Can Piramal Enterprises grow as per its guidance?
Companies passing through ‘special situations’—capacity additions, acquisitions or demergers, amongst others, often attract investors’ attention. And if the managements are hopeful of value-unlocking or value creation, markets get even more excited about such ‘news-bound’ companies.
Piramal Enterprises is one such company. And interestingly, it’s been in the news for multiple reasons for the last few months.
In September 2021, Piramal Enterprises successfully acquired bankrupt DHFL for Rs 34, 250 crore, after fighting a long-drawn battle with other bidders. And in October 2021, the board of Piramal Enterprises approved the scheme of listing its two businesses—pharma and NBFC, as independent companies. Q3FY23 has been the indicative deadline to achieve the completion.
While DHFL’s acquisition is said to be value accretive for the NBFC business in the long run, hiving off the pharma business is expected to unlock value.
How excited is the street about Piramal Enterprises?
To be fair, the overall market conditions became patchy in October last year. The stock got hammered in the FPI-led market sell-off that followed. And now that markets are witnessing a strong recovery, Piramal Enterprises has bounced back sharply.
Was that a classic case of stock prices going down temporarily due to bad market conditions without many changes in the fundamentals of the company? Or had markets already factored in all the potential positives?
Well, taking any guess on stock prices is often a futile exercise. Hence, let’s focus on fundamentals and run a quick check on the performance of the company’s business.
As per 9MFY22 results, financial Services business had a revenue contribution of 54% while the rest was pharmaceuticals revenue.
DHFL Acquisition—a shot in the arm
DHFL acquisition is expected to give Piramal’s NBFC business a massive upside. Numbers speak for themselves.
In December 2020, Piramal had a retail loan book of Rs 5,310 crore. With the acquisition of DHFL and owing to growth of its own book, now the company’s consolidated retail loans have grown 4X. As the company claims, to achieve such growth through an organic route, it usually takes 7-10 years for NBFCs.
Before the acquisition of DHFL, Piramal had a presence across just 10 states. It had only 14 branches. With the acquisition of DHFL, now its branch network has touched upwards of 300.
From a customer base of ~ 23,000, the company has got access to 10 lakh customers of DHFL spread across 24 states and 236 cities.
Moreover, Piramal Enterprises is planning to add 100 branches in the next 1 year to grow its financing business. It not only retained about ~3,000 employees of DHFL but added another 2,000 employees over the past few months.
According to company disclosures, 60% of the new manpower is the field staff and is sourced from the staffing company of the group called Piramal Sales and Services Limited. The simple interpretation of this is the cost structure will be a bit more flexible here.
Two-engine growth strategy for the NBFC business
The company aspires to grow the new customer base for its retail lending business through small-ticket low-duration loans such as personal loans and merchant BNPL (Buy-Now-Pay-Later), to name a few.
And it aims to expand its AUM (Asset Under Management) through cross-selling other loan products such as affordable housing loans and MSME loans, amongst others.
Has it become a time-tested model now after the roaring success of Bajaj-group NBFCs?
The company is keen on fintech tie-ups for a large-scale customer acquisition at affordable cost.
As on December 31, 2021, the company had a loan book of Rs ~60,640 crore. It is aiming to increase the weightage of the retail book from the existing 36% to 2/3rd (about 67%) over the medium to long term.
Before the acquisition of DHFL, the company was disbursing retail loans of about Rs 500 crore a quarter. It has set a target of growing it 5 to 7 times over the next 4-5 quarters. In Q3FY22, the disbursements amounted to Rs 739 crore.
The company is keen to scale up its wholesale lending business—which many would consider risky.
Speaking about the wholesale book, it wants to curtail the real estate exposure to 50% and have the remaining 50% of the wholesale exposure to non-real estate sectors. The company is confident of generating a Return on Asset (RoA) in the range of 2.5% to 3% yields.
And how is the pharma business placed?
As far as the pharma business of Piramal Enterprises goes, Contract Development and Manufacturing Organization (CDMO) accounts for 56% of the pharma revenue. Complex Hospital Generics (CHG) contribute 32% while consumer healthcare business-India makes up nearly 12%.
Within the CDMO vertical, nearly 64% of the revenue comes from commercial CMO and generic API which is sticky in nature. Regulated markets contribute 76% of the CDMO revenue.
Piramal Enterprises has recently entered the biologics business—a sector with high-growth potential—by acquiring a 28% stake in Yapan Bio, a CDMO having expertise in biologics and vaccines. Piramal has undertaken a capex of USD 130 million to cater to higher demand in future.
In the CHG segment, the company caters to product lines such as inhalation anesthesia, injectable anesthesia, pain management and intrathecal spasticity. These categories have limited competition and have high entry barriers. The company has a portfolio of 40 products in this category and also has a strong product pipeline of 30 products, which are at various stages of pre-launch cycle.
Speaking about its India focused consumer healthcare business, well-known brands such as Lacto Calamine, Littles, Tetmosol, Saridon and Supradyn, amongst others, roughly make up 2/3rd of the revenue.
E-commerce contributes about 14% of the consumer healthcare revenue. The company also reaches out directly to customers through its own website https://wellify.in/
The focus of the pharma business going forward will be on:
- Acquiring niche manufacturing capabilities to grow CDMO revenue
- Launching new complex products in CHG
- Growing the consumer healthcare-India business organically as well as inorganically
The company has guided for 15% revenue growth in its pharma business and expects EBITDA margins to remain strong in the range of 25%-28% over the next 3-5 years. If the company achieves these margins, these would be the best margins achieved in the last 10-12 years.
The financial services business of Piramal Enterprises is expected to become retail-dominated and technology-driven. This has been the flavour of the season with almost all big players echoing this tune. Therefore, high and profitable growth at minimum damage (Non-Performing-Assets) would be crucial to get better valuations.
Any breakthrough success with new launches will offer tailwinds to the company’s pharma business.
On the whole, the growth plan of Piramal Enterprises appears promising on paper. Execution remains the key. Delivery of performance as per the company’s guidance might reward long term shareholders.
Do you think the company will be able to walk the talk? Do let us know by leaving a reply in the comments section. And if you found this piece helpful, do share it with your friends and acquaintances.
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