In order to understand Piramal Enterprise Limited (PEL) its important to understand what all has gone through it in the last 10 years since they sold their Indian Pharma business to Abbott for 3.8 billion dollar in 2010-11. Considering the exchange rate of that period in INR it was close to 17000cr. After the sale company reduced most of their debt and also returned 2500 cr to shareholder through buyback.
Hence effectively from 2012 PEL almost started on a clean slate with close to 9000cr on its book as liquid investments. Its total equity was 11242cr in 2012.
Figure 2 - Real money earned over last 7 years
Hence effectively from 2012 PEL almost started on a clean slate with close to 9000cr on its book as liquid investments. Its total equity was 11242cr in 2012.
Figure 1 - Equity movement from 2012 to 2019
Lets look at figure 1 which depicts how its equity has increase from 2012 to 2019. Over this period PEL has returned 3529cr as divided to shareholders gained 3036cr from its investment in Vodafone. Raised 7000cr from investors by issuing new shares in. Increased their book value by booking a deferred tax asset of 3500cr on merging all its financial services under one umbrella. This 3500cr is not a real asset. This is something which they will unlock in future by amortizing their intangible and goodwill on its book. They have not given much explanation with numbers on how it will really benefit them. They have just explained in words that their effective tax rate should come down from 2019 onward due to the merger. Frankly I have not seen any real change in their effective tax rate from 2018 to 2019. It would be great if any reader can explain here in comments section on how they can unlock the 3500cr DTA.
With an understanding of figure 1 lets take a look at figure 2. Here I am trying to delve deeper into their equity movement to understand how much of that is real cash movement driven by business performance from 2012 to 2019.
The DTA is not a real cash sitting on their book and it has noting to do with their business performance hence I am deducting it. If we start with a equity of 27262cr in 2019 and deduct 3500cr we will get 23762cr. Similarly Rs7000 cr raised in 2018 from investors has nothing to do with its business performance and hence after deducting from 23762cr we get 16762cr. On the other hand the money they have returned to shareholders onver the 7 years should be added back because its a money generated from business performance. Hence after adding 3529cr to 16762cr we get 20291cr.
Therefore the difference between 20291cr and 11242cr is 9049cr which is the real increase in equity from its business performance (retained earnings). For the period of 7 year it is a CAGR of 9%.
Now lets take a look at where PEL has deployed their equity in figure 3.
Figure 3 - Equity allocation
In 2012 after the sale of their business to Abbott PEL had close to 8869cr of liquid asset. By 2019 we see that they invested close to 7197cr in Pharma (out of this close to 3000cr is intangible asset for buying many brands from Janssen and Mallinckordt). Rest is invested in plant and inventory.
5287cr is invested in Decision Research Group (DRG). Almost all of it is goodwill an very minimal is intangible asset.
In 2014 they spent 4440cr to buy Shriram finance (10% of listed company Shriram Transport finance for 1635cr, 20% of Shriram Capital Limited for 2014cr and 10% of Shriram City Union Finance for 790cr). In 2019 March quarter they have booked 6600cr for this investment in their books based on the market price at that time. Recently they have sold their Shriram Transport Finance 10% for 2000cr and are planning to sell the rest of the stake. Shriram Capital is not a listed and 10% of Shriram City Union is around 1000cr (based on its current market price). Hence in case of liquidation they can at easily get more than 5000cr. The DTA that they booked in 2018 is 3500cr. That leaves us with 4678cr for financial services.
The advances they have given by march 2019 was 56624cr and in summary this was backed by 4678cr (which is only 8.3% of total advances). This is the key reason why PEL had to sell Shriram's holding at lower valuation. Among all the assets they have this is the only asset which right now can give them liquidity and equity to back their advances.
Now lets look at how well they are using their assets allocated to their different business in Figure 4.
Figure 4 - Revenue analysis
You would notice here that 50% of the revenue is from its financial services business. This we will get a better idea from its PBT analysis. Lets look at figure 5.
Figure 5 - Profit and ROA analysis
Few points to keep in mind. In 2019 they had a one off loss of -452cr for writing off a business they have acquired earlier. They have a 514cr cost on depreciation and amortization. Most of this is on account of their investment in pharma business. It would be little complicated to explain here but most of this is a real cost (depreciation is a real cost for the business and cannot be ignored). But to keep things in perspective I will not deduct this cost from their Pharma PBT for now.
You would notice in figure 5 that most of their profit is coming from financial services business and in the earlier table we saw that not much of their equity was invested in this business.
In other words if we now try to see the Return on asset (ROA) invested in different business we would notice that their DRG business is giving a very poor return on investment (and this business is not even growing in past 3-4 years). Pharma is giving an ROA of 9.5% (excluding the depreciation and amortization charge) which is not a good number, but the hope here is that it is at least growing by around 15% for last 4-5 years and is expected to grow at similar rate in future. Now coming to their Financial services business the ROA is 26.7% which is a very good number but at a very high leverage.
Summary-
Cons
* Very poor growth rate and return on their DRG business which is 20% of their total equity
* Pharma business is yet to give enough return on invested capital. It could give good return in future only if it would continue to have good growth rate without much requirement for additional capital
* Not much return on their investment in Shriram
* High leverage in their financial services business hence they are forced to sell their only liquid asset which is Shriram
Pros
* Small shareholder friendly (refer figure 6, whenever they had good year they have returned a substantial part to shareholders)
Figure 6 Amount returned to shareholders
* Transparent disclosure - Last year when the NBFC crisis started they started disclosing more about their portfolio of advances and how they are managing the risk. Refer figure 7 and 8 below
Figure 7 - Discloses the details on concentration of advances
Figure 8 - Discloses the risk in their portfolio and how they are managing it
* Potential to grow their financial services business at a very fast rate.
In summary its not really their financial services business which is a cause of concern for them. It is actually that most of their money is stuck in low return business like DRG and Pharma (at least in short term Pharma is not likely to give them good return on investment).
Please provide your valuable comment if you think I have missed any important point here.
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