Buy This NBFC Stock, Share May Rise 40%: Emkay Global

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Advent of a major player in retail financing

Piramal Enterprises (PIEL), following the spin-off of its pharmaceuticals business, is an NBFC with a presence in retail and wholesale finance and assets under management (AUM) of Rs645.9bn. Building on its acquisition of Dewan Housing Finance (DHFL) and capitalized by the capital injection of approximately Rs 185 billion, from equity sales and rights issue, we expect the loan portfolio to of PIEL will almost double to reach 1.21 billion rupees by FY27E, at a CAGR of 15%. Supported by an experienced management team, we expect the retail portfolio to post a CAGR of 30% in FY22-27E, while the wholesale portfolio is expected to remain stable. As a result, retail assets are expected to constitute ~67% of the portfolio in FY27E, up from 37% currently.

Outlook and stock returns

Outlook and stock returns

The current market price of the share is Rs 972.70 each. Its 52-week low is Rs 937.05 each and the 52-week high is Rs 2,014.95 each, respectively.

The stock has returned negative 1.65% in the last week, 48.84% in the last month and 39.97% in the last 3 months. The stock over the past year has fallen 63.24% and 47.53% over the past 3 years. It has fallen by 64.71% over the past 5 years.

Acquisition of DHFL - A leap forward in the big leagues

Acquisition of DHFL – A leap forward in the big leagues

Analysis of the acquisition shows that it is NPV positive for PIEL. It propelled PIEL to the rank of leading HFC with retail assets of Rs 222.7 billion – a feat achieved in the past by other HFCs of similar size over a period of over 7 years. Along with the retail management team under Jairam Sridharan (exCFO, Axis Bank), PIEL has hired approximately 2,000 additional employees, through the first quarter of FY23, to augment the 3,000 employee base of DHFL. With 100% of ex-DHFL branches online, we expect PIEL’s retail portfolio to quadruple from around Rs 215 billion in FY22 to around Rs 810 billion by FY 27th – a feat last seen on the DHFL Network in FY18. While secured products like home loans and LAPs are expected to be the mainstay of the retail portfolio, unsecured loans at 20% of the portfolio should help deliver a 2.5% ROA by FY26E-27E.

POCI collections should cushion the impact of higher credit costs on the wholesale portfolio

We expect provisions on the former wholesale book to increase from around 8.3% in FY22 to around 18.3% by FY25E. Credit costs, net of POCI recoveries, are expected to be 116 basis points in FY23-25E (FY22: 133 basis points).

Broker Comments

Broker Comments

Emkay Global said: “Based on our assessment, the positive P&L flow from the Purchased or Originated Credit Impaired (POCI) book, representing the DHL Stage 2 and 3 retail loans, coupled with operating profit growth of 31 % for the loan portfolio in FY22-25E, should minimize the impact of rising credit costs on the firm’s former wholesale portfolio We expect earnings to accrue to 43 % in FY22-25E with POCI book flows expected to contribute approximately 25% to earnings, RoA/RoE of consolidated lending activity is therefore expected to increase from 1.2%/4.2% in FY22 at 2.5%/14.1% by FY27E.”

Valuation and risks

Valuation and risks

The brokerage said: “We are initiating a hedge with a Buy rating and a target price of Rs 1,360 on September 23, based on the SOTP methodology, valuing: i) the financial services sector using the Excess method Return on Equity (ERE) for a per share value of Rs 845, implying 1.03x of Sep24E BVPS; ii) Investments in Shriram Finance based on our target price for Shriram Transport and Shriram City Union Finance, after remittance of holdco, at Rs 179 per share; iii) Investments in AIF and Insurance at book value of allocated equity of Rs58 and Rs40 per share, respectively; and iv) Unallocated net worth at Rs237 per share.”

Key risk

Key risk

Merger integration issues due to mismatch of corporate culture and technology.

Disclaimer

Disclaimer

The stock was selected in Emkay Global’s brokerage report. Greynium Information Technologies, the author and the respective brokerage are not responsible for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.

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