*Piramal Enterprises – Analyst Meet Update*
_Leveraging best in class Real Estate financing capabilities to scale-up Corporate and Housing segments_
(Nirmal Bang Retail Research)
*What differentiates PEL from others?*
1) PEL provides a complete suite of products that no other financier does - right from private equity for buying land, Mezzanaine lending (pre-construction phase), construction finance, lease rental discounting (for commercial projects) and housing finance.
2) PEL undertakes an in-depth industry wise approach towards lending by meeting various promoters of that industry and understanding the pain points. Due to its background as a RE developer, it targeted the real estate industry initially. PEL has used the same approach to make inroads into Corporate loans in industries like roads, renewable, logistics, auto ancillary, hospitality and others.
3) Instead of addressing issues that the developers come forward with, PEL plays the role of a partner, a strategic advisor on the developers’ overall plans, provides innovative and flexible solutions and structures the deals in such a way that optimizes the developers cash flows and in turn secures itself from not only the cash flows of the concerned project but also from cash flows and collateral of other projects.
4) Even in Corporate Finance, PEL is not chasing the interest rate game and is focused only on deals where it can add value to the borrower which a normal bank/NBFC would be unable to, due to lack of in-depth domain knowledge, flexibility in approach and innovative products.
5) PEL has built its proprietary risk management systems and early warning signals, controls and processes which are much more granular than competitors. The loan sanctioning process is also stringent and involves multiple independent levels of approvals and checks involved.
6) PEL has a separate monitoring desk unlike other banks and NBFCs where the monitoring activity is handled by the risk teams. Also, monitoring by most banks/NBFCs is done on a six monthly basis, whereas PEL does it on a monthly basis. This team of 18 people monitors the progress of the each project and matches them with their budgeted and actual cash flows.
*Other highlights*
- From just 3 products in 2014, PEL has expanded to 22 products in 4 years. Further, PEL will also enter into Retail financing over the next 3-5 years.
- PEL expects to become a top 10 player in housing loans by Sep 2019 from a loan book of just Rs. 1,604 Cr today.
- Corporate Finance mix will become larger than RE mix in the long term owing to a larger opportunity size across various industries.
- Strong growth from Corporate Finance and Housing Loans would compensate for the slowing growth in RE and hence overall loan growth should remain robust.
- 45% of lending is on floating rates which is matched by 43% of borrowings on floating rate.
- Inspite of having a good track record in M&As, PEL believes it is not suited for financial services business as culture is very important in this business which is different in different companies. Also it is tough to assess the asset quality.
- Real Estate industry will consolidate and 90% of the developers will cease to exist in a few years due to RERA.
- Sold Nicholas Piramal pharma business to Abbot at 9.5x sales and at 30x EV/EBITDA – the highest valuation ever for any pharma M&A globally. PEL is still at good terms with Abbot as the deal was clean unlike many other companies where all facts are not disclosed.
- Share is trading at P/E of 23.1x FY19E EPS. Our rough cut estimates suggests investors are currently valuing the NBFC business at 2.0x FY20E. With diversification away from RE lending into Corporate loans and Housing loans and best in class metrics among wholesale lenders (loan CAGR of 40%+ over FY18-20, ROE of 20%+, GNPA of 0.3%), PEL’s NBFC business could re-rate to 3.0x FY20E over the course of next year, which would yield a TP of Rs. 4040.