BSE SENSEX 37,104 S&P CNX 10,983 Piramal Enterprises CMP: INR1,965 Moderating growth  12 September 2019 Annual Report Update | Sector: Financials - NBFC TP: INR2,400 (+22%) Buy Financial Services’ domination increases The liquidity crisis, lag impact of demonetization, RERA implementation and stress in the Real Estate financing space has weighed down the growth of PIEL’s Financial Services (FS) business. FY19 saw PIEL’s customer assets grow by 34% YoY to INR566b v/s 50%+ in the past few years. Nevertheless, dominance of FS in overall revenue and operating profitability continue to rise with share of 53%/67% v/s 47%/67% in FY18. Pressure on margins (partially led by move towards low yielding Retail Housing loans) and cost of Retail rollout weighed on profitability. ROAs declined ~50bp to 3.1%. Stress loans increased with stage 2/3 loan share at 1.9% v/s 0.9% a year ago. Outstanding provisions on the balance sheet stand at 1.8% of loans (stable YoY). Real estate share of the loan book is down to 71.6% YoY v/s 75.9% a year ago, helped by sharp rise in the share of Retail Housing loans (9.5% v/s 2.9% a year ago). In the FS business, banks (71%), mutual funds (11%) and insurance companies (8%) are the largest sources of funding. The share of CPs is down to 12% v/s 18% a year ago. At consolidated level, the mix between floating and fixed rate borrowing is 75:25 v/s 43:57 a year ago and at the FS business level, it is 60:40 v/s 50:50 a year ago. From an Asset Liability Management (ALM) perspective, ~84% (~90% in FY18) of liabilities mature within three years, while ~55% (~58% in FY18) of assets mature during the same period. Networth allocation disclosure: (a) FS business at INR114b; (b) Pharma and IT business at INR50b; (c) Shriram group’s outstanding value at INR72b; and (d) the rest is DTA related with networth of INR36b. Outstanding aggregate debt of Pharma and IT business stands at ~INR95b. Pharma business: PIEL has implemented multiple initiatives for improvement in margins, thereby resulting in global EBITDA margin increasing from 14% in FY13 to 23% in FY19. Domestic pharma business continues to show moderation and remains a drag on overall pharma business’ profitability. Company sold the Imaging business and booked loss of INR4.5b (pre-tax) at the consolidated level and INR12.9b (pretax) at the standalone level (including investment write-off of INR8.4b) In the current environment, PIEL is focusing on (a) reducing key large exposures such as Lodha, Wadhwa and Omkar, (b) reducing share of short-term borrowings, and (c) diversifying the loan mix to lower risk assets. The company also plans to raise capital to reduce leverage – this would help lower its cost of funds in the Financing business, which is currently elevated at 10.3%. Considering the challenging environment, we expect the company to keep higher capitalization and liquidity on the balance sheet. Buy with TP of INR2,400 (FY21E SOTP-based). Bloomberg Equity Shares (m) M.Cap.(INRb)/(USDb) 52-Week Range (INR) 1, 6, 12 Rel. Per (%) 12M Avg Val (INR M) Free float (%) PIEL IN 199 392.1 / 5.5 3054 / 1652 14/-23/-31 1763 53.9 2021E 181.5 48.8 25.4 127.3 23.7 1,424 35.0 19.0 1.7 1.9   Financials Snapshot (INR b) Y/E March 2019 2020E Revenues 132.2 153.6 EBITDA 36.6 42.2 PAT 14.7 20.5 EPS (INR) 73.7 102.9 EPS Gr. (%) BV/Sh. (INR) Payout (%) Valuations P/E (x) P/BV (x) Div. Yield (%) -5.2 1,275 38.0 32.8 1.9 1.2 39.5 1,342 29.2 23.5 1.8 1.3   Shareholding pattern (%) As On Jun-18 Mar-18 Jun-17 Promoter 50.8 51.4 51.4 DII 4.4 3.8 3.6 FII 27.5 28.0 28.7 Others 17.3 16.8 16.3 FII Includes depository receipts Stock Performance (1-year) Piramal Enterp. Sensex - Rebased 3,300 2,700 2,100 1,500   Research Analyst: Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com); +91 22 6129 1526 / Tushar Manudhane (Tushar.Manudhane@motilaloswal.com); +91 22 6129 1519 Piran Engineer (Piran.Engineer@MotilalOswal.com); +91 22 6129 1539/ Ashish Chopra (Ashish.Chopra@MotilalOswal.com); +91 22 6129 1530 Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.