Reorganisation key for Piramal Enterprise

As operations are put under one basket, analysts say it is difficult for investors to understand

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The mention of Piramal could bring back memories of its deal with Abbott India, when Piramal Healthcare sold its formulation business for about Rs 17,000 crore. A lot has changed since and the Street’s interest in Piramal Enterprise’s stock, too, gradually receded.

For instance, Sarabjit Kour Nangra, vice-president of Research, Angel Broking, who had an active coverage on Piramal Healthcare says after the sale, the residual businesses were only cash and contract research and manufacturing. So, not many analysts tracked it.

However, the firm’s journey after its name changed to Piramal Enterprise (PEL) is interesting. PEL’s stock, which was trading at Rs 500-550 levels in 2012, is now at Rs 1,877 and commands a market capitalisation of around Rs 32,000 crore. Much of the stock re-rating has happened in the past seven months, where it has more than doubled on hopes of gains emerging from value-unlocking of businesses like financials.

In 2011-12 (FY12), when PEL forayed into financial services, the vertical contributed to less than five per cent of revenues. Over the years, with operations picking up at a rapid pace, the division’s contribution increased to 28 per cent in FY16. In the quarter ended June, its share rose to 36 per cent and is among the fastest growing for PEL. The financial services business is largely oriented to wholesale lending and has around 47 per cent exposure to real estate lending. The division also has direct exposure to real estate assets of the group through its asset management arm. “As economic activities pick up, PEL will gain from these businesses in terms of execution and realisation,” says Sanjiv Bhasin, executive VP, Markets and corporate affairs, IIFL. PEL’s wholesale loan book has almost doubled in the past year to over Rs 16,000 crore and the Street is factoring more upside for the stock if the pace is sustained.

Work is on to demerge its health care and financial services businesses. On Tuesday, PEL made further progress on this by transferring assets to its wholly-owned finance subsidiary for a net consideration of around Rs 1,500 crore. While this is positive, analysts say more clarity and faster pace of restructuring is required.

“We don’t know how net worth has been allocated to each of its business and this makes valuations complex for PEL,” says an analyst from a domestic brokerage. “Therefore, business reorganisation is extremely critical to renew interest in the stock,” he points out.