8: NBFC financing of consumer durables (CD) has seen a steady increase…

Chart 9: …as the overall CD financing market has grown with increasing finance penetration

147 169230

338418

517

648

0

100

200

300

400

500

600

700

FY15 FY16 FY17 FY18 FY19 FY20P FY21P

CD Financing - NBFC Market Size

397 490

597 726

889

1,104

23 2426

28

31 34

0

5

10

15

20

25

30

35

40

-

200

400

600

800

1,000

1,200

FY16 FY17 FY18 FY19 FY20P FY21P

CD Finance Market Finance penetration (RHS)

Source: CRISIL, I-Sec research

What these easy financing schemes have done is that they have improved the ability

of consumers to buy higher-value products. Also, the replacement cycle of consumer

durable (CD) products is down from 9-10 years to about 4-5 years now. The tie-ups of

consumer durable manufacturers with financiers has led to strong CD industry growth

over the last five years.

Chart 10: CD market itself is expected to grow at a CAGR of ~17% over FY16-FY21P

Chart 11: Smartphones form ~66% of the total CD financing

1,761 2,049

2,292 2,565

2,850

3,254

-

500

1,000

1,500

2,000

2,500

3,000

3,500

FY16 FY17 FY18 FY19 FY20P FY21P

Total CD market (Rs bn)

SmartPhone, 66%

PCs, 4%

TVs, 10%

Washing Machine, 4%

ACs, 6%

Fridge, 10%



14

CD financing market has three kinds of lenders/players – NBFCs, credit cards and

banks. The CD finance market witnessed a CAGR of 21% between FY15 and FY19

driven by rapid expansion of NBFCs, increasing use of credit cards and online EASY-

EMI models. Data from CRISIL Research suggests CD finance disbursements can

grow at a CAGR of ~23% over FY19 to FY21E.

Chart 12: NBFCs still have ~60% share in CD financing market

33% 30% 26%18%

12% 11% 9%

25% 28%27%

25%28% 29% 30%

43% 43%47%

57% 60% 60% 61%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY15 FY16 FY17 FY18 FY19P FY20P FY21P

Banks Credit Cards NBFCs


CD finance penetration has also been on the rise. While this is partly because of the

wider distribution reach (beyond tier 1 and tier 2 cities), the financier’s ability to offer a

greater number of products under the financing umbrella has also played a key role in

this. Moreover, finance is now very easily available (in the form of EASY EMIs –

sometimes at zero interest) through credit costs (and some debit cards as well) in both

offline and e-commercial distribution channels.

Chart 13: Commercial nuances of consumer durable financing

Customer Dealer Manufacturer

NBFCs (POS)

Initial down

payment

(33%)

Monthly Installment

Manufacturer

subvention and

processing fees

(4.5% - 5.5%)

Remaining

(67%)Dealer Buy

down (1-2%)

Dealer

discount

(~2%)


CD product manufacturers will also play a big role in growth of CD financing.

Consumer durables industry is a supply-push market where financing is facilitated by

the manufacturer tying up with financiers. Subventions paid by the manufacturers (and

some-times by even the dealers and/or the e-commerce platforms) to the financiers

play a big role in ZERO interest EMI schemes. If manufacturers reduce or stop

subvention to financiers to protect their margins, it would impact growth in CD

financing.


15

One segment where NBFCs have low access is the customers of ecommerce

platforms, who mostly use credit cards for purchases. The advantage of credit cards is

that they have pre-set limits while NBFCs need to assess a customer’s profile before

approving financing.

Chart 14: Physical stores – single shop owners and large format retailers- contribute ~70% to the CD financing market

Chart 15: Still a big head-room for finance penetration to improve across channels

Single shop owners, 43%

Multiple shop owners, 14%

e-Commerce, 15%

Large format retailers, 28%

39%

31%28%

25%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Single shopowners

Multiple shopowners

e-Commerce Large formatretailers

Channel-wise Finance Penetration


Piramal is using its technology platform with data analytics at its core plans to do real-

time assessment of the credit-worthiness of the customer. For this, Piramal will use

data from its technology partner’s ecosystem, from credit bureaus and its proprietary

risk models. Importantly, given the under-penetration of consumer financing and only a

handful of players – it is not a winner takes all market. In collaboration with its

technology partner, Piramal can effectively tap into a large customer base, which

interacts with the digital ecosystem every day.


16

Financial services: Business overview

Chart 16: Summary of financial services business of PEL

Financial services

Wholesale RE Lending Alternative Asset

Management

Stakes in Shriram

Group

AUM: Rs360.8bnPortfolio size

• Mezzanine Lending

• CF – Residential

• CF – Commercial

• Lease Rental Discounting

Products

• Yields:

-Mezzanine: 15%-17%

-CF: 14%-15%

-LRD: 9%-12%

• Gross NPA: Much lower

than industry levels

Features

AUM: Rs.118.3bn

• Third party funds

-Real Estate (Rs72.6bn)

-Corp Finance (Rs23.1bn)

-India RF (Rs18.5bn)

Yields:

Real Estate: 20%-24%

- RE includes

investments with

Ivanhoe, sub of CDPQ

- India RF is a stressed

asset platform (JV with

Bain Capital Credit)

Invested: Rs45.83bn

• Retail financing

– 20% in Shriram Capital

– 10% stake in SCUF

• Sold ~10% stake in

Shriram Transport for

~Rs23bn in June’19

• Market leaders in

Used CV, MSME

Financing

Corporate Finance Group

Emerging Corporate Lending

AUM: 92.1bn

• Mezzanine/Structured Lending

• Loan Against Shares

• Capex Funding, Senior Debt

• Promoter Funding

• Project Finance, LAP

• Yield on Loans:13-16%

• Sector Focus:

Infra, Cement, Transmission,

Auto Components, Logistics,

Chemicals

Housing Finance

AUM: Rs.61.4bn

• Home Loans

• LAP

• Mid market

Construction Finance

• Yields:

- Home Loans: 9%-10%

- LAP:

15 cities, 17 branches

ATS: ~Rs7mn

Salaried (72%): Self

employed (68%)


Piramal’s financial services business broadly comprises wholesale and retail lending.

In addition, it also has an alternative asset management platform (off-balance sheet)

and financial stakes in Shriram Group.

Chart 17: Split of the loanbook as of March-2019

76

44

2919 16

22

3

34

43

4041

4 68

64

65

5

34

17 16 15

1917

22

39

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

FY15 FY16 FY17 FY18 FY19

(%)

Housing Finance

ECL

CFG

Hospitality

LRD

CF - Commercial

CF - Residential

LAP

Structured Debt


Wholesale real estate: Under the wholesale umbrella, it does real estate lending

ranging from structured (mezzanine) funding, Loan against Property (LAP), residential

construction finance (CF), commercial CF and Lease rental discounting (LRD).

Incrementally, we see the company inclining to do wholesale real-estate lending

more under the co-investment fund structure or under the co-origination model

with large global pension funds, PSU banks and foreign banks.

CFG and ECL: Under the non-real estate vertical, it has a Corporate Finance Group

(CFG) and an Emerging Corporate Lending (ECL) group where it does structured

lending, Loan against shares (LAS), capex funding, promoter funding, project finance


17

and LAP. Under CFG and ECL, it has exposures to sectors like infra, cement,

transmission, auto components, logistics and chemicals.

Housing finance: Under retail financing, it does housing finance and already has an

outstanding loanbook of Rs61.4bn as of Dec-2019. Initially, housing finance was a

B2B2C sourcing model where loans were sourced from projects where the company

had a wholesale lending exposure. In addition, it also extensively leverages BRICKEX

wherein houses sold under the BRICKEX platform are referred to Piramal Housing

Finance for a home loan.

Consumer financing: The company has also articulated that it plans to start

consumer financing (new-age digital financing for consumer durables and unlike

micro-finance consumptions loans) and SME financing. For the same, it has on-

boarded McKinsey as the consulting partner to help it draw out a strategy. It has also

started working on an analytics platform that it can leverage for consumer financing.

While building its own proprietary risk model, it might also partner with some fin-tech

or telecom company to get quick access to a big ecosystem of customers. Moreover,

the company has also indicated there are some attractive acquisition opportunities

available in the space, so the consumer financing foray of Piramal could be a mix of

both organic and inorganic. Important to note here is that the consumer financing

business will be under a separate subsidiary of Piramal Enterprises (PEL).

Alternative Assets Under Management: These are various fund-based platforms

(off-balance sheet), which Piramal leverages for the wholesale financing opportunities

across real-estate, corporate finance (non-real estate) and distressed assets.

Following are some of its active platforms:

InvIT platform for renewables: This has seen initial allocation of US$360mn from

CPPIB and another US$90mn by PEL. The company is actively evaluating potential

seed transactions that they can fund under this platform.

JV with APG: This is a Corporate Finance platform where the company has done

mezzanine investments in infrastructure companies. This fund has been fully deployed

across six deals worth US$800mn.

India Resurgence Fund – JV with Bain Capital: The company has concluded four

investments worth ~US$400mn across sectors such as marine chemicals,

pharmaceuticals and steel. Even CPPIB and IFC have committed US$225mn and

US$100mn, respectively, in this fund. This is a stressed-assets platform where the

company invests in distressed assets.

Real estate platforms:

The company has multiple funds for financing wholesale opportunities in real estate.

Equity fund for residential real estate: Piramal partnered with Ivanhoe Cambridge

(Ivanhoe - real estate subsidiary of CDPQ) to provide long-term equity to developers.

Ivanhoe did an initial commitment of US$250mn. In Q4FY19, under this co-investment

platform, PEL and Ivanhoe announced an equity investment of ~Rs5bn towards one of

the top-tier real estate developer.


18

Last-mile real estate funding platform: PEL partnered IIFL for an Alternative

Investment Fund (AIF) platform. This will be a co-investment platform with a target

size of Rs20bn. The mandate will be to identify last-mile debt funding opportunities in

real estate projects. Such ‘Last In, First Out’ (LIFO) deals are senior debt and offer

attractive yields for superior risk-adjusted returns.

Stakes in Shriram Group

PEL bought stakes in Shriram Transport, Shriram Capital and Shriram City Union

Finance over May 2013 and June 2014. Subsequently, in November 2014, Mr. Ajay

Piramal was appointed as the Chairman of Shriram Capital (the HoldCo for Shriram

Group businesses including life and general insurance). The initial idea was to merge

Shriram lending companies into Piramal but because of cultural differences, the idea

of a merger never really fructified. PEL sold ~10% stake in Shriram Transport Finance

for ~Rs23bn in June 2019. PEL has made it sufficiently clear that it will exit its

remaining investments in Shriram City and Shriram Capital at an opportune time.

Chart 18: Chronology of investments (exits) in (from) Shriram group

May, 2013

April, 2014

Acquired ~10% stake in Shriram Transport Finance for Rs 16.36bn

Acquired ~20% stake in Shriram Capital for Rs 21.46bn

Investments in Shriram GroupDate

June, 2014Acquired ~10% stake in Shriram City Union for Rs 8.01bn

June 2019 Pirmal Enterprises sells entire ~10% stake in Shriram Transport for

~Rs 23bn



19

Expect growth mode to be restored after current phase of consolidation

FY20 was more about balance sheet and liquidity management. The company has

replaced its short-tenured commercial paper (CP) liabilities with long-term borrowings

from banks and financial institutions. From peaks of ~19% of the borrowing mix, CP

now forms only ~4% of the borrowing mix and has since been replaced by other

instruments of borrowing like term loans, external commercial borrowings (ECB) and

securitisation. Through FY2020, the company has exhibited a significant improvement

in its liquidity position.

We highlight below some of the key steps taken by PEL to improve its liquidity

position, achieve de-leveraging and infuse equity into its financial services business:

Even when refinancing has been tough because of risk-aversion of broader real

estate lenders, the company managed to successfully re-finance/sell-down

~Rs99bn of its loan portfolio in the five quarters over Oct-2018 and Dec-2019.

Most of the sell-downs were done at par without any haircuts.

To diversify its sources of borrowings, it did its first securitisation transaction of

wholesale loans through the PTC structure worth ~Rs24bn. This pool was rated

AA+ by CRISIL.

PEL sold its ~10% stake in Shriram Transport for ~Rs23bn in June 2019 and has

signed a definitive agreement to sell DRG (Healthcare Insights & Analytics)

business to Clairvate Analytics PLC for a consideration of US$950mn. PEL will

use the proceeds to further de-lever its balance sheet and infuse equity into its

financial services business.

In January 2020, PEL also completed its equity capital raise of ~Rs54bn through a

combination of preferential allotment (~Rs17.5bn) to an existing long-term investor

CDPQ and a rights issue (~Rs36.5bn) where even the promoters participated.

FY20 was a year of consolidation wherein PEL sold-down most of its low RoI and low

risk exposures like LRD and loans to hospitality. This was also the right thing to do

given that these relatively lower-yielding businesses made very low spreads especially

when the cost of borrowings of the company went up by 150bps-200bps. Given the

underwriting expertise, deal-structuring and asset-monitoring capabilities of PEL, it will

continue to tap into opportunities in real estate lending through fund-structure or co-

origination model. While this will help PEL reduce its single-borrower exposure, it will

also ensure a steady fee income.

Over the next few years, we expect higher granularity in loanbook with retail housing

finance, consumer finance and SME finance forming a major proportion of the

disbursements. We expect loanbook growth to pick up again by mid-FY21 and

estimate a loanbook CAGR of ~18% over FY20E-FY22E.


20

Chart 19: Evolution of loan book in FS Chart 20: Segmental split of loanbook (Rs514.3bn) as of Dec-2019

4 20 29 48

133

250

422

566

504

580

695

0

100

200

300

400

500

600

700

800F

Y12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20E

FY

21

E

FY

22

E

(Rs b

n)

FS - Loan AUM

Residential RE, 244bn,

47%

Commercial RE, 117bn,

23%

Retail Housing Finance,

61bn, 12%

CFG and ECL, 92bn,

18%


Both spreads and margins to improve with changing product mix

Chart 21: Expect spreads to improve led by lower incremental cost of borrowing

17.516.4

14.4 14.0 14.4 14.5 14.0

8.49.4

8.19.3

11.010.0 9.5

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

FY16 FY17 FY18 FY19 FY20E FY21E FY22E

(%)

Avg. yield on loans Avg. cost of funds Interest Spreads


The cost of borrowings of the company increased by 150bps-200bps over FY20. This was partly because of short-tenured CPs being replaced by higher cost longer-tenured borrowings. This was also because post IL&FS, the domestic mutual funds (MFs) were not lending to most NBFCs (PEL was no exception) through NCDs/bonds/CPs. Funding from MFs, which formed ~29% of the borrowing mix of the company as of September 2018, was down to 4% as of December 2019. This was replaced with higher cost ECBs, term loans from banks and securitisation.

We expect the incremental cost of borrowings of the company to further come down as we move into FY21 primarily because: 1) MFs have shown some early signs of lending to NBFCs through NCDs; 2) post the equity capital infusion, much lower debt-to-equity ratio of the company will provide more comfort to the lenders, and 3) more granularity in loanbook from retail lending in housing finance and consumer finance.


21

Yields should also witness a minor improvement since the company has sold-down

the lower yielding exposures like LRD and hospitality. Also, given the current state of

the real estate sector, we feel the company will be able to identify higher-yielding last-

mile funding opportunities. This should help the company achieve stable to increasing

yields.

With benefits on both the lending yields and the cost of borrowing, we estimate both

spreads and NIMs to improve from current levels.

Investments in technology/analytics will keep cost ratios elevated for the next two years

PEL has plans of building its own proprietary risk models and analytics infrastructure

for its retail financing (especially consumer finance) business. Given the high volume

of transactions that PEL anticipates on this platform, it will be looking to build the

technology platform in-house along with partnerships with some fintechs/technology

partners.

Moreover, given the nature of consumer durable financing, PEL will have to enter into

strategic partnerships with consumer-durable manufacturers and dealers. This may

also entail setting up a distribution network and digital/physical presence at all points

of sale (PoS). It might have to expand its branch presence further, particularly, to cater

to SME customers.

This capability-building phase will entail investments and will likely keep cost ratios

elevated for the next two fiscal years.

Chart 22: Cost ratios expected to remain elevated primarily because of investments in analytics/technology/distribution

14.8

18.3

13.5

16.7

19.518.5 18.0

0

20

40

60

80

100

120

140

160

180

200

0.0

5.0

10.0

15.0

20.0

25.0


(bps)

(%)

Cost to income ratio (%) Op.costs/avg AUM (bps) (RHS)



22

Asset quality could witness some deterioration but write-offs will be minimal

Given the current financial health of the residential real estate developers and the

continued risk-aversion of real estate lenders, we can see more slippages into stage 3

over the next two years. However, given the asset-monitoring and resolution/recovery

capabilities that we have discussed earlier, we feel actual write-offs on financial

services lending book will be minimal. Each project/deal in real estate financing is

unique and when the project is stressed, it requires a unique resolution – which

is where we feel Piramal has built competitive moats in its wholesale lending

business, which its peers find difficult to replicate.

We build-in higher credit costs in FY21E-FY22E because of incremental provisioning

against the likely slippages from Stage 1 into stage 2 and stage 3. But unlikely, the

company will have to take very high write-offs.

Chart 23: Stage 3 assets could marginally increase from current levels led by slippages in the wholesale RE portfolio

Chart 24: Estimate higher credit costs towards provision of exposures which could potentially slip into Stage 3 but write-offs will be minimal

1.9

0.9

0.40.3

0.9

2.0

2.32.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20E

FY

21E

FY

22E

(%)

GNPA (%)

185

8171 66

20

8090

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

FY

16

FY

17

FY

18

FY

19

FY

20E

FY

21E

FY

22E

(bps)

Credit costs (bps)


Cumulatively, the company has only written off Rs42mn in the last six quarters. Given the company’s ability to resolve stressed exposures, we estimate that even if the Stage 3 assets increase from here and the company has to make provisions against it, the actual write-offs will be very low.


23

Real estate: Sector overview

Inventory levels have soared in the last decade

As per Liases Foras, while annual sales volumes in units have grown 1.3x over CY09-

18, existing unsold units have grown 3.3x over the same period. In value terms,

annual sales value has grown 1.6x but value of unsold stock has risen 4.7x. Simply

put, unsold inventory today stands at 41 months in volume terms and 45 months in

value terms across India’s top eight tier-I cities.

Table 3: City-wise sales volumes in units

Details CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18

Sales (in units) 217,253 214,743 210,109 228,472 211,646 222,149 224,869 237,185 256,248 278,989 Unsold Inventory (units)

283,060 378,577 438,416 499,949 584,734 674,888 854,668 953,977 918,773 943,680

Volume Wise Months Inventory

16 21 25 26 33 36 46 48 43 41

Value of Sold Stock (Rs bn)

1,315 1,253 1,186 1,380 1,432 1,600 1,784 1,814 1,967 2,058

Value of Unsold Stock (Rs bn)

1,643 2,235 2,866 3,789 4,851 5,894 7,329 8,253 7,791 7,772

Value Wise Months Inventory

15 21 29 33 41 44 49 55 48 45

Source: Liases Foras, I-Sec Research

~50% of the inventory lies in stuck/stalled projects

At first glance, the bloated inventory levels tend to convey a message that a steep

price correction is warranted to clear this inventory and developers should cut back on

launches and focus on completing and selling the on-going projects. However, a

closer look reveals a contrasting picture. As per a study done by Prop Equity,

~600msf of projects or ~470,000 units at a pan-India level are stuck or facing

significant construction delays. This accounts for ~50% of unsold inventory in

terms of units.

Table 4: Pan-India residential projects stuck/on hold

City

No. of Projects

Launched Area (msf)

Launched units

Present Sale Value

(Rs bn)

Launch Value

(Rs bn)

% Volume

Share

% Value Share

MMR 496 101 105,747 1,128 967 16.8 33.8

NCR 305 260 180,846 1,225 1,012 43.5 35.3

Bengaluru 222 57 38,242 265 239 9.5 8.4

Chennai 97 22 20,847 95 85 3.8 3.0

Hyderabad 51 23 13,710 78 71 3.9 2.5

Pune 148 24 22,517 141 132 4.0 4.6

Kolkata 65 18 15,552 62 55 3.0 1.9

Tier 2 Cities 303 94 68,094 335 301 15.6 10.5

Overall 1,687 599 465,555 3,328 2,862 100.0 100.0

Source: Prop Equity Research, I-Sec Research


24

Within this, the Mumbai Metropolitan Region (MMR) and National Capital Region

(NCR) account for 60% of volume and 69% of value of all stalled projects. The

markets of South India (Bengaluru/Chennai/Hyderabad) and Pune have relatively far

lower levels of such stuck projects.

Customer preference has shifted to ready projects

With ~50% of projects being stuck with no resolution in sight as many of these projects

have already sold units to customers, new home buyers are now gravitating towards

nearing completion/ready units across cities. Hence, we are of the view that levels

of “saleable inventory” by developers to customers is not all that gloomy and

actual inventory levels would be closer to 18-24 months if one were to exclude

these stalled projects.

As per various industry estimates, ready/nearing completion unsold inventory

accounts for 8-10% of the overall unsold inventory. Even before the introduction of the

Real Estate Regulator under RERA and GST implementation (12% additional GST in

under construction projects vs. no GST in ready projects), customers had already

begun gravitating towards ready inventory across cities. As per Liases Foras, across

India’s top eight tier-I cities, the percentage share of sales of ready properties has

risen from 11% in CY14 to 27% in CY18.

Table 5: Pan-India units available for sale (CY14-18)

Details CY14 CY15 CY16 CY17 CY18

Ready Inventory (units) 32,023 51,403 71,625 79,214 79,450 Under Construction Inventory

642,865 803,265 882,352 839,559 864,219

Total Unsold Inventory (units)

674,888 854,668 953,977 918,773 943,669

% share of Ready Inventory

4.7 6.0 7.5 8.6 8.4


Table 6: % contribution in sales from ready properties (CY14-18)

Details CY14 CY15 CY16 CY17 CY18

Ahmedabad 39% 39% 45% 54% 53% Bengaluru 7% 9% 16% 22% 20% Chennai 18% 48% 38% 44% 40% Hyderabad 13% 15% 25% 29% 28% Kolkata 10% 6% 13% 15% 17% MMR 11% 10% 18% 22% 26% NCR 2% 8% 11% 11% 16% Pune 8% 14% 18% 21% 27% Top 8 Cities 11% 16% 21% 23% 27%



25

Number of developers shrinks by 51% over CY11-18

As per Prop Equity, there has been a large developer consolidation across India’s top

nine cities with over 50% of total developers who existed in CY11, now leaving the

market till CY18. This consolidation is more pronounced in Gurugram, Noida (both part

of NCR) and Chennai where over 70% developers are virtually out of business.

Bengaluru, Hyderabad and Kolkata have also seen a reduction of over 60% in the

number of developers with active projects. At a pan-India level, overall number of

developers have shrunk by 51% to 1,745 in CY18 from 3,538 in CY11.

Table 7: Number of developers shrinks by 51% across India

City-Wise Number of Developers

CY11 CY18 % Increase/(Decline)

Mumbai 364 248 (31.9) Pune 658 531 (19.3) Thane 680 355 (47.8) Bengaluru 646 251 (61.1) Chennai 445 101 (77.3) Hyderabad 387 146 (62.3) Kolkata 235 83 (64.7) Gurugram 82 19 (76.8) Noida 41 11 (73.2) Overall 3,538 1,745 (50.67)

Source: Prop Equity Research, I-Sec Research

A combination of factors such as financial distress, lack of execution capability,

oversupply of inventory, GST implementation, demonetisation, excessive land

banking, lack of understanding of the demand supply dynamics, unjustified price

appreciation and lack of social and physical infrastructure in certain locations has led

to this consolidation speeding up.

The ongoing funding concerns in the residential space coupled with increased

consumer activism and awareness in a post RERA era, has led to a number of smaller

developers focusing on trying to complete their ongoing projects, if possible. We

believe over the medium term, the wheat will be separated from the chaff with larger,

organised developers becoming stronger and smaller mid-tier developers continuing to

partner larger developers to monetise their existing land parcels.

Affordable housing driving majority of sales

Post RERA/GST implementation in Q1FY18, developers have tweaked their product

offering to include more affordable and mid-income housing projects as that is where

the majority of demand lies. Further, the CLSS benefits coupled with lower effective

GST rate of 8% for affordable housing projects has helped to attract buyers.

This is reflected in the residential absorption over Q2FY18-Q3FY20 where ~56% of

sold units were priced less than Rs5mn across eight tier-I cities in India (as per Liases

Foras). We believe over the medium term, the wheat will be separated from the chaff

with larger, organised developers becoming stronger and smaller mid-tier developers

continuing to partner with larger developers to monetise their existing land parcels.


26

Chart 25: India residential absorption by ticket size of units

19% 19% 18% 20% 17% 16% 17% 18%30% 31%

36% 35% 35% 36% 39% 37% 37% 35%27% 27%

29% 28% 30% 29% 28% 30% 30% 29% 28% 28%

11% 12% 11% 10% 11% 12% 11% 12% 11% 10%6% 6% 6% 5% 5% 5% 5% 5% 4% 4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20

< Rs 2.5mn Rs 2.5-5mn Rs 5-10mn Rs 10-20mn Rs 20mn+


Chart 26: Q3FY20 residential absorption by ticket size across cities

31%

4% 11%2%

38%

17%26% 19% 18%

44%

28%

45%

17%

42%

26%

44%45%

35%

17%

51%

31%

46%

15%

28%

19% 30%

29%

6%13% 10%

26%

3%

20%

8% 4%12%

2%4% 4% 9% 1%

10% 3%1%

5%

0%10%20%30%40%50%60%70%80%90%

100%

Ahm

edabad

Bengalu

ru

Chenna

i

Hyd

era

bad

Kolk

ata

MM

R

NC

R

Pune

Overa

ll



Incremental supply also coming in affordable housing segment

Chart 27: Q3FY20 residential supply by ticket size across cities

37% 30% 27%38%

28%29% 31%

29%

24%26% 28%

25%

6% 11% 12%7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Q2F

Y19

Q1F

Y20

Q2F

Y20

Q3F

Y20




27

Pharma – strong presence in CDMO and critical care

The company generates ~37% of the total revenue from pharmaceutical segment. It

has witnessed a CAGR of 15.3% over FY11-FY19. Especially, during FY16-FY19

wherein the industry and its players faced several headwinds, globally, not only did the

company’s revenue grew a healthy 11.3% but its EBITDA also recorded a strong

growth of 23.5% with margin expanding 600bps to 22.9%. This strong performance is

a testament to its strategic position in the pharmaceutical space. The company is

looking to raise funds through issue of a minority stake sale of ~20% of the segment.

Chart 28: Historical revenue performance

19,060

23,390 27,150

30,080

34,670

38,930

43,220

47,860

-5,000

5,000

15,000

25,000

35,000

45,000

55,000

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

(Rs m

n)


The company is present in two broad pharmaceutical verticals – Global Pharma and India Consumer Products. Global Pharma contributes ~93% to the pharmaceutical segment.

Global Pharma

Global Pharma segment is further classified into:

Global Pharma Services (CDMO): The company provides end-to-end development

and manufacturing services starting from drug discovery all the way to

commercialisation of API and formulations. It specialises in manufacturing of high

potent APIs (HPAPIs) and anti-body drug conjugates (ADCs).

Global Pharma Products (critical care): The company manufactures a portfolio of

complex critical care products comprising inhalation & injectable anaesthesia, pain

management, intrathecal spasticity management, etc. These products have a

niche requirement with high entry barriers.

Global Pharma Services

The Contract Development Manufacturing Organisations (CDMO) industry has two

major advantages: High entry barriers with years of relationship leading to new orders

and a sticky client base with the involvement from early stage of development. This

industry is strongly linked to R&D funding. Over CY08-CY18, the global R&D

expenditure grew at 3.0% to US$179bn. It is expected to grow at 3.2% over CY19-


28

CY24 and reach US$213bn. Simultaneously, new molecule entities (NME) approvals

rose. ~85% of NMEs are manufactured as CDMOs.

Chart 29: Global R&D expenditure (08-24 with CAGR)

133 129 129 137 136 138 145 150

160 168

179 182 189 196 202 207 213

-

50

100

150

200

250

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019E

2020E

2021E

2022E

2023E

2024E

(US

$ b

n)

Source: Industry reports, I-Sec research

Chart 30: NME approvals (04-18)

28 29 25

31 35

26

35

44

35

51 56

27

55 62

-60.0

-40.0

-20.0

-

20.0

40.0

60.0

80.0

100.0

120.0

-

10

20

30

40

50

60

70

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

(%)

(nos)

NME approval % growth

Source: Industry reports, I-Sec research

The global healthcare contract research outsourcing market is not only rising with

increasing complex regulatory process but also due to the rise in research by small

biotech pharmaceutical companies. The global CDMO market is expected to grow 8%

over the next five to seven years and reach a size of US$70-100bn.

The company recently acquired Sterile Injectables and HPAPI facilities to become an

end-to-end provider of oncology therapies and high potent APIs. Strong historical track

record of supporting 34 commercial launches with a standing pipeline of 150

molecules across various developmental stages substantiates the argument in the

company’s favour.

Apart from long-standing relations with top global pharma companies, the company is

associating itself with smaller and newer biotech companies. This provides a strong

and long partnership as well as a significant value unlocking as these products clear

each stage of development. For the client, the company is a one-stop shop for end-to-


29

end services with a proven track record. The company has undergone 36 USFDA

inspections, 151 other regulatory inspections and 1,064 customer audits since FY12 to

prove its strong focus on quality and compliance.

Table 8: FDA inspection history

Year No of total inspections No of USFDA inspections Client inspection

FY12 13 5 60 FY13 10 2 71 FY14 14 4 116 FY15 17 7 115 FY16 26 5 140 FY17 25 5 157 FY18 27 3 167 FY19 44 2 163 9MFY20 22 3 108

Total 198 36 1,097


Considering its presence in niche categories of injectables, ADCs and HPAPIs with a

global reach across >100 countries with 13 manufacturing units and integrated

capacity for end-to-end services for >500 clients, the company has been steadily

adding customers to its clientele (50 in FY19 and 30 in H1FY20). New additions have

built a strong orderbook, which would help the company in outpacing the industry

growth in CDMO segment over the next three years.

Global Pharma Products

The company has a differentiated branded portfolio catering to hospital generics

comprising inhalation anaesthesia, injectables, pain management, intrathecal

spasticity and other anti-infective generic products. It is the third largest player globally

after Abbott and Baxter. These products are inherently used for critical care, which are

complex to manufacture. Since the company employs a B2B model with hospitals,

entry barriers into the business are very high.

The company has followed an inorganic approach since the inception to increase the

product basket and reach. Currently, it has 19 key products of which only one has

been developed in-house and several other generic APIs that contribute revenue to

the segment. Over the years, the company has leveraged direct sales force as well as

distributor channel to increase its reach to more than 100 countries. Considering the

high barriers in this business, resulting in low competition, the company is well placed

to maximize its market share and monetise value in a US$58bn market.

Table 9: Acquisition history

Year Transaction

2002 Acquired pharma business of ICI India Limited - Entry in Inhalation Anaesthetics: Halothane.

2005 Acquired Inhalation Anaesthetics business of Rhodia Organique, UK - Distribution network across 58 countries. Manufacturing technology for Halothane & soflurane.

2008 Acquisition of brand Haemaccel from Plasmaselect, Germany.

2009 Acquired Minrad Inc., US - Gave access to Sevoflurane & Desflurane. Acquired Rxelite Inc., US - Gave direct presence in the region Acquired Injectable Anaesthesia business in India.

2010-12 Production doubled at Bethleham; Registered Sevolfurane in EU countries.

2013-15 Presence in now over 100 countries; >50% market share in emerging markets; significantly increased Sevoflurane market share in US.

2016 Piramal expands its product portfolio; enters into an agreement to acquire Janssen's Injectable Anaesthesia and Pain Management products

2017 Acquires a portfolio of drugs for Spasticity and Pain Management from Mallinckrodt LLC.



30

Chart 31: Critical care product portfolio

Fluothane®Halothane USP

TorraneTM

Desflurane USP#

Acquired from Mallinckrodt LLC

in 2017

Acquired in Jan 2018

Acquired in Jun 2018

Acquired from Janssen Pharmaceutical

in 2016

Rapifen® Alfentanil

hydrochloride

Dipidolor®Piritramide

Hypnomidate®Etomidate

Glycopyrrolate** Controlled substances# In selectmarkets

Ceftriaxone

Oxacillin

** Developed in-house

Inhalation Anaesthesia

Injectable

Anaesthesia / Pain

Management

PlasmaVolumeExpander

Intrathecal Spasticity

Pain Mgmt

Injectable

for Myxedema

Coma

Capsule for type I

Gaucher & Niemann-

Pick disease

Selected Anti-

infectives

Other

Products

Sojourn®Sevoflurane USP

Sublimaze®Fentanyl citrate

Haemaccel#

Polygeline

Gablofen®Baclofen

Levothyroxine

SodiumYargesaMiglustat

Ampicillin-

SulbactamGeneric APIs, Vitamins and

Premixes,

Terrell®Isoflurane USP

Sufenta®Sufentanil citrate

MitigoTM

Morphine Sulfate

EstablishedProductsCefepime


The company launched seven products in H1FY20 (4 in Q1FY20 and 3 in Q2FY20) and is working on several products whose launch would aid its growth of double digits with integration synergies lifting margins.

The company’s CDMO business and its products segment are expected to grow at a healthy pace over the next three years leveraging its historical performance, integration synergies and organic development. Cumulatively, we expect the global pharma segment to grow at 12.2% over FY19-FY22 with steady margins.

Chart 32: Revenue performance of global pharma

27,650 32,060

35,170 39,760

44,520

50,085

56,095

62,827

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E

(Rs m

n)



31

Chart 33: EBITDA margin consistently improving

15.7 16.9

20.3 22.4 22.9

25.0 25.0 25.0

-

5.0

10.0

15.0

20.0

25.0

30.0

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000


(%)

(Rs m

n)

EBITDA % margin (RHS)


India consumer products

The India consumer products is an over the counter (OTC) business model across key

categories like skincare, gastro-intestinal care, women’s intimate range, child care,

pain management and oral and respiratory healthcare. The company had started its

OTC business in 2007 which was sold to Abbott India in 2010. Thereafter, the

company acquired key brands like I-pill, Caladryl, Equal to remain rooted in the

market. Currently, the company boasts established brands like Saridon, Lacto

Calamine, Supradyn, etc. as well as upcoming brands like Little’s in the child care

segment.

Table 10: Acquisitions in OTC business

Year Transaction

2007 Started OTC independently 2010 Domestic biz sold to Abbott India 2011 Acquired i-pill from Cipla 2013 Acquired Caladryl from Inova Pharma 2014 Exclusive distribution partnership with Merisant Inc for "Equal"

2015 Piramal Enterprises acquires the Baby Care brand – Little’s and five brands from Organon India Pvt. Ltd. (OIPL) and MSD BV for its Consumer Products Business.

2016 Piramal Enterprises enters an agreement to acquire four brands from Pfizer Limited for its Consumer Products Business


The company has developed a tremendous network across 1,500 towns in India with

presence in 2,80,000 outlets including 1,60,000 chemists and a field force of 2,000.

Expansion using e-commerce with partners like Amazon, Netmeds, 1mg, Nykaa,

Flipkart, Firstcry, etc. would allow its reach to expand even more at minimal costs.

Employing data analytics would create insights into decision making and maintain a

focused-growth approach. Subsequently, the company has increased expenditure

towards brand building activities for key products in selective markets.

The OTC market in India is valued at US$5bn after recovering from structural

headwinds in the form of demonetisation and implementation of GST. Both the

regulatory changes resulted in significant inventory correction leading to a decline in

primary sales. However, the industry and the company have recovered strongly from

these aberrations and the company is poised to grow at 20.4% over the next three


32

years leveraging its strength in network and distribution channel. We expect margins

to improve significantly with increased usage of digital platform.

Chart 34: Revenue growth in OTC business

2,430 2,610

3,760 3,460 3,340

4,409

5,070

5,831

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000


(Rs m

n)


Chart 35: EBITDA margin in improving trajectory

1.0 1.5

2.0

2.8 3.0 3.0

5.0

8.0

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

-

50

100

150

200

250

300

350

400

450

500


(%)

(Rs m

n)

EBITDA % margin (RHS)


The company is strategically placed to grow fast in individual segment of the

pharmaceutical segment. The non-compete agreement with Abbott has ended and the

company is looking to re-enter the domestic formulations leveraging the existing sales

force and distribution channel of its OTC business. Successful execution would be an

important growth driver as well as margin booster for the company. Overall, we expect

pharmaceutical segment to grow 12.8% over FY19-FY22.


33

Chart 36: Steady revenue growth in total pharma business

30,080 34,670

38,930 43,220

47,860

54,494

61,165

68,657

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000


(Rs m

n)


Healthcare insights and analytics

In May’12, the company acquired Decision Resource Group (DRG), a US-based

healthcare information analytics company for a consideration of US$650mn

(~Rs34bn). Over the years, it has evolved from being a provider of syndicated market

research into a diversified data and analytics business with a proprietary database

providing information services in life sciences, healthcare provider and payer

industries to world’s leading pharmaceutical, biotech and medical technological

companies.

The company’s growth in the segment has been inorganic with major acquisition of

Adaptive Software and Healthcare Business Insights. With these acquisitions, the

company entered the provider space (best practice research, training and services to

>1,400 hospitals in US) and payer space (leading solutions for health plans and

pharmacy benefit managers). Overall, this business segment is a merger of 13

discrete intelligence and data brands. Currently, the company has 17 offices across

six countries employing >275 specialised industry analysts and disease experts.

Recently, the company announced the sale of its healthcare insights and analytics

segment to Clarivate Analytics for a sale consideration (EV) of US$950mn of which

US$50mn would be received after twelve months. This transaction is expected to

complete by Feb’20. It has been valued at 5xFY19 sales which is positive in our view

as global peer companies trade ~4x EV/sales.


34

Risks to our investment thesis

Given the current macro environment and the financial health of the residential

real estate developers, we expect more slippages into stage-3. PEL’s forte lies in

its ability to achieve successful resolution in stressed exposures. Any inability to

achieve resolution in high/concentrated exposures could lead to big write-offs and

risks on the asset quality of its loanbook.

While Piramal has in the past demonstrated its ability to incubate new businesses

– in consumer finance lending it will have to compete with two peers who are

leaders in the consumer financing space. Consumer durable (CD) lending requires

the lender to enter into strategic partnerships with CD manufacturers and gaining

share from incumbents in this space will be a tough ask.

Housing finance will now target the self-employed customer segment at lower

ticket sizes of Rs1.5mn-Rs2.5mn. These are still untested waters for PEL.

Inability to exit investments in Shriram Capital since the holding company is not a

listed entity.

Slowdown in expenditure towards innovative R&D due to lack of funding in the

wake of pricing pressure on drugs in the global market.

Failure of products to move to next stage of development for the innovative

pipeline.

Regulatory hurdles with any lapse on compliance standards by the company could

delay projects and thus revenues.


35

Annexure 1: Consolidated financials in charts

Chart 37: FY19 consolidated revenue (Rs132bn) – percentage contribution of segments

Chart 38: 9MFY20 consolidated revenue (Rs109bn) - percentage contribution of segments

Financial Services

54%

Pharma36%

Healthcare Insight and Analytics

10%

Financial Services

54%

Pharma35%


11%


Chart 39: FY19 consolidated EBITDA (Rs31.9bn) – percentage contribution of segments

Chart 40: 9MFY20 consolidated EBITDA (Rs33bn) - percentage contribution of segments

Financial Services

77%

Pharma16%


7%

Financial Services

62%

Pharma29%


9%


Chart 41: Revenue for Financial Services Chart 42: Revenue for Pharma

3.0 3.97.3 9.4

17.4

33.5

49.8

70.6

78.9 81.1

92.8

0

10

20

30

40

50

60

70

80

90

100

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20E

FY

21E

FY

22E

((R

s b

n)

Revenue (Financial Services)

19.123.4

27.230.1

34.738.9

43.247.9

54.5

61.2

68.7

0

10

20

30

40

50

60

70

80

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

FY

19

FY

20E

FY

21E

FY

22E

((R

s b

n)

Revenue (Pharma)



36

Chart 43: Consolidated revenues of PEL

23.5

35.445.0

51.2

63.8

85.5

106.4

132.2

147.6142.3

161.5

0

20

40

60

80

100

120

140

160

180

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E

((R

s b

n)

Revenue (PEL)

Source: Company data, I-Sec research Note: PEL has sold its Healthcare Insights and Analytics business (HIA). FY21E and FY22E do not have revenue contribution from the HIA business.

Chart 44: Break-up of net-worth (Rs 267bn) as of Sep-2019

Financial Services, 144bn,

54%Shriram Investments & Others, 75bn,

28%

Pharma & DRG*, 48bn, 18%

Source: Company data, I-Sec research Note * includes equity from unallocated business

Chart 45: RoE will improve with leverage

3.4 3.2

8.5

1.9

4.1 4.0 4.2

6.9

9.0

24.7

5.5

10.58.6 9.4

0.0

5.0

10.0

15.0

20.0

25.0

30.0


(%)

RoAA (%) RoAE (%)



37

Annexure 2: Price chart and top public shareholders

Chart 46: Historical Price/book chart

0

500

1000

1500

2000

2500

3000

3500

4000

Fe

b-1

3

Fe

b-1

4

Fe

b-1

5

Feb-1

6

Feb-1

7

Fe

b-1

8

Fe

b-1

9

Fe

b-2

0

(Rs)

0.5x

1.0x

2.1x

1.5x


PEL is currently trading at 0.9x FY21E P/BV. We find these valuations attractive given

that PEL has delivered on its guidance to bring in additional equity into its financial

services business. Given its announced foray into consumer finance, the loanbook will

increasingly become more granular and diversified with increasing proportion of retail

– housing and consumer finance – in the loanbook mix.

Inability to achieve resolutions in high/concentrated exposures could lead to big write-

offs and risks on the asset quality of its loan-book.

Table 11: Top public shareholders in PEL – as per latest available data (18-Feb-2020)

Top shareholders

Caisse de dépôt et placement du Québec (CDPQ)

Life Insurance Corp of India

Standard Life Aberdeen PLC

East Bridge Capital

Indiahold Ltd

Vanguard Group Inc

BlackRock Inc

Dimensional Fund Advisors LP

Capital Group Cos Inc

Blackstone Asia Advisors LLC

Government Pension Investment Fund

Source: Bloomberg, I-Sec research


38

Chart 47: Timeline for Piramal Enterprises

2019• Sold ~10% stake in Shriram Transport for ~Rs23bn

• Raised (~Rs17.5bn) through preferential allotment of CCDs to CDPQ

2018

• Raised Rs20bn through Rights Issue

• Merged Piramal Capital and Piramal Finance with Piramal Housing

Finance; renamed as Piramal Capital and Housing Finance

• PEL sold the Imaging business (Loss of Rs4.5bn)

2017

• Acquired product portfolio from Mallinckrodt LLC

• Acquired product portfolio from Janssen Pharmaceuticals

• Entered retail financing with launch of Housing Finance business

• Launched Emerging Corporate Lending vertical

• Raised ~Rs49.96bn through QIP of CCDs

2015 • Acquired baby care brand Little's

• Acquired five brands in the gastrointestinal segment

2016 • Acquired 4 brands from Pfizer in May 2016

• Acquired Ash Stevens, a US based CDMO for High Potency APIs (HPAPIs)

2014

• Entered strategic alliance with CPPIB and APG

• Acquired ~20% stake in Shriram Capital and ~10% stake in Shriram City

• Sold stake in Vodafone for Rs89bn

• Integrated Real Estate PE (Indiareit) and lending arms

2013 • Acquired ~10% stake in Shriram Transport Finance

2012 • Entered Healthcare Insight & Analytics business by acquiring DRG

• Started Special Situations investment arm

2011

• Entered Financial Services by acquiring Indiareit

• Acquired stake in Vodafone India for Rs58.64bn

• Sold Domestic Formulations business to Abbott for US$3.8 Bn (9X sales

and 30X EBITDA valuation)

2020• Raised ~Rs36.5bn through a Rights issue

• Sold healthcare insights and analytics (DRG) business to Clarivate

Analytics for a sale consideration (EV) of US$950mn (5x FY19 sales)



39

Annexure 3: Financial summary

Table 12: Profit and loss statement (Consolidated)

(Rs mn, year ending Mar 31)

FY18 FY19 FY20E FY21E FY22E

Revenues 1,05,128 1,31,816 1,47,628 1,42,275 1,61,485 -Financial Services 49,816 70,634 78,879 81,109 92,828 -Pharma 43,220 47,860 54,494 61,165 68,657 -DRG 12,092 13,322 14,255 0 0 -Others 1,266 337 0 0 0

EBITDA (Pre-exceptional) 29,611 36,582 42,685 45,786 53,060 -Financial Services 19,933 24,507 26,611 31,509 36,887 -Pharma 8,001 9,809 12,654 14,277 16,173 -DRG 1,677 2,266 3,421 0 0

Depreciation 4,773 5,202 6,217 5,288 5,560 -Financial Services 37 76 91 110 132 -Pharma 3,757 3,929 4,679 5,179 5,429 -DRG 980 1,197 1,447 0 0

EBIT (Pre-exceptional) 24,838 31,380 36,469 40,498 47,500 -Financial Services 19,897 24,431 26,519 31,399 36,756 -Pharma 4,244 5,880 7,975 9,099 10,744 -DRG 697 1,069 1,974 0 0

Interest exp of Pharma and DRG 5,721 6,688 6,900 2,100 2,100 Unallocated Income/(expenses) 521 83 0 300 300

Core PBT (pre-exceptional) 19,638 24,775 29,569 38,698 45,700 Exceptional Items 0 -4,656 16,270 0 0 Reported PBT 19,638 20,119 45,839 38,698 45,700 Taxes -28,764 8,611 15,851 9,752 11,516 Profit after taxes (PAT) 48,402 11,507 29,987 28,946 34,184 Share of associates and JV (including MI) 2,801 3,194 3,561 3,790 4,100 PAT after share of associates and JV 51,203 14,701 33,548 32,736 38,284 Normalized PAT (excluding exceptional items and exceptional taxation) 15,511 19,358 25,678 32,736 38,284


Table 13: Balance sheet (Consolidated)



Equity share capital 361 369 478 478 478 Reserves & Surplus (including OCI) 2,65,263 2,72,161 3,68,584 3,93,679 4,23,845 Shareholders' equity 2,65,624 2,72,530 3,69,061 3,94,157 4,24,322 Minority Interest 120 90 90 90 90 Total equity 2,65,744 2,72,621 3,69,152 3,94,247 4,24,413 Borrowings 4,41,608 5,59,867 4,05,826 4,27,639 5,26,691 Other liabilities 20,652 23,773 20,451 24,785 30,523 Total Liabilities 7,28,004 8,56,261 7,95,429 8,46,671 9,81,627

Cash and cash equivalents 24,670 9,175 81,340 40,000 40,000 Loans 4,21,680 5,66,240 5,03,954 5,79,547 6,95,456 Investments 93,304 79,085 54,085 54,085 54,085 Goodwill 56,326 59,395 12,344 12,344 12,344 Fixed Assets 57,402 57,510 62,110 68,322 73,787 Deferred tax assets 42,444 40,685 27,706 27,706 27,706 Other assets 32,179 44,172 53,890 64,669 78,249 Total Assets 7,28,004 8,56,261 7,95,429 8,46,671 9,81,627



40

Table 14: Key ratios (Consolidated)

(Year ending Mar 31)


Growth ratios (%) Core PBT 48.7 26.2 19.3 30.9 18.1

PAT 347.3 -76.2 160.6 -3.5 18.1

EPS 291.6 -71.9 76.3 -2.4 16.9

Debt-to-equity (x) 1.7 2.1 1.1 1.1 1.2

Profitability ratios (%) EBITDA Margin - Pharma 18.5 20.5 23.2 23.3 23.6

Return ratios & capital management

RoAA (%) 8.5 1.9 4.1 4.0 4.2

RoAE (%) 24.7 5.5 10.5 8.6 9.4

Payout ratio (%) 8.8 38.0 19.9 23.3 21.2

Valuation ratios DPS (Rs) 25.0 28.0 28.0 32.0 34.0

EPS (Rs) 284.1 79.7 140.5 137.1 160.3

Price to Earnings 5.4 19.2 10.9 11.2 9.5

BVPS (Rs) 1,474 1,478 1,546 1,651 1,777

Price to Book 1.0 1.0 1.0 0.9 0.9

Dividend yield (%) 1.6 1.8 1.8 2.1 2.2


Table 15: Profit and loss statement (Financial Services)



Interest Income 48,212 69,331 77,054 78,554 89,250 Interest Expense 24,062 37,410 44,606 37,265 41,007 Net interest income 24,150 31,921 32,448 41,289 48,244 Non-interest and fee income 1,604 1,304 1,825 2,555 3,578 Total Income (Net of interest expenses) 25,754 33,225 34,273 43,845 51,821 Operating expenses 3,470 5,550 6,683 8,111 9,328 PPoP 22,284 27,675 27,590 35,733 42,493 Provisions & contingencies 2,387 3,244 1,070 4,334 5,738 Profit before tax (PBT) 19,897 24,431 26,519 31,399 36,756 Tax expenses 6,964 8,551 6,683 7,913 9,262 Tax rate (%) 35.0% 35.0% 25.2% 25.2% 25.2% Profit after tax (PAT) 12,933 15,880 19,837 23,487 27,493


Table 16: Balance sheet (Financial Services)



Shareholders’ equity 97,250 1,14,420 1,93,210 2,09,056 2,28,431 Borrowings 3,59,825 4,46,238 3,64,787 3,80,505 4,82,793 Other liabilities 0 27,205 13,603 9,522 6,665 Total Liabilities 4,52,196 5,87,863 5,71,600 5,99,083 7,17,890 Loan book 4,21,680 5,66,240 5,03,954 5,79,547 6,95,456 Other assets 30,516 21,623 67,646 19,536 22,434 Total Assets 4,52,196 5,87,863 5,71,600 5,99,083 7,17,890



41

Table 17: Key ratios (Financial Services)

(Year ending Mar 31)


Loan book (Rs mn) 4,21,680 5,66,240 5,03,954 5,79,547 6,95,456 Loan book growth (%) 69 34 -11 15 20

Growth (%)

Net interest income 56.5 32.2 1.6 27.2 16.8 Operating expenses 8.2 59.9 20.4 21.4 15.0 PPoP 55.1 24.2 -0.3 29.5 18.9 Provisions 54.0 35.9 -67.0 305.0 32.4 PBT 55.3 22.8 8.5 18.4 17.1 PAT 55.3 22.8 24.9 18.4 17.1

Yields, interest costs and spreads (%) Avg. yield on loans 14.4 14.0 14.4 14.5 14.0

Avg. cost of funds 8.1 9.3 11.0 10.0 9.5 Interest Spreads 6.2 4.8 3.4 4.5 4.5 NIM (on AUM) 7.2 6.5 6.1 7.6 7.6

Operating efficiencies Cost to income ratio (%) 13.5 16.7 19.5 18.5 18.0

Op.costs/avg AUM (%) 1.0 1.1 1.2 1.5 1.5

Capital Structure Debt-Equity ratio 3.7 3.9 1.9 1.8 2.1

Provisioning GNPA estimate (% of on-book AUM) 0.3 0.9 2.0 2.3 2.5

Coverage ratio [total provisions as % AUM] 1.8 1.9 2.1 2.3 2.6 Credit costs as % of average AUM 0.7 0.7 0.2 0.8 0.9

Return ratios & capital management RoAA (%) 3.6 3.1 3.4 4.0 4.2

RoAE (%) 19.9 15.0 12.9 11.7 12.6


Table 18: DuPont Analysis (Financial Services)

(%) FY18 FY19 FY20E FY21E FY22E

Interest earned 13.5 13.3 13.3 13.4 13.6 Interest expended 6.7 7.2 7.7 6.4 6.2 Net Interest Income 6.7 6.1 5.6 7.1 7.3 Non-Interest Income 0.4 0.3 0.3 0.4 0.5 Total Income 7.2 6.4 5.9 7.5 7.9 Total operating expenses 1.0 1.1 1.2 1.4 1.4 PPoP 6.2 5.3 4.8 6.1 6.5 Credit cost 0.7 0.6 0.2 0.7 0.9 Profit before tax 5.6 4.7 4.6 5.4 5.6 Tax 1.9 1.6 1.2 1.4 1.4 RoA 3.6 3.1 3.4 4.0 4.2 Effective leverage (AA/ AE) 5.5 4.9 3.8 2.9 3.0 RoE 19.9 15.0 12.9 11.7 12.6



42

Annexure 4: Index of Tables and Charts

Tables

Table 1: SOTP valuation ....................................................................................................... 3 Table 2: Change in strategy underway within housing finance .......................................... 11 Table 3: City-wise sales volumes in units ........................................................................... 23 Table 4: Pan-India residential projects stuck/on hold ......................................................... 23 Table 5: Pan-India units available for sale (CY14-18) ........................................................ 24 Table 6: % contribution in sales from ready properties (CY14-18) ..................................... 24 Table 7: Number of developers shrinks by 51% across India ............................................ 25 Table 8: FDA inspection history .......................................................................................... 29 Table 9: Acquisition history ................................................................................................. 29 Table 10: Acquisitions in OTC business ............................................................................. 31 Table 11: Top public shareholders in PEL – as per latest available data (18-Feb-2020)... 37 Table 12: Profit and loss statement (Consolidated) ............................................................ 39 Table 13: Balance sheet (Consolidated) ............................................................................. 39 Table 14: Key ratios (Consolidated) ................................................................................... 40 Table 15: Profit and loss statement (Financial Services) ................................................... 40 Table 16: Balance sheet (Financial Services) .................................................................... 40 Table 17: Key ratios (Financial Services) ........................................................................... 41 Table 18: DuPont Analysis (Financial Services) ................................................................. 41

Charts

Chart 1: Decent sale of units in projects where PEL has exposure… .................................. 5 Chart 2: …has led to strong repayments/pre-payments in the RE wholesale portfolio ........ 5 Chart 3: FY19 loanbook (Rs566.2bn) with top-10 developers constituting 31% of the total

lending exposure ............................................................................................................. 6 Chart 4: Only one exposure is above the 15% net-worth threshold and we expect there

would be none by end-FY20 ........................................................................................... 6 Chart 5: Asset-monitoring forms the core of wholesale RE lending business ...................... 8 Chart 6: Preventive actions (case-specific) initiated when the project is stressed ............... 8 Chart 7: PEL’s underwriting moats ....................................................................................... 9 Chart 8: NBFC financing of consumer durables (CD) has seen a steady increase… ........ 13 Chart 9: …as the overall CD financing market has grown with increasing finance

penetration .................................................................................................................... 13 Chart 10: CD market itself is expected to grow at a CAGR of ~17% over FY16-FY21P ... 13 Chart 11: Smartphones form ~66% of the total CD financing............................................. 13 Chart 12: NBFCs still have ~60% share in CD financing market ....................................... 14 Chart 13: Commercial nuances of consumer durable financing ......................................... 14 Chart 14: Physical stores – single shop owners and large format retailers- contribute ~70%

to the CD financing market ............................................................................................ 15 Chart 15: Still a big head-room for finance penetration to improve across channels ......... 15 Chart 16: Summary of financial services business of PEL ................................................. 16 Chart 17: Split of the loanbook as of March-2019 .............................................................. 16 Chart 18: Chronology of investments (exits) in (from) Shriram group ................................ 18 Chart 19: Evolution of loan book in FS ............................................................................... 20 Chart 20: Segmental split of loanbook (Rs514.3bn) as of Dec-2019 ................................. 20 Chart 21: Expect spreads to improve led by lower incremental cost of borrowing ............. 20 Chart 22: Cost ratios expected to remain elevated primarily because of investments in

analytics/technology/distribution ................................................................................... 21 Chart 23: Stage 3 assets could marginally increase from current levels led by slippages in

the wholesale RE portfolio ............................................................................................ 22 Chart 24: Estimate higher credit costs towards provision of exposures which could

potentially slip into Stage 3 but write-offs will be minimal ............................................. 22 Chart 25: India residential absorption by ticket size of units ............................................... 26


43

Chart 26: Q3FY20 residential absorption by ticket size across cities ................................. 26 Chart 27: Q3FY20 residential supply by ticket size across cities ....................................... 26 Chart 28: Historical revenue performance .......................................................................... 27 Chart 29: Global R&D expenditure (08-24 with CAGR) ...................................................... 28 Chart 30: NME approvals (04-18) ....................................................................................... 28 Chart 31: Critical care product portfolio .............................................................................. 30 Chart 32: Revenue performance of global pharma ............................................................ 30 Chart 33: EBITDA margin consistently improving............................................................... 31 Chart 34: Revenue growth in OTC business ...................................................................... 32 Chart 35: EBITDA margin in improving trajectory ............................................................... 32 Chart 36: Steady revenue growth in total pharma business ............................................... 33 Chart 37: FY19 consolidated revenue (Rs132bn) – percentage contribution of segments 35 Chart 38: 9MFY20 consolidated revenue (Rs109bn) - percentage contribution of segments

...................................................................................................................................... 35 Chart 39: FY19 consolidated EBITDA (Rs31.9bn) – percentage contribution of segments35 Chart 40: 9MFY20 consolidated EBITDA (Rs33bn) - percentage contribution of segments

...................................................................................................................................... 35 Chart 41: Revenue for Financial Services .......................................................................... 35 Chart 42: Revenue for Pharma ........................................................................................... 35 Chart 43: Consolidated revenues of PEL ........................................................................... 36 Chart 44: Break-up of net-worth (Rs 267bn) as of Sep-2019 ............................................. 36 Chart 45: RoE will improve with leverage ........................................................................... 36 Chart 46: Historical Price/book chart .................................................................................. 37 Chart 47: Timeline for Piramal Enterprises ......................................................................... 38


44

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