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Piramal Enterprises Ltd.

BSE: 500302 Sector: Health care
NSE: PEL ISIN Code: INE140A01024
BSE 10:10 | 22 Oct 2687.00 3.55
(0.13%)
OPEN

2688.00

HIGH

2707.60

LOW

2682.00

NSE 09:59 | 22 Oct 2688.80 5.60
(0.21%)
OPEN

2689.00

HIGH

2709.70

LOW

2681.00

OPEN 2688.00
PREVIOUS CLOSE 2683.45
VOLUME 5578
52-Week high 3013.00
52-Week low 1198.90
P/E 203.71
Mkt Cap.(Rs cr) 64,125
Buy Price 2684.95
Buy Qty 1.00
Sell Price 2687.05
Sell Qty 25.00
OPEN 2688.00
CLOSE 2683.45
VOLUME 5578
52-Week high 3013.00
52-Week low 1198.90
P/E 203.71
Mkt Cap.(Rs cr) 64,125
Buy Price 2684.95
Buy Qty 1.00
Sell Price 2687.05
Sell Qty 25.00

Piramal Enterprises Ltd. (PEL) - Chairman Speech

Company chairman speech

Dear Shareholders

My warm greetings to all of you.

I hope you all are safe and in the best of health! This is a challenging andunprecedented time for all of us. The severity and longevity of the pandemic's impact onthe domestic and global economy remains uncertain. The health and safety of our colleaguesand their families as well as our customers are of the utmost importance - and wecontinue to take proactive measures to preserve their well-being.

I want to thank all our employees around the world who continue to support ourcustomers and contribute to our role in the society

In the beginning of the year we made a few clear choices and implemented themrigorously which make us well-positioned to navigate these challenging times.

FY2020 was an exceptional year for us. The year was largely impacted by domestic andglobal economic slowdown continued NBFC liquidity tightening and later by the COVID-19pandemic. Despite significant volatility in the business and economic environment wedelivered a resilient performance during the year with the Company's revenues growing 10%YoY to Rs 13068 Crore. Our Pharma businesses continued to perform well and grew 13% YoYin FY2020.

The Financial Services business too delivered a resilient performance despite a weakbusiness environment.

Strengthening of balance sheet

In the current environment well-capitalised Non-banking Financial Companies (NBFCs)with strong parentage are likely to be in a better position to resist consequences as wellas to leverage the consolidation opportunities that may arise from the ongoing environment.

At the beginning of the year we had committed to bringing in Rs 8000 to Rs 10000Crores of equity into the Company. Despite this adverse environment we exceeded ourcommitment and were able to bring in ~ Rs 14500 Crores of capital during the year throughthe following milestone transactions:

• ~ Rs 6800 Crores (US$ 950 Million) from the sale of DRG

- a transaction closed in end-February in the midst of the COVID-19 crisis in the US

• Rs 1750 Crores. from preferential allotment to CDPQ

• Rs 3650 Crores through the Rights Issue that was oversubscribed 1.14 times.This included ~ Rs 1600 Crores of investment made by promoters

• ~ Rs 2300 Crores from sale of our investments in Shriram Transport

The severity and longevity of the pandemic's impact on the domestic and globaleconomy remains uncertain . The health and safety of our colleagues and their families aswell as our customers are of the utmost importance .

Both our business segments have clearly defined roadmaps in place for delivering strongand sustained long-term performances in the years to come .

At the beginning of the year we had committed to bringing in ^8000 to ^10000 Croresof equity into the Company. Despite this adverse environment we exceeded our commitmentand were able to bring in ~^14500 Crores of capital during the year.

Deleveraging

These measures have not only enabled us to increase the equity base from Rs 27224Crores to Rs 30572 Crores but it also helped us to significantly deleverage the balancesheet resulting in a net debt-to-equity multiple of 1.2x times as of Mar-2020 compared to2.0x times in Mar-2019.

Profitability

The reported net profit stood at Rs 21 Crores. Our net profit performance was impactedby the following non-recurring items that occurred during the year:

• Considering the potential risks that our businesses might face due to COVID-19we ran a scenario analysis and created an incremental non-cash provision of ~ Rs 1900Crores in our Financial Services business out of an abundance of caution.

• In Sep-2019 the corporate tax rate was reduced to 25% from 35% providedcompanies do not avail of some other tax exemptions/incentives. Given the comparativeadvantage we have opted for the new tax regime . As a result there was a one-timenon-cash impact from DTA write-off and MAT credit reversal of ~ Rs 1760 Crores. We willcontinue to get benefit in future by paying the tax at the reduced rates .

• Sold DRG for a total consideration of US$ 950 Million. Recorded gain of ~US$ 100Million net of transaction costs

Excluding these three one-time items the normalised net profit of the company grew 22%for the year to Rs 2615 Crores.

Dividend

Keeping in mind the global environment of heightened uncertainty caused by the COVID-19pandemic on the one hand and on the other the sale of our DRG business as well as theinterest of the minority shareholder for FY2020 the Board has recommended subject toyour approval a dividend of Rs 14 per share resulting in a total dividend payout of Rs316 Crores as compared to Rs 557 Crore in FY2019.

Financial Services

Trends in the NBFC sector

Over the past couple of years NBFCs have played a critical role in India's economicgrowth as they have been instrumental in extending credit to Micro Small and MediumEnterprises (MSMEs) real estate and retail consumers. MSMEs account for 31% of the GDP40% of exports and hire 25% of the labour force . Also the real estate sector whichcontributes more than ~7% to the GDP and hires ~17% of the labour force directly orindirectly is largely dependent on NBFCs and Housing Finance Companies (HFCs) for itsfunding. The underlying credit demand of an emerging India will continue to require NBFCsto fill the gaps where traditional banks have been wary to serve.

The last 18 months have been challenging for the NBFC sector. The sector was impactedby a system-wide liquidity tightening as well as negative business news from largecorporates not necessarily from within the sector. The situation had further worsened dueto COVID-19 making this one of the most prolonged crises for the sector. While thebusiness environment has been gradually improving lately uncertainties remain.

Given the significance of the NBFC sector both the Reserve Bank of India and theGovernment of India introduced multiple measures to reduce the stress in the economy.

Those measures to a certain extent have eased business conditions and assistedNBFCs/HFCs to build adequate liquidity reduce ALM mismatches and improve their focus onasset quality.

We expect that this prolonged crisis will enhance the speed and extent of the ongoingconsolidation in the NBFC sector. Only strong well-capitalised and well-governed NBFCswill be able to withstand this prolonged crisis .

Granularisation of the loan book

Within the Financial Services business in line with our earlier stated strategy wehave been treading with utmost caution not chasing growth instead preserving liquidityand deleveraging the business .

On the asset side we have continued to diversify our loan book and increase itsgranularity in order to reduce the overall risk profile of our loan book. In our endeavourto reduce single-borrower exposures the wholesale loan book declined 12% YoY with top-10exposures reducing by ~ Rs 4200 Crores during the year. Hence the overall loan bookreduced from Rs 56624 Crores as of Mar-2019 to Rs 50963 Crores as of Mar-2020 .

Asset quality and provisioning

Our entire loan book is secured in nature and the GNPA ratio stood at 2.4% as ofMar-2020. The gross NPA in our retail housing financing business is 0.17% with a weightedaverage loan-to-value of 65% as of Mar-2020.

As a matter of prudence we proactively conducted a scenario analysis to assess thepotential impact of COVID-19 and created an additional conservative provision of ~ Rs1900 Crores which should be sufficient to meet any contingency that may occur to theportfolio due to COVID-19. This brings our total provision to ~ Rs 3000 Crores (or 5.8%of the loan book) as of Mar-2020 implying a provision coverage of ~2.5x times.

Retail financing

We see a significant untapped potential in the retail financing space offeringlong-term growth opportunities. Also due to the impact of COVID-19 the competitiveintensity in the retail financing space is likely to decline.

As on Mar-2020 the Retail Housing Finance loan book accounted for 11% of our overallloan book. We expect the share of retail financing in our loan book to increase in future.

In this regard we have announced the launch of a multiproduct retail lending platformwhich would be fully "digital at its core" . Given that we do not have a legacyretail financing book we will incorporate learnings from the current environment as webuild this platform. We are currently focused on building technology infrastructuresetting up robust processes developing loan products and acquiring top quality key talentfor this business. Also as part of this multi-product retail lending strategy we plan togradually shift the housing finance business towards the mass-affluent category to enableus to improve the profitability of the business.

We have announced the launch of a multiproduct retail lending platform which would befully 'digital at its core'. We will incorporate learnings from the current environment aswe build this platform.

Liabilities side

Since September 2018 liquidity has remained scarce for the NBFC sector due to aheightened risk aversion amongst lenders such as banks and mutual funds. The availabilityof liquidity has got further impacted due to COVID-19 making this one of the mostprolonged crises for the NBFC sector. Interventions by the RBI and the Government havehelped ease system-wide liquidity to a certain extent particularly for good qualityplayers. However rising delinquencies continue to dampen stakeholders' sentiments.

Leveraging our strong balance sheet we borrowed ~ Rs 13500 Crores in the form oflong-term borrowings during the year. In this process we shifted our borrowing mixtowards longer-term sources of funds and reduced commercial paper borrowings to Rs 1080Crores from ~ Rs 18000 Crores as of Sep- 2018 .

As on March 31 2020 we had cash and cash equivalents of ~ Rs -8900 Crores in theform of cash and undrawn bank lines. In fact the Company raised ~ Rs 5000 Crores oflong-term borrowings in April-May 2020 from large public sector banks. Further werecently announced issuance of non-convertible debentures (NCDs) amounting to Rs 2590Crores in June 2020 reflecting the Company's ability to raise funds even in such anextremely challenging environment .

As we strengthened the Company's balance sheet the gross debt-to-equity of theFinancial Services business reduced to 2.6x times as of March 31 2020 from 3.9x times ayear ago making it one of the least levered sizeable financial services entities in thecountry.

Outlook

We continue to constantly transform and improve our business model with the followingkey priorities: (i) constantly engage with and support our partners/developers to ensureproject completion remains on track; (ii) continue to diversify the loan book and make itmore granular; and (iii) build a tech-enabled multi-product lending platform to targetsignificant future growth opportunities.

Pharma

Our company has demonstrated a three-decades-long track record of growth andre-invention in Pharma. Following the sale of its domestic pharma business to Abbott in2010 for US$ 3.8 billion the Company has re-demonstrated its ability to build a solid andresilient Pharma business over the last 10 years. Leveraging its differentiated businessmodel and strong quality track record PEL's Pharma revenue since the Abbott deal hasgrown 3.5 times at a CAGR of 15% from Rs 1537 Crores in FY2011 to Rs 5419 Crores inFY2020. In this period the Pharma business EBITDA has gone up 13 times at a CAGR of 33%from Rs 110 Crores in FY2011 to Rs 1436 Crores in FY2020 resulting in a significantimprovement in the EBITDA margin from 7% in FY2011 to 26% in FY2020.

Continuing with this long-term track-record the Company has delivered a FY2020revenues growth of 13% YoY as all the three Pharma businesses delivered a healthy revenuegrowth for the year. EBITDA for the Pharma segment grew by 41% YoY in FY2020 with asubstantial expansion of EBITDA margins

Focus on quality

Quality remains an ongoing concern for Indian and global pharma companies with manyfacing scrutiny from regulatory authorities such as the US FDA. Quality is a culture atPiramal and we have built an exemplary quality framework that is implemented across ourmanufacturing facilities.

Similar to Risk Legal and Compliance the Quality function also reports independentlyto the Board. Since 2011 we have successfully cleared all 36 US FDA inspections 169other regulatory inspections and 1130 customer audits - without ever receiving any'Official Action Indicated (OAI)' status - reflecting our commitment to excellence inquality and compliance .

COVID-19 impact and our measures

Pharmaceutical companies are playing an important role in these tough times by enablingthe supply of key medicines across the world despite facing multiple challenges such asensuring continuous production of life-saving medicines while maintaining the safety ofemployees and complying with constantly evolving government restrictions. This hasunderscored the Pharma industry as one of the safest and most resilient industries in thisperiod of uncertainty.

Pharma is one of the safest and most resilient industries in this period ofuncertainty. The recent strategic growth investment is an affirmation of the underlyingstrength of the business and will provide us with a war chest for the next phase of ourstrategy.

The underlying medical conditions that drive demand for our Complex Hospital Genericsand CDMO products and services remain unchanged. We believe that near-term volatility istemporary in nature and the situation will normalise over time. We are also having somepotential upsides related to the current situation across our Pharma businesses. Forinstance some of our Complex Hospital Generics are getting used in COVID-19 treatments.We have also received 30+ new business inquiries related to COVID-19 for our CDMObusiness and demand has surged for sanitiser and multi-vitamin brands in our IndiaConsumer Healthcare and so on. Given that we have production facilities across threecontinents we are also well-positioned to cater to any evolving requirements related toincreasing preference of customers for locally manufactured products and for diversesourcing options.

We have implemented robust prevention and response protocols at our operational sitesto ensure worker safety and allowed work from home for employees wherever feasible. Wehave also been proactive in managing our supply chain and had accelerated alternativevendor development and backward integration projects more than 18 months ago to mitigatesupplier concentration and location risks for our key raw materials. Due to theseinitiatives we have neither faced nor do we envision any major negative impact ofCOVID-19 on our supply chain. However the current environment remains dynamic and weremain cautiously optimistic towards managing any possible future impact of the COVID-19pandemic.

Fundraising in Pharma and outlook:

In late 2019 we embarked on a search for a like-minded investing partner for strategicgrowth capital in Pharma which would also be a step in the direction of the eventualdemerger and separate listing of our Pharma and the Financial Services businesses.Accordingly our Pharma businesses have been integrated into a subsidiary of PEL i . e .Piramal Pharma Limited .

In June 2020 Carlyle Group agreed to invest fresh equity capital of ~US$ 490 Millionfor a 20% stake in Piramal Pharma Limited. The transaction valued our Pharma Business atan enterprise value (EV) of US$ 2775 Million with a potential upside of another US$360Million depending on the business' FY2021 performance. The transaction is expected toclose in 2020. It is one of the largest private equity deals in the Indian pharmaceuticalsector and will accelerate our organic and inorganic growth plans in the coming years .

Building leaders for the future

To deliver on PEL's strategic priorities we continue to invest in our key talent whoare valuable contributors to our success. During the year 2019 PEL was ranked 32nd amongthe world's top employers in Forbes' Global 2000 Rankings.

Our Top Talent programmes aim to provide high-potential employees with personalisedskill development journeys and differentiated careers in line with their aspirations.

Today we have more than 190 high-potentials who have been identified and developed fortaking on leadership roles through programmes across the organisation's hierarchy.

The SUMMIT leadership programme focuses on developing senior leaders across businessesto take on top management roles. As many as 49 leaders have undergone the SUMMIT programmein the past few years and 69 mid-senior level employees have undergone the ASCENDdevelopment journey and are being groomed for roles at the next level.

At the junior management level the IGNITE programme focuses on enabling our emergingleaders to take on midmanagement roles. In an environment where the only constant ischange enabling our employees in reinventing and developing themselves helps us buildlong-term organisational resilience as well.

Doing Well and Doing Good

Our corporate purpose of 'Doing Well and Doing Good' is embodied in our continuousendeavour to make a positive impact by serving people and living our values . We arecommitted to transforming Health Education Water and other social sector sub-systemsthrough high impact solutions thought leadership and partnerships with multiple donorsand funding institutions to implement a variety of programmes across 22 states in India.

We conduct our CSR initiatives through Piramal Foundation which operates under threedistinct verticals — 'Piramal School of Leadership' (PSL) for improvement in studentlearning outcomes; 'Piramal Swasthya' for primary healthcare; and 'Piramal Sarvajal' forsafe drinking water. In 2019 the verticals crossed a memorable milestone of havingdirectly and indirectly benefitted over 100 million lives that include healthcarerecipients education leaders youth and those without access to safe drinking.

The past year has been pivotal for the Foundation in bringing about systemic change .The single most important programme out of a host of other programmes has been theAspirational Districts Transformation Programme (ADTP) in partnership with NITI Aayog.Under this flagship programme the Foundation has been working with district State andCentral governments in 25 out of the 112 aspirational districts across seven states toimprove health nutrition and education outcomes.

Amidst the COVID-19 pandemic we are supporting the district administrations tostrengthen their immediate response to the pandemic and establish systems for itsprevention and control. It is a testament to the Foundation's strong track record that theBill and Melinda Gates Foundation has chosen to partner with us in this effort.

Also we are running 104 health helplines across eight states to respond to COVID-19queries and track home quarantined individuals. The 830 staff of these helplinecall-centres have answered over 6 lakh COVID-19 related calls. The Piramal Group has alsopledged Rs 39 Crores to various Central State Government and local bodies including thePM CARES Fund.

We also launched a campaign to support over 400000 elderly citizens through 41754volunteers in 28 districts across the country. In the safe drinking water domain wecontinue to serve over 6.7 lakh beneficiaries daily in 20 states through a network of1700+ purification plants and water ATMs.

In closing

In the beginning of the year we made a few clear choices and implemented themrigorously which make us well- positioned to navigate these challenging times. Some ofthese measures that we implemented include deleveraging the business strengthening thebalance sheet and simplifying the corporate structure to focus on our two core businesses- Pharma and Financial Services.

Pharma is one of the safest and most resilient industries in this period ofuncertainty. The recent strategic growth investment is an affirmation of the underlyingstrength of the business and will provide us with a war chest for the next phase of ourstrategy.

I believe we are now at an important inflection point. Having significantlystrengthened our balance sheet and maintaining a strong liquidity position we areconfident that PEL will emerge even stronger post the COVID-19 crisis.

With low leverage level conservative provisioning and enough liquidity our FinancialServices business also remains well-positioned to gradually transform our business modelfrom being a largely wholesale lender to becoming a well- diversified lender with a muchgranular loan book while ensuring our asset quality by supporting our clients throughthis challenging period

I believe we are now at an important inflection point. Having significantlystrengthened our balance sheet and maintaining a strong liquidity position we areconfident that PEL will be among the few sizable companies that will emerge even strongerpost the COVID-19 crisis Also both our business segments have clearly defined roadmapsin place for delivering strong and sustained long-term performances in the years to comewhile continuing to live up to our defined values and our stated purpose of 'Doing Welland Doing Good'.

We thank all our stakeholders including our shareholders employees customerspartners as well as the Government for their unflinching trust and support to us. We willcontinue to act as trustees in our pursuit to create long-term value for all ourstakeholders.

Please do take care of yourself and your family and stay safe.

Best regards

Ajay G. Piramal

Chairman Piramal Enterprises Limited

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