Piramal Group : Overview

A brief about Ajay Piramal, chairman of Piramal group

The quality of management and level of corporate governance Mr. Ajay Piramal brings on board is unmatched and one of the prominent example in leading a company. From exiting textile business and entering pharmaceuticals, selling pharma division (at 9xP/S) and rewarding shareholders, Ajay Piramal has compounded wealth at 26% CAGR over last 33 years.

“Having a “web of trust” is our philosophy. I am comfortable with it. We don’t have a single legal case. Why? Why did we not go into patent challenges? Because you can’t have a relationship where you keep fighting.”

“I don’t take much cognizance of the stock market which focuses on the short term. I will do what’s right for the business and the shareholders. Frankly, I don’t owe my job to an analyst. So, therefore, I can afford to take a long term view.”

They think in terms of not years, but decades. They think in terms of not maximizing near term reported earnings, but maximizing eventual net worth.

To know more you can check out

https://fundooprofessor.wordpress.com/2011/03/26/the-grand-strategy-of-ajay-piramal/

Timeline:

PEL now enters another phase - probably the most awaited demerger of pharma industry.

Post demerger structure :

 It not unlocks the value in the company but also makes it much easier to understand. The Pharma business will get vertically demerged from PEL and get consolidated under Piramal Pharma Limited (PPL). PPL will become one of the largest pharma companies listed on the NSE and BSE, post the demerger. In Financial Services, PHL Fininvest Limited, the NBFC which was a 100% subsidiary of PEL will get amalgamated into PEL to create a diversified NBFC, which will remain listed on NSE and BSE. Piramal Capital and Housing Finance, the HFC, post the DHFL acquisition will remain a wholly-owned subsidiary of PEL.  

 Revenue breakup

Piramal Pharma : Multiple growth engine approach

Advantages by demerger

1.      Strengthening of Balance Sheet leading to robust equity inflow

2.      Deleveraged company i.e. - 0.9x D/E

3.      Distinguished and Niche hiring

4.      Better inorganic opportunities and realignment of focus

5.      Organic buildup of lending business

Impact of the DHFL acquisition: (a) Growth: The impact of the DHFL acquisition can be seen firstly in growth. Our total AUM has increased by 42% quarter-on-quarter to INR 67,000 crores and our retail loan book has increased by 4.3 times to ~INR 22,200 crores. (b) Diversification: We have now got diversification and the share of our retail loan book has increased to 33% from 12% which was at the end of March. (c) Scale and Granularity: Besides that, we have got significant increase in scale and granularity and have created a platform with a pan-India presence, with 301 branches across 24 States and Union Territories. We have access to our customer pool of one million and the average ticket size of the combined retail book is INR 16 lakhs, making the book more diversified and granular.

Valuation

The DHFL's loan book has witnessed a significant mark down by the administrator prior to the acquisition. Over the last two years, the book had already been marked down from INR 88,000 crores. Prior to the acquisition, the gross loan book excluding the fraudulent assets was INR 44,000 crores. We have paid a net consideration of INR 20,000 crores for the assets of DHFL. This valuation serves as an adequate buffer to mitigate any unforeseen asset quality risks.

In line with philosophy of chairman –“  never look for a perfect asset. If you are going to acquire a perfect asset then the whole world is going to bid for it and its a very easy calculation to understand value and then you have to keep outbidding the next bidder. So there has to be some think. That asymmetry which you can recognize that is there today — an inefficiency perhaps, or something wrong which you can correct — that is where the value is created.”

Post the DHFL merger, the leverage of the Financial Services business has increased from 1.6x as of June-2021 to 2.7 as of September-2021. With growth in the retail loan book, the leverage could increase to 3.5x in the near-to-medium term.

Management on other segments :

“Our Pharma business delivered a robust revenue growth during the first half of this year at 20%, delivering revenues of INR 2,983 crores, the Pharma business contributed to 50% of PEL's overall revenue. The EBITDA margin was lower at 13% in this half. We expect a better performance in the second half and which is expected to offset the lower margins in the first half.”

With diversified manufacturing facilities comes lower EBITDA margins but the certainty of revenue is much better compared to domestic business.

CDMO’s lumpiness-

“There is increase in the number of phase 3 molecules which obviously increases the probability of these going commercial, so of course there is a probability associated with it because it is in phase 3, but yes, that definitely will provide a boost to the CDMO business in terms of greater stability of revenues coming from the commercial.”

The CDMO business historically if you see has always been lumpy, roughly we have about 45% of our business coming in the first half and 55% of the business coming in the second half of the year, but more specifically if we were to look at the EBITDA then you have 35% of the EBITDA coming in the first half and 65% coming in the second half, so this year we expect it not to be different, it will be similar lines, a little bit more pronounced in terms of EBITDA towards H2 because we have had slightly adverse mix when it came to H1, so yes, we would see growth coming back, we delivered 20% growth overall for the pharma in H1 and the overall pharma growth for H2 would be on similar lines, though in terms of margin, we may see some modest decline because input prices have been going up and obviously we have not insulated from that completely, likewise expenses on distribution and logistics have also been going up, so there may be some impact of that, a modest decline, but yes, more closer to what it was in FY21.”

WHY ?

Expected get reasonably corrected towards H2, so it is an adverse product mix.

“I have been saying reinvest profits to grow OTC business at a faster pace, so that spend has gone up and in some of our overseas sites, due to various execution and operational issues, revenues has been lower and we expect this also to catch up in the second half as you are aware overseas overheads are on the higher side and therefore absorption of fixed assets has been lower in the first half. We expect to get corrected in the second half."

Comment on sustainability – A red flag for others. “I would refrain from commenting for next year right away. We will wait and see how things go, the longer term is to expand margin, so we remain committed to our long term strategy of expanding margins to the levels that we have stated earlier in our Pharma Day.”

Phase 3 - 30 molecules and commercial 19 molecules (Suven 4 molecules and 12kCr Mcap)

Thesis-10-15% topline growth expected

1.      Acquisition (Hemma for peptides, OTC acquisitions)

2.      Organic as well as inorganic expansion

3.      Late stage CDMO molecules-8 done 30 inline +US plant

4.      Strong OTC and complex hospital generics space

5.      Margin expansion—mean of 20s—from low EBITDA.

Valuations of Piramal Pharma :

Mcap-28-30k Cr expected post demerger (Comparing to peers like Syngene and Gland pharma i.e. P/S multiple of 7x-9x).

“Who can predict what the market growth is going to be. If you tell me anybody who had predicted that the markets will grow like they have in India today. I don’t think so. If anybody could predict to me what is going to happen to the exchange rate which is another big variable? I don’t think so. Nobody can predict what happened to interest rates. So everything is variable and yet on that basis we make a fixed 10 year projection and do the DCF? I don’t believe in this and in my entire life I have never done it.”--- “false precision” is yet another form of “physics envy,” practiced by men (mostly) who forget that its better to be roughly right, than to be precisely wrong. - Charlie Munger.