Buy This NBFC Stock, Share Can Surge 40%: Emkay Global

Renowned brokerage firm Emkay Global has given a "buy" call to Piramal Enterprises Ltd. for a target price of Rs 1,360 apiece. Piramal Enterprises is a Non-Banking Financial Company (NBFC) having a market cap of Rs 23,162.31 crore. Considering the stock's current market price and the brokerage's estimated target price, the stock could surge up to 40%.

Advent of a prominent retail-financing play

Piramal Enterprises (PIEL), post the de-merger of its pharmaceutical business, is a NBFC with presence across both retail and wholesale financing and assets under management (AUM) of Rs645.9bn. Building on its acquisition of Dewan Housing Finance (DHFL) and capitalized by the infusion of capital of ~Rs185bn, from stake sales and the rights issue, we forecast PIEL's loan book to almost double to Rs1.21Tn by FY27E, at a CAGR of 15%. Backed by an experienced leadership team, we forecast the retail portfolio to clock CAGR of 30% over FY22-27E, while the wholesale portfolio is expected to remain flattish. Consequently, the retail assets are expected to constitute ~67% of the portfolio in FY27E, up from the current level of 37%.

Stock Outlook & Returns

The current market price of the stock is Rs 972.70 apiece. Its 52 week low level is Rs 937.05 apiece and the 52 week high level is Rs 2,014.95 apiece, respectively.

The stock gave 1.65% negative return in the past 1 week, 48.84% in the past 1 month and 39.97% in the past 3 months. Stock over the past 1 year has fallen 63.24% and 47.53% in the past 3 years. It has fallen 64.71% in the past 5 years.

DHFL acquisition – Leap-frogging into the big league

Analysis of the acquisition shows it to be NPV positive for PIEL. It has catapulted PIEL into a leading HFC with retail assets of Rs222.7bn - a feat accomplished in the past by other similar-size HFCs over a period of more than 7 years. With the retail leadership team under Jairam Sridharan (exCFO, Axis Bank), PIEL has hired ~2,000 additional employees, till Q1FY23, to augment the 3,000 strong employee-base of DHFL. With 100% of the erstwhile DHFL branches online, we forecast the retail portfolio of PIEL to quadruple, from ~Rs215bn in FY22 to ~Rs810bn by FY27E - a feat last seen on the DHFL network in FY18. While secured products like home loans and LAP are expected to be the mainstay of the retail portfolio, unsecured loans at 20% of the portfolio should help deliver 2.5% RoA by FY26E-27E.

POCI recoveries should cushion the impact of higher credit costs on the wholesale book

We forecast provisions on the legacy wholesale book to increase, from ~8.3% in FY22 to ~18.3% by FY25E. Credit costs, net of POCI recoveries, are forecasted to be 116bps over FY23-25E (FY22: 133bps).

Brokerage's comments

Emkay Global said, "In our assessment, the positive P&L flow-through from the Purchased or Originated Credit Impaired (POCI) book, representing DHFL's stages 2 & 3 retail loans, coupled with operating profit growth of 31% for the lending portfolio over FY22-25E, should minimize the impact of higher credit costs on the company's legacy wholesale portfolio. We forecast earnings to compound at 43% over FY22-25E, with the POCI book flow-through forecasted to contribute ~25% to earnings. RoA/RoE of the consolidated lending business are thus estimated to increase, from 1.2%/4.2% in FY22 to 2.5%/14.1% by FY27E."

Valuation and risks

The brokerage said, "We initiate coverage with a BUY rating and Sep-23 Target Price of Rs 1,360, based on SOTP methodology, valuing: i) the financial services business using the Excess Return on Equity (ERE) method 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, post holdco discount, at Rs179 per share; iii) Investments in the AIF and Insurance at allocated equity book value of Rs58 and Rs40 per share, respectively; and iv) the unallocated networth at Rs237 per share."

Key risk

Integration issues from the merger due to mismatch of corporate culture and technology.

Disclaimer

The stock has been picked from the brokerage report of Emkay Global. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable 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.