After a sharp 63 percent fall in 2022 year-to-date (YTD), recovery is likely on the cards for Piramal Enterprises (PIEL). Domestic brokerage house Motilal Oswal sees a potential upside of nearly 35 percent for the stock in the next 12 months.
The brokerage has a 'buy' call on the stock with a target price of ₹1,320.
The firm has been on a downward trend for the most part of the current year. It tanked 40 percent in August and is down 8 percent in September so far. In the 9 months of the current year, the stock has given positive returns in just two of them - March and July.
According to the brokerage, over the past two years, Piramal has: a) strengthened its Balance Sheet by running down its Wholesale loan book; b) ensured its Wholesale book is granular, with no exposure over 5 percent and only 10 exposures over 2 percent of Wholesale AUM; c) improved texture of its borrowings, driving the lower cost of borrowings; and d) fortified itself against contingencies.
Now, post the demerger of its pharma business, PIEL is now an NBFC with a simpler structure, noted the brokerage.
PIEL had fixed September 1, 2022, as the record date for the demerger of Piramal Pharma (PPL). Price discovery for the Financial Services business has already occurred, and PIEL now trades as a diversified NBFC registered with the RBI. Also, last year, the company did a merger with DHFL which was one of the largest home loan companies in the country.
The brokerage further pointed out that PIEL's integration of DHFL has progressed well.
"The Retail lending business continues to gain traction, with an improvement in the disbursement run-rate. Multiple partnerships with FinTechs and Consumer-Techs have aided the momentum in the Embedded finance product segment," added MOSL.
The brokerage further noted that Asset quality (with slippages in the Wholesale book) has deteriorated over the last two quarters, with PIEL making provisions in corresponding accounts.
It expects Piramal's Wholesale loan book to continue to moderate as the company looks to aggressively create provisions on stressed exposures, and then monetize them. Within Retail, it sees a disbursement/AUM CAGR of 90 percent/30 percent over FY22-25E. Consolidation in the Wholesale book and strong growth in the Retail book will result in the proportion of Retail loans increasing to 55 percent of the loan mix by FY25E.
It further highlighted that PIEL is relatively better positioned to navigate the rising interest rate regime as a) 60 percent of its assets are at a floating rate, and b) 80 percent of its liabilities are at a fixed rate. This includes debentures of ₹19,500 crore, which were raised for the DHFL acquisition at 6.75 percent per annum.
However, it cautioned that PIEL will now have to scale up DHFL’s Mortgage franchise and leverage the platform to cross-sell other Retail products to its customer pool. It will be prudent to take a deep dive into the Wholesale loan book, recognize any stressed loans, and front-load the required provisioning, said the brokerage. It expects a loan book CAGR of 12 percent over FY22-25, incorporating consolidation in the Wholesale book over the next one year. MOSL also estimates a PAT CAGR of 37 percent over FY22-25, resulting in an FY25 RoA/RoE of 2.2 percent/10 percent.
In the June quarter, the firm reported an 8.95 percent decline in consolidated net profit to ₹485.98 crore impacted by higher expenses. The company had posted a consolidated net profit of ₹533.79 crore in the same period last fiscal. Its revenue from operations in the first quarter stood at ₹3,548.37 crore compared to ₹2,908.68 crore in the year-ago period.
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