Ladies and gentlemen, good day and welcome to Piramal Enterprises Limited Q3 and 9 months FY 2022 results earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Hitesh Dhaddha, Chief Investor Relations Officer from Piramal Enterprises Limited. Thank you, and over to you, sir.
Hi, good evening, everyone. Hope you are safe and in best of your health. I'm pleased to welcome you all to this conference call to discuss Q3 and nine months, FY 2022 results. Our results materials have been uploaded on our website, and you may like to download and refer them during our discussion. The discussion today may include some forward-looking statements, and these must be viewed in conjunction with the risks that our businesses face. On the call today, we have with us our Chairman, Mr. Ajay Piramal, Nandini Piramal, Executive Director of Piramal Enterprises and Chairperson, Piramal Pharma Limited, Mr. Khushru Jijina, Executive Director of Financial Services, Piramal Enterprises, Mr. Jairam Sridharan, Managing Director, Piramal Capital & Housing Finance, and Mr. Vivek Valsaraj, CFO of our company.
With that, I would like to hand it over to our chairman and would request him to share his initial thoughts. Over to you, sir.
Good day. I hope you are all safe and in good health. This quarter we have delivered a strong performance. The revenues grew by 20% year-on-year to INR 3,816 crores, driven by solid performance across both businesses. Financial services gross income has grown 25%, and pharma revenues were up 15%. Despite the ongoing transformation within financial services, the Q3 normalized net profit grew by 14% to INR 888 crores. I just would like to give you an update on the de-merger announcement that we had done last quarter. This was approved by the board, as you are aware, in October last year. This de-merger is expected to simplify the corporate structure, with two separate pure-play entities enabling better understanding by the investor and analyst community, resulting in the right value discovery for both businesses.
We expect to complete this de-merger in Q3 of FY 2023, subject to various required approvals. Another significant development in the last quarter has been the approval of the merger of DHFL and our financial services business. This has been a very value-accretive acquisition for us, and it has enabled us to achieve significant growth. It has materially given us a further impetus to our business ambitions and targets. The overall loan book grew by 31% year-on-year to INR 60,600 crores, and our retail AUM grew 4 times year-on-year to AUM of INR 21,500 crores. The share of the retail AUM has also increased. The retail share has gone up to 36% from 12% as of March 2021. Besides that, we've got now scale.
Significantly, we have increased our presence with 1 million live-to-date customers and 301 branches across 24 states and union territories. Also, this acquisition creates granularity of one of the leading housing finance companies in India, which is focused on affordable financing with an average ticket size of INR 16 lakhs. This merger and acquisition has been value accretive from day one of the acquisition itself. If you look at it, the yield on the DHFL book is over 11%, and the cost of borrowing is nearly 7%. 300 basis points lower than the average cost of our borrowing prior to this acquisition, creating a healthy spread of nearly 4%. Since the loans have already been sourced, all operating costs have been incurred to build this book.
The potential upside is from recoveries, and additionally, we have got an off-balance sheet securitized pool of INR 20,000 crore, generating a fee of 1.6% per annum. All this growth has been achieved without infusing any additional equity. During the last quarter, we have started the integration process and have made significant progress. We have retained the 3,000+ employees which were there in DHFL. We have now added in the last four months, another 2,000 employees. The new loan originations have now restarted at most of the DHFL branches. Customer-facing digital assets are fully integrated and a large-scale IT asset upgrade program is underway. In retail lending, we have now adopted a two-engine strategy which will drive scale and growth.
The first engine is phygital, secured lending with a dominant position in affordable housing, mass affluent housing, and MSME loans, which contribute over 90% of the retail AUM. The second engine is of embedded finance that will include small ticket and short duration loans such as personal loans, purchase finance, merchant BNPL, et cetera, originated through digital channels and partnerships, which act as a customer acquisition engine, adding over 90% of the new customers. Whereas the first engine does the growth in AUM, the second will be a significant growth in new customers. In line with our new strategy, we continue to scale up partnerships with FinTech and consumer tech firms to acquire customers at scale at a low acquisition cost. We are today live with 10 partnerships in several segments. Disbursement.
Through the activation of multiple branches and customer acquisition under the twin engine strategy, our disbursements grew 5x year-over-year to INR 739 crore. An improving mix of disbursement towards both secured and digital loans enabled us to improve our disbursement yields to 12% in quarter three versus 11.3% in quarter one. We are significantly investing for future growth, and this you will see in the next few years as we continue to focus on capacity building and investing for the future. We have assembled a best-in-class leadership team over the last few quarters across various businesses. We target to have a presence across 1,000 locations. We rolled out 2,000+ job offers post the DHFL acquisition in September 2021.
We have made significant investment in technology and analytics hires, hired nearly 200 people in the technology and analytics team, and have set up a digital center for excellence in Bangalore. All these initiatives should enable us to significantly increase the disbursement in the next 12-15 months. I will now come to wholesale lending. The real estate sector is picking up well, and credit offtake by corporate seems to be improving with a CapEx push from the government. Significant consolidation has happened across NBFCs in wholesale lending and developer financing business. We are among one of these few NBFCs that have continued to remain strong even after this prolonged crisis environment. We aim to cater to large addressable markets. We will soon start executing new deals in our wholesale business.
Our new approach to wholesale lending will be more calibrated, as we will give smaller loans and make the loan book more granular and diversified. In future, we will focus on cash flow backed lead lending, and high loans will be done under the fund structures. Overall, the FS business' asset quality has stood the test of time. GNPA stood at 3.3%, marginally up QoQ due to some impact of the RBI circular and NPA classification and slippage of one account from stage two to stage three in our wholesale book. Our provisioning remains conservative at 4% of AUM at INR 2,655 crores. We believe this provision should be adequate to meet any future contingencies.
In summary, as far as financial services is concerned, I'd like to point out to you that as a company, we have grown organically as well as inorganically, and we have done this throughout our history. We have done more than 50 acquisitions so far, and almost all were successful. We will continue to look for M&A to boost our growth post the DHFL integration. With the debt equity of the financial services business at 2.5 times and near-term monetizable investments in Shriram, et cetera, the company has significant firepower to continue to carry out value accretive acquisitions as well as organic growth in the future without needing to raise any additional equity. As I said before, we plan to increase the share of retail loans to two-thirds in the medium to long term.
We remain committed to create a scalable financial services business to deliver sustainable growth and profitability for the long term. Coming to our pharma business. Our pharma business delivered an 18% revenue growth, delivering revenues of INR 4,500 crores during the nine months. The business delivered a 16% EBITDA margin for nine months and 22% for the Q3. Our Q4 performance is likely to partly offset margins in H1. We witnessed some execution-related challenges related to logistics, rising input prices, and availability of raw materials and manpower. The CDMO business revenues grew by 10% during the nine-month period. Apart from the execution and supply chain related challenges, deferral of few orders by customers to the last quarter of this year impacted the growth during this quarter. We have over 500 clients, which...
Of which we have added 175 new customers since FY 2020. This has enabled us to witness a healthy order book for our development services business growing 32% year-on-year. Our commercial CMO and generics API, which contributes to nearly 64% of CDMO revenues, is sticky in nature. We continue to witness growth in commercial products on patent and phase III molecules. Business had started integrated offerings since FY 2018 and now has a track record of delivering 125 integrated projects. There has been an 8x increase in integrated projects since FY 2017, with 40% of the order book now from integrated projects. In addition, we are strategically shifting our CD-CDMO business model towards our top clients in developed markets with focus on niche capabilities. This gets reflected from the fact that 75% of our revenues are coming from regulated markets.
Revenues from the top 20 clients have grown at a CAGR of 26% over the last two years. Our niche capabilities now contribute 22% of our CDMO revenue. This shift will enable us to improve our CDMO top line and bottom-line performance in the medium to the long term. I wanna talk a bit about investments. During the quarter, we acquired minority stake of 28% in Yapan Bio, broadening our services in the biologics space. To meet increasing demand, we are carrying out capacity expansions worth $130 million across multiple sites. The complex hospital generics business, which is the second business in our pharma, grew by 25% during the first nine months. Revenues during this quarter grew by 23%. We've witnessed strong sales of sevoflurane in U.S., with continued growth in the sevoflurane market share.
However, volatility due to COVID remains across different regions. We maintain U.S. market share in the intrathecal portfolio and continue to expand Gablofen gabapentin presence in Europe. We are witnessing some supply chain related constraints due to longer lead times, rising input prices and higher logistics costs. We have a strong new product pipeline consisting of 30+ SKUs at various stages of development and approval. Now coming to the India domestic consumer healthcare market. This continues to deliver robust performance with nine-month revenues growing by 45%, which is driven by strong growth in key brands. We've launched 41 new products since April 2020, and new products now contribute to 10% of our sales.
We also launched Piramal's own direct to customer e-commerce website, wellify.in, and we are now able to sell our products across 22 e-commerce platforms, which contributes 14% of revenues. We are continuously investing in brands and marketing, reflecting in the strong performance of our key brands. We are investing in media and trade spends for future growth, resulting in business operating at breakeven. Overall, in the pharma, post the Carlyle fundraise, we have been investing organically and inorganically across all our businesses. Each of our pharma businesses have a compelling plan for growth. We expect near 20% growth in FY 2022 for the overall pharma business. In the medium to the long term, we expect about 15% revenue growth across the businesses, and we expect the EBITDA margins to reach anywhere between 25%-28% in the next 3-5 years timeframe.
To conclude, I would say that with the balance sheet strength and the uniqueness of our business models, both the businesses are well positioned to tap organic and inorganic growth opportunities and create long-term value for our shareholders in the years to come. Thank you.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on the touchtone telephone. If you wish to remove yourself from the question queue you may press star and 2. Participants are requested to use while asking a question. Ladies and gentlemen we will wait for a moment while the question queue assembles. Reminder to the participants a nyone who wishes to ask a question may press star and 1 at this time. The first question is from the line of Abhijit Tibrewal from Motilal Oswal. Please go ahead.
Yes. Thanks. Am I audible?
Yes, sir.
Yeah. Good evening. Three questions here. Firstly, on your reporting and classification of NPAs based on the RBI circular, are there any loans in stage three which are less than 90 DPD? Basically, what I'm kind of trying to understand is, while on one slide we talk about the impact of the RBI circular leading to this increase in GNPA, on two slides we also say that stage three is loans which are 90+. That's my first question. The second question that I had is, I mean, if you could kind of share what is the quantum of exposure to the wholesale account which flipped from stage two to stage three, and also if you can give some qualitative color around that account.
Lastly, just trying to get some picture of your disbursements. Will it be fair to say that, I mean, of the disbursements that you have reported, broadly around INR 390 crore-INR 200 crore will be in your housing and MSME secured, and maybe the remaining INR 330 crore-INR 340 crore will be in your embedded finance. Sir, lastly, if you could just help me with a few data points. What was the consolidated net worth and the consolidated net debt? I see that we've not given what is the provisions on the wholesale books right now. That will be all from my side, sir. Thank you so much.
All right. Let's start with questions one and three, and then Khushru Jijina will talk about question two, and then we'll come back to number four. Okay? Your first question of how we have shown the RBI's November circular. Firstly, we have completely implemented the circular, both in terms of reporting it to RBI as NPA, as well as converting the stage two stage three, right? What you see as stage three does have accounts which are not 90 days past due. If somewhere in the deck it says something different, that must be a typo. The amounts are not very large. There's about INR 25 crores of value which is sitting in stage three, which is not 90 days past due as of the end of the quarter.
The stage three is what is NPA. As far as our numbers are concerned, there's no separate NPA reporting from our side. That's on number one. Your third question was on disbursement split between, let's call it our engine one business versus engine two businesses. You're broadly right. About 23% of by value of disbursements in the quarter was in engine two, which is the embedded finance business. And about 77% was in engine one. That's number on question number 3. For question number 2, Khushru Jijina will jump in.
To your question on the wholesale book, the one which moved from stage two to stage three, let me give you a qualitative color. The amount was INR 147 crore. It was a packaging company. The reason we moved it to stage three, because it was a part of our resolution of the packaging company, and we needed to restructure it to safeguard the loan. It is not that it's moved to stage three and the money is going to be lost. In fact, we will recover the entire money, but since we had to do some restructuring, we moved it to Stage III.
Abhijit, on your last question about provisioning. Of the total provisioning pool which we have disclosed, I think about INR 2,600 crore or thereabout, roughly 10% of it sits in retail and about 90% of it sits in wholesale. Please remember also that the entire fair value adjustment that we have done as part of the DHFL transaction is not shown as part of provisioning. That is extra, that sits over and above this INR 2,600 crore of the provisioning that we have shown.
I have another question.
Sure, please.
Regarding the net worth and the net debt. As on December, we have not reported the balance sheet. For now you may please refer to the September figures. Net worth of about INR 34,000 crore and net debt about INR 48,000 crore.
Sure, sir. If I can squeeze just one last question for Jairam. If I look at slide 18, you're talking about disbursement yields of around 15.4% in used car, 19.5% in MSME unsecured, and 14.9% in digital unsecured. How does this tie in with 14.5% disbursement yields on slide 21?
What you see on slide 21 is basically the averages on all disbursed cases during the course of the quarter. You are seeing that 12%. It's a weighted average of all the individual businesses that we have done, weighted by the disbursement amount.
Yeah. Thank you so much, and wish you the same. Very best.
Sorry, one last one. One point. The 14.5%, I hope you saw the annotation there. All the embedded finance business, 14.5%, is not included in the 12.5. We have kept that out.
Yeah. I mean, the thing is these three products that we are doing, right? I mean, used car, MSME unsecured, digital unsecured, they all have, I mean, yields well in excess of 14.5% reported on slide 21.
Correct. Of the last one of that, which is digital unsecured, is not included in the weighted average of 12%. The reason we have not included it is that it's very short tenure. The tenure there, like, three months or thereabout. It doesn't add much to the overall value. If you see, on that product slide that you spoke about, slide 18, the piece that is the very last row, the one that says digital unsecured, that one we have not included at all in slide 21.
Got it, yeah. Thank you so much. This is useful. That's all from my side.
Thank you. The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services. Please go ahead.
Yeah, thanks for the opportunity. Just from the pharma side and particularly on the CDMO side, while this COVID wave would have led to some, you know, decrement in terms of the patient flow. I just would like to have, you know, your insights in terms of the offtake by the innovators in this scenario. Is it improving or is it still yet to show some signs of improvement? That is on the CDMO piece. Likewise, with the COVID cases reducing, are you seeing better traction on the complex hospital generic side?
As far as the CDMO business is concerned, the COVID has not actually impacted demand. In fact, demand for our CDMO services continues to remain high. Excluding the generic APIs in all other spheres, we've seen a good and consistent increase in demand. COVID has not specifically made an impact as far as the demand is concerned. The challenge that we've had is on the execution side, as the Chairman alluded to, whether it's in terms of availability of raw materials, availability of people, the additional costs, or availability of carriers for logistics and distribution, that's impacted the CDMO business. As far as hospital generics business is concerned, we did see improvement in the U.S. market. In the ex-U.S. market, the condition has been volatile.
In fact, depending upon the country that you speak about and the wave that is there, the demand has been very volatile. Of course, the subsequent waves also we've seen the situation to be very volatile in different markets, whether it's Europe or whether it is the other ROW markets. U.S. market, it's largely on track, but ex-U.S. markets, the situation is still very fluid.
I think in addition, what is important to note is that the order book remains quite healthy for us. I think there is 30% increase in the order book. If you look at the new customer addition, the numbers that we've reported, I think that also shows that there is a significant set of new customers that have added in last one year. I think that will translate into better performance of the business as we continue to go forward, once these logistics challenges gets reduced post the COVID impact gets subsided.
Sure. Secondly, on this, on the biologics related CDMO, other than adding, I mean, other than the investment into Yapan Bio, if you could just, you know, give further color in terms of how do we, you know, how are we building this capability either in the form of CapEx or any further acquisitions, on the biologic CDMO side?
The acquisition or the strategic investment that we have done in Yapan with a minority stake is our first foray into biologics. So far we've not done anything concrete in terms of doing any acquisition or investment. This is the first foray. The reason for testing it out is that with minimal capital outflow, we will be able to get access to technical talent. This will help us develop some synergies with our existing sites, whether it's at Lexington or whether it is at Grangemouth. We will be able to utilize the Yapan's capabilities there. It's just a beginning for us. It's a foray, and we will see how this entire thing pans out for us to be able to take further decisions with respect to Yapan.
Also, it adds an additional capability at this point in time because this could be complementary for our CDMO business, where this capability can be offered to our existing customers. That's how we have begun this space. We'll of course, be monitoring how we perform before we take further decisions on further investments in this space.
Got you. Just lastly on the overall guidance of 20% growth for FY 2022, which implies that Q4 is expected to be much stronger. I mean, any which case, Q4 is stronger for us, but it's going to be I mean, year-on-year growth also looks quite interesting on the Q4 level. Kind of like INR 2,400 crore kind of a top line compared to, say, the two quarters where we did INR 1,600 crore. Is that righT UNDERSTANDING?
First let me just qualify that it will be near 20% and not necessarily 20%. Yes, it'll be a big quarter, especially in the CDMO business. We do have a lot of deliveries lined up. Of course, this is subject to the overall situation across the world in terms of how the COVID pans out. Yes, it is going to be a big quarter for us. If execution and delivery, all of them happen consistently, then you will see a significant top line.
Thank you. That answers my question.
Thank you the next question is from the line of Kunal Shah from ICICI Securities. Please go ahead.
Yeah. Good evening. Firstly, in terms of the performance of DHFL pool, if you can highlight in terms of the recoveries rundown, which is happening in that. I agree you would primarily look at the retail as the overall pie, rather than splitting it between the DHFL and the PEL early business. Still, if you can help to get some sense both on the retail as well as wholesale, how is the collection efficiency out there?
Kunal, we are gonna resist talking separately about DHFL and the erstwhile DHFL or PEL organization. You are unlikely to see us give separate disclosures on these two books. That said, there is a more sort of simple version of your question, which I will attempt to answer, which is, A, there is some sort of distressed book that you guys took on your balance sheet or you purchased, but it is not showing up on the balance sheet. From that distressed book, you know, were you guys able to recover anything during the course of the quarter? If I interpret your question that way, I'd say the answer is yes.
We were able to do a little bit on both sides of the business. The numbers are at this stage small. Let's call it very low three digits. I wouldn't want to go into a lot more details on that one. On your... If I interpret your question as, "Hey, how is overall collections efficiency for the full sort of combined retail business been in the quarter?" It has been extremely good. It has been in the very high 90s. Depending on the month, it's been between 97%-99%. Very high collection efficiency otherwise on the on-balance sheet book.
Sure. Overall, in terms of ROA, if I have to broadly look at between the wholesale and retail now, so is retail, is it like now we have got into breakeven and out of this 2.5%-2.6% ROA, which we report for the financial services, if you can help in terms of how much is still flowing in from the wholesale and where do we see the normalized levels? Okay, once we see the scale up on the retail side, no doubt a lot of investments have been done, so ROAs would be very low or in fact negative as well. Just broadly, if you can start sharing that number, so it will be better for us to track in terms of the entire scale up even on profitability side.
Yeah, Kunal, that's a good point. We are considering doing segmental profitability reporting, but we don't at this point of time, as you know, do segmental profitability reporting. We are considering, you know that, so just watch that space in the quarters to come. You had a sort of more pointed version of the question, which I'm able to answer, which is that, you know, given the movement and given the addition of DHFL, you know, has retail gotten to a point where it is breakeven? The answer is yes.
This quarter there would be a profit in retail as well?
Yes.
Okay, got that. Lastly, in terms of the scale up, 3,000-odd employees are retained, plus, we have added 2,000, so that takes almost 5,000 on the overall branch network, which is there. Plus I think we are looking to add almost 100-odd branches. Just want to get the sense maybe, is the intensity so high even at the branch level, wherein if I have to look at it, maybe this would be largely, the field staff and the ground level staff. 5,000 for almost 300 or 400-odd branches. That's how it seems to be at this point in time.
Is it like some kind of an attrition which we are still building in, and that's why 2000-odd people we would have further added on to it? Or this is for altogether the newer products which we are adding?
No, no. I think there's a third reason that, which is the most important reason, Kunal. When we took over DHFL, the core employee base of the DHFL organization had already fallen almost 60%, 65% from its peak. Not that necessarily you need to go anywhere near the peak of the staffing there. I want to simply give you a sense that a lot of attrition had happened on the DHFL side before the merger. A lot of the merger is just catching up on the lost people in the pre-merger era to make sure that the branch is all functional. They have a basic level of functional staff, so a lot of it is that.
An important distinction I'd like to make is that all the employees that we spoke about are not on our roll on the rolls of the parent company. We have a separate manpower entity in the company called PMO Sales and Service Limited. About 60% of the staff actually sits on that entity. A core employee base, the on-rolls employee base is about 40% of the number that you mentioned. The other 60% is in this manpower entity, which is a field force, as you rightly mentioned, where you expect to see a much higher rate of attrition.
Okay. No, I was just looking at 300 branches, 3,000 already retained, so maybe 10 per branch is already there and we are still adding on. Just wanted to gauge that.
Yeah.
Yeah.
Including the field staff, Kunal. Yeah, you're right.
Yeah.
By the time we get to March, for these 300 branches, we should be by and large done from a staffing standpoint, even including the new product. However, of course, we will continue to increase our branch network as we have mentioned in the past.
Okay.
We expect to add 100 branches in the next 12 months, and you will start seeing some additions in Q4 itself.
Oh, okay. Thanks and all the best. Yeah.
Next question is from the line of Prakash Agarwal from Axis Capital. Please go ahead.
Yeah. Hi, good evening. Thanks for the opportunity. Just trying to understand the, you know, the EBITDA margin seasonality. Last time, Q2, there was again some delay in, you know, booking and all, and we said it's pushed to H2. We are flat QoQ. Margins were 12.5% last quarter and it's moved up significantly to 22%. I mean, what is the change here in terms of margin? I mean, the delta I see is not much in the, I mean, there is actually the revenue decline. What is the higher margin business here? My understanding was CDMO is the, you know, and complex generic hospital business is the highest margin business, and these two are flat here.
Can you explain the seasonality of the margins, please?
It's basically the mix of the projects which have got booked in the first half versus what is getting booked. If you have been part of the early investor call, you may recall that we had mentioned that we had an adverse product mix in the first half, where projects which had relatively lower margins were the ones which got invoiced, and the ones which have relatively higher margins are the ones which are going to get invoiced in H2. That's what is playing out, which is resulting in the overall improvement in gross margin and therefore the EBITDA margin. In fact, you will see a similar trend playing out in quarter four as well, where you will see a significant part of the margin improvement happening with more high margin projects getting billed during the period.
This seasonality is here to stay or we are in a, you know, process of having a more, you know, what do you call, smoother EBITDA margin across the quarters?
If you looked at the trend for the last few years, it's true that we've had a skew more in terms of higher sales in H2 and compared to H1. While we are definitely trying to make this a more even kind of sales and try to improve the overall skew, it's obviously going to take time. This year, because of various COVID-related issues and the delays that happened on the execution front, it got even a bit more skewed than it has historically been. Yes, our attempt is definitely to try and improve this. Remember, a lot of this also depends upon customers because the kind of orders that we get and the kind of project deliveries and customer commitments and timelines all determine how the skew eventually pans out.
Yes, it's a valid point, and we are looking at how we can improve it.
Perfect. Obviously customers drive business. My other question was also the understanding, like, you know, you mentioned CDMO business, which has been delayed in some of the orders being delayed from Q2 and now Q3. There is a lot of visibility, given that 40 days of the quarter already done, that the business will trickle down to Q4, and that visibility is with high margin order book closure. Is that correct understanding?
Correct. As far as order book is concerned, there is clear visibility of what needs to be delivered. The challenge is primarily on execution. In fact, in the month of January, when the COVID wave did impact, several sites, especially our overseas sites, we did have a lot of, absenteeism of people and therefore lost some production days. It's very important for us to ensure that the execution happens properly in the months of February and March to be able to meet the target. To answer your question, from an order book standpoint, there is visibility. What we need now is impeccable execution.
Closure is also, I mean, this is subject to execution during the quarter.
Correct.
Okay. One question for Mr. Piramal, on, you know, thought process of bringing some business to India. I mean, obviously being near to the client has its own advantages, but is there a thought process of bringing in large scale business, to India and have lower cost of operations?
It is a seamless thing that we do build investment. We are doing significant investment actually in the current, in the next year as far as the Digwal facility is concerned. Which anyway in terms of sheer numbers is the largest manufacturing facility that we have across the world. We are increasing capacity and the customers, depending on what the customers want, but we always are conscious of margin.
Sure, sir. Thank you and all the best.
Thank you. The next question is from the line of Aditya Jain from Citigroup. Please go ahead.
Thank you. Just wanted to understand the yield a little bit. DHFL yield mentioned over 11%, cost of borrowing 7%, so a spread of 4%. I understand the cost of borrowing we'd finance it to that low 6 and 3/4 coupon bonds. The yield of 11%, so the denominator here, I assume the gross yield on the original loan was probably lower because of a housing finance nature. This yield is based on a lower denominator based on write down of the book. Is that the right understanding?
No, no, Aditya. It's on the gross book.
Okay. Yeah.
It's on the gross book, Aditya.
It's on the gross book. Okay. What flows into our financials then should be a much higher yield than this, right?
What flows into the financials should be a higher yield. Yes.
Okay. Got it. When we get these kind of recoveries, so we'll, you know, the small amount of recoveries that are there in the quarter probably will become larger with time.
Yes.
They are part of the financial services, yield on loans, is it?
That is right. As per Indian norms, as you know, these will show up as part of the as.
As part of the revenues, but not part of the yields.
Are in the revenues but not in the yields.
Yeah.
These are essentially loans which are not on book at all. I guess it makes sense not to have them in the yield.
Yeah.
They are sort of non-interest income. Understood. Then just lastly, in terms of monthly disbursement. Clearly, I mean, in the hiring and the branch expansion shows plans to really scale things up. Just broadly, what level of monthly disbursements would you target for the new products and for the housing or, you know, even collectively, if not broken up by the type of product?
Sure. I think I will reiterate what we said on the previous call that, you know, our pre DHFL retail disbursements were about INR 500 crore a quarter. We had said last quarter that in the first 12-15 months after acquisition, we expect that disbursement number to grow 5-7x. That continues to stand given what we have seen in the first 3 months.
Sorry, 5-7x in what time period?
DSI is also October, so I'll do Q3 of the coming year.
Understood. Got it. Thank you.
Thank you. The next question is from the line of Abhishek Sharma from Jefferies. Please go ahead.
Hi. Good evening, everyone. Am I audible?
Yes, sir.
All right. Thank you. Yeah, my question is on the pharma side, just trying to get some better color on the CDMO business here. Your investor presentation says that, you know, there was a deferral of few orders to Q4. Whereas, the commentary says, you know, was more about supply chain constraints. Just wanted to understand, what is the relative weightage of each of these in the CDMO flatness this quarter. Also, you know, in terms of, you know, what kind of decision do clients have in terms of deferring their orders to future quarters? Do you think that, you know, that can sort of play some disturbance with your demand planning in the future?
Okay. In terms of, you know, the overall deferral of orders which have happened, that's in our CDMO side, primary reason for not being able to achieve plan has been challenges with respect to execution at our overseas facilities. These are the ones which are going to get pushed. In fact, most of the shortfall that we've had is primarily attributable to execution in various forms. Whether it could be because of non-availability of people or it could be because of non-availability of material or the customers themselves asking for a change of schedule and therefore us having to push out the orders to quarter four. As you're aware, in the CDMO space, most of these products are customized products made as per customer's requirements.
Obviously the customers source from us, and they obviously cannot go elsewhere as far as CDMO is concerned. All of these, what we have done is to sensitize the customers with respect to what the reasons are, and the customers are fully aware of the various reasons in the current scenario, which is an extraordinary scenario where, if you look at not just us, but in general, there have been challenges with respect to logistics and distribution, and there have been challenges with respect to availability of manpower. This has been a global problem. What we do is timely sensitization of the customers so that they are fully aware of when these orders will be executed and when they can expect to get their products.
The primary reason was on our side of execution, not the customer deferral per se.
It's a mix of both. There have been cases of customer deferrals as well, but it's more predominant towards execution at our end.
Given the fact that, you know, you said that January, there were still some problems, you are now back to normalcy as far as our execution is concerned?
Not fully, but to a great extent, yes. Most of the sites now with the COVID wave receding seem to have people coming back on track. Yes, fingers crossed for February and March to be able to meet the plan numbers.
I mean, what is encouraging to also see is that, you know, at the beginning of the year, we had guided you that we will deliver 20% revenue growth for pharma as a whole. I think we are continuing to maintain that kind of similar guidance even when we are standing in Q4 right now, right? I think that itself should be a comforting thing, despite the fact that, you know, the year had its own challenges in form of COVID and logistics issues.
No, specifically on CDMO, given the fact that we are already halfway through this quarter, you think you'll be able to meet the CDMO, you know, the targets that you have?
Yeah. I definitely have to look at the pharma revenue as a whole and not get into specific, you know, guidance on individual businesses. I think we intend to deliver 20% revenue growth or nearly 20% revenue growth for pharma as a whole. I think we're sticking to that kind of target as we're talking right now.
Sure. Thanks.
Thank you. The next question is from the line of Bhaskar Basu from Jefferies. Please go ahead.
Yeah. Good evening, everyone, and thanks for this. I had a few two questions. Firstly, just wanted to get some understanding of the securitized pool on which you get a fee income, if you can kind of explain this, what does this pertain to? That's number 1. Secondly,
The total cost on a consolidated basis has actually remained flat even though you consolidated DHFL during this quarter. Just wanted to understand despite the fact that you've added accounts, there hasn't been much cost increase at a consolidated level. Obviously, we do not have color on the lending side specifically. If you can explain that disconnect. Finally, on the provision coverage, while NPLs have gone up, you kind of chose to reverse provision and bring down the coverage. What kind of coverage levels are you comfortable with? As you kind of ramp up your retail business, what kind of credit costs do you expect, or from the lending side as such? Thank you.
All right. There's a lot of questions in there. We'll try and unpack each one of them. On the first question, which is the off-balance sheet, the securitized assets. At a very simplistic level, during the time when DHFL was facing liquidity issues, they sold a lot of their book to other investors, mostly banks. Think of large public sector banks essentially as the buyers of those securitized pools. Those banks own the most of the economic interest in those assets. However, those assets continue to get managed by the erstwhile DHFL team, now Piramal team. That book is about INR 20,000 crore, which is not shown on our balance sheet, obviously. On that book, we earn a fee of 1.6% annualized, give or take, roughly that amount.
That's what we have disclosed. We didn't talk about it the previous quarter. We thought it might be useful for us to actually point that out this quarter. We have specifically actually mentioned both the amount of them and the fees we make on that. The cost base on this is relatively limited and is incremental to what we have in the core retail business. We are not particularly. That's not a particularly large, you know, cost line item. That is number one. You had another point on the cost line, which let me take as well.
You had noticed and commented appropriately that the costs have increased, the OpEx has increased a little bit at the overall PEL level, but not by a whole lot. You had wondered why, and your point is absolutely right. There are a bunch of moving pieces here, so I'll not try and unpack everything. I'll just say a couple of things, and then we can talk more offline. One is, of course, that this is at the overall PEL level, so individual entities have had slightly different deltas.
The second thing that I'd say is that we chose also to move some of the manpower to this separate manpower company, which changes the structure a little bit in terms of what you know how some of those cost line items work out. The final point that I'd also give for your reference is in the last published results of the DHFL entity, you will notice that the total cost base was very small to begin with, right. The total cost base of DHFL in the first quarter of the financial year was only INR 90 crore for the quarter, and only about 55 odd crore for manpower.
The cost base wasn't very large to begin with, so consolidation wasn't expected to materially move the overall OpEx line item for us. That's as far as that piece is concerned. You had a question on provision. What is the level of provisions that we are comfortable with? Currently, from a gross NPA perspective, we have a provision of just about 50% or thereabouts on an overall basis. I think 48%. Now, in a book which is, you know, entirely secured, and has sort of, you know, residential housing assets underneath it, we think 50% is by and large okay.
Especially considering that on top of this, we have got other buffer provisions as well, which make for an overall provisioning of 4% of AUM, which we think is a fairly, you know, strong situation. As you've seen in the past two quarters, we have resisted releasing any provisions, right? Even though the overall real estate market was improving, for the last two quarters, we didn't release anything. We got, if you might recall, the reverse question the last quarter, essentially saying that, "Hey, the market environment is improving. Do you still need to hold on to all these provisions?" This quarter, we have chosen to release just a little, but don't read too much into it. This is not a big trend or anything. This is a quarterly thing based on individual assets.
Okay. Thanks. I'll come back for any questions. Thank you.
Yeah. How are you?
Thank you.
Yeah. Where are you?
The next question is from the line of Nischint Chawathe from Kotak Securities. Please go ahead.
Thanks. Just a couple of questions. You know, if you look at slide 32, you know, just trying to get a sense of, you know, the difference between AUMs and loan book. You know, what part of it is AIFs and what part of this is, investments? I think the number was around INR 5,000 odd crore this quarter.
Yeah. Can you just repeat your question?
I am looking at slide 32. You know, you have AUMs of around INR 65 odd thousand and loan book around INR 60 thousand. The difference between the two essentially is AIF and investments. If you could, you know, give some breakup between how much was AIF and how much was investments.
I think the major amount is AIFs, except for a large investment which PEL did in when we took over the Andheri East land from Omkar, if you recollect, almost a few months ago or a few quarters ago, which is INR 1,300-odd crore. Balance everything you can assume that they are in AIF.
Okay. All of this pertains essentially to the lending or the wholesale lending business. This does not include any liquid investments at all. I just want to be clear.
Yeah. Yes, yes. Yes, absolutely.
Sure. The other thing is, if I look at slide 33 and, you know, you have yields and margins, just wondering where does this, you know, 1.6% spread get reflected? Is it getting reflected in the yields or margins or, you know, which line item should I see this?
Yeah. The 1.6% is not part of the yield. It's. I think there's a footnote here which talks about that.
On this page, if I'm not mistaken.
Yeah. Footnote number three on the slide talks about that. The fee income from securitized assets has been excluded from the yield calculation that we've shown on this slide.
Is it reflected in the ROA? I mean, can I kind of, you know, connect it backwards?
Yeah. ROA will reflect everything.
Sure. Just on the cost of funds finally, you know, this 9.1% cost, if you could sort of split between the 6.75% DHFL NCDs, and you know, what would be the cost if I exclude the 6.75% DHFL NCDs?
Yeah. This is not something we wanna do. I mentioned this at the early part of the call. We don't wanna get in the practice of trying to separate out the DHFL transaction from the rest of the book. I mean, if you're really desperate to calculate it, I'm sure you can calculate it. You know what the NCD amount is and what the rates are. And you can go back and calculate it. We do not intend to separate that out. I will go back to what we have been saying before the transaction happened, right? Which is that we believe one of the major advantages of the transaction is that it will lower our cost of borrowing.
It'll lower cost of borrowings first purely mathematically, because the transaction has got a lower cost of borrowing itself, and so purely mathematically to some extent you will see cost of borrowing. Apart from that, there'll be some organic reduction in cost of borrowing as well. What we have seen very clearly demonstrated in this quarter is that the mathematical part of the reduction in cost of borrowing, which will, the rest of the delta will also come over time. We but it is not our intent to make that artificial distinction and separately show. I'm sure, you know, smart folks out there like you will back calculate and figure it out anyway.
Perfect. Just one last point. If you could share the incremental cost of funding for the quarter.
Around 8.5%.
Perfect. Thank you very much. That answers all my questions.
Thank you. The next question is from the line of Shalini Vasanta from DSP Mutual Fund. Please go ahead.
Hi, this is Vivek Ramakrishnan. My question is primarily for Mr. Jairam Sridharan because he's already been there, done that. You know, when we look at the various NBFC presentations, it almost always says the same set of things, digital, and, you know, co-participation in FinTech. What do you feel is the secret sauce that is going to propel DHFL forward is one of the questions that I have. Then just diving down into the housing finance business, you can see that the yields, depending on which company goes all the way or a bank goes all the way from 7%-14%. You've chosen 11%. Is that a secret?
Is that a sweet spot for you in terms of the customer segment that you'll target, which you feel will give you the best risk-adjusted returns and also link it to cost to income? The last question is more on the liability side. One of the keys to the housing finance business is to have low cost funding, of course, and which is dependent on the ratings. Is there a glide path to ratings that you're working on with rating agencies? Are there a few triggers that we should watch out for that will help us in terms of knowing how the ratings would move? Thank you.
All right. Thank you, Vivek. Thanks for those questions. Firstly, to your strategy point, right? It has started to feel for us with a lot of NBFC sort of communication that there are these sort of two broad types, different types of businesses that people are trying to do and how do we differentiate? In general, my feeling on this, Vivek, is that in the retail business, nobody's gonna win because they have a better strategy. People are gonna win because they have better execution. I don't think kind of comparing strategies head-to-head is of any use at all.
What we gotta figure out is who is able to execute both the really high touch, get your sort of dirt under your fingernails, you know, go at the ground level customer to customer and do high touch underwriting for affordable housing, and is also able to figure out how to set up a new gen tech stack, how to build the right API libraries, how to connect in the most seamless way with digital partners, how to create the most scalable backend loan management systems, et cetera. People who are able to execute on both of those things very well are the folks that are gonna win. Needless to say, it is our belief that we have put together the right team to be able to do both of that.
On the one hand, we have people who have done hands-on physical lending, and affordable housing business for 20+ years who are leading our business on that side. On the other side, we have a team led by a CTO who has joined us from Amazon, who has put together an engineering team of 200 people, that is trying to build our own software, yeah, out of our center of excellence in Bangalore. We have put together a talent set which we believe adequately addresses both of the things that we need, and hopefully that will lead to good execution, but time will tell on whether that execution is gonna pan out or not.
Your second question was on affordable housing or the housing space in general, and the fact that we have chosen to be in that 11.3%, I think, is our average yield on housing, and the fact that we've chosen to be there. I will say that this is not a perfect sweet spot here, Vivek. There are multiple spots, and you got to operate on all of them, and you got to let the market decide where what the most appropriate sort of product market fit is. Like all sorts of people who are evaluating new markets, then to use a startup terminology, we are constantly looking for the right product market fit. We have currently got two major offerings in the housing space.
One in the mass affluent space, where we have found that the right product market fit for us is around the 10.5, 10.75 kind of range. We've got an affordable housing product where we've found that the right fit is around the 12% range, right? Weighted average, these two things are leading us to about 11.25% in terms of yields on housing. We are also considering a product in the even smaller ticket size, the budget space, where yields might be even higher. In each of these spaces, it is their own sort of sweet spot that we will find, and we will let the market tell us where the big opportunities are. Based on that, the weighted average will come out.
It's not like we are particularly targeting a specific weighted average rate.
Was there another question?
Was there anything else, Vivek, that I've not answered?
Yeah. No, thank you. That answered the question. As I said, on the liability side, please, in terms of the ratings and the guide path, so that, I mean, any specific triggers that we should look forward to?
Yeah. I mean, great ratings are like happiness, right? You can't chase them. You will get it when you stop chasing it. We don't have a great sort of big project which is trying to get our ratings up to a particular level. We are doing all the right things. We have changed the tenure profile of our liability. We have reduced leverage. We have significantly increased granularity on the asset side of the book. We have increased provision levels. Our capital adequacy is upwards of 25%. We are doing all the right things. Hopefully, the credit agencies will notice and give us our due in the goodness of time. We are not gonna be knocking their doors on this.
Extremely well put. Thank you. Just one other question, if I can sneak in. Given the fact that on the liability side you have loans which are at sub 7% for a long period of time, essentially you can turn your housing book twice over with that liability profile, right?
Thanks for noticing that, Vivek. Yes, we can.
Okay, great. Thank you so much, and wishing you very good luck.
Thanks, Vivek.
Thank you.
The next question is from the line of Prateek Poddar from Nippon India Mutual Fund. Please go ahead.
Sir, just one small clarification. On slide number 38, you talk about three products on the oncology side which will hit $5 billion of sales. These are your sales or the innovator's sales?
These are the innovator's sales.
What is your share of business there in this? Or your share of revenue, if I may ask?
See, you know, we continue to have many customers. These are one of those many customers. They contribute to a portion of our sales, and we don't give customer-wise sales, you know. I think what the point we are trying to make here is these are attractive segments, and there are sizable customers with whom we are continuing to do business with, and we can expand our business along with them as they grow.
To clarify, these are your commercial products, right? These are commercial basket of products under CDMO which you are supplying, right?
Correct. What it basically indicates is the potential and the
Correct.
You know, the stickiness of revenues in the future. If these products really take off to the potential that is there, that ensures a more stable line of business for the business.
Any timeline by which you expect these to hit their peak sales?
It's difficult to say that at this point in time.
Sure. Last question on your tax rates. You have deferred tax assets, right? Can you just talk a bit about your tax rates? Thanks.
Effectively, the tax rate is between 24%-25% currently.
Got it. Thanks.
Thank you. The next question is from the line of Vinod Jain from WF Advisors. Please go ahead.
Good evening. Sir, my first question relates to other comprehensive income. I wish to know what does the changes in share values of equity instruments in OCI comprise?
It's primarily Shriram City Union. As you're aware, that's equity accounted currently. There has been a 29% increase in the share price of Shriram City Union if you compare April to December. That's the primary driver for that.
Okay. Sir, the other question is whether some color can be given as to what comprises the share of net profit of associates and joint ventures in the quarterly results of INR 183 crores.
Yeah.
What could be the way forward?
Sorry?
What would be the going forward view on that?
That basically comprises of our share of profit in Shriram, as well as our joint venture with Allergan. That is what you see currently in that.
What could be the view going forward for this head of income?
Allergan business has been growing. They're number one in ophthalmology in India, the JV that we have, and their profitability margin has been 30%. We remain optimistic with the business. I'm sure Shriram business you will be tracking us as you know in a lot more detail, so you can kind of l ook at the estimates of the Shriram Group.
Very well. Thank you.
Thank you. The next question is from the line of Bharat Sheth from Quest Investment Advisors. Please go ahead.
Hi. Thanks for the opportunity. Sir, on the financial side of the business our reported ROE is around 9.5% without factoring the inflow of the disinvestment that we in near future we'll do. What kind of a medium-term ROE are we looking and what are the strategy? How do we plan to achieve that medium-term ROE?
We did not offer specific ROE guidance on this, but we have said in the past, and I'll reiterate, that the kind of business that we are building is one which has a mix of two-thirds retail, one-third wholesale, and within wholesale, about half and half between real estate and non-real estate. This type of business, we believe, can yield somewhere between 2.5%-3% ROE. Now, what that converts to in terms of ROE, let us see, depending on what the leverage environment in the market is. Currently, we are playing it extremely conservative from a leverage standpoint with our financial services business. You can apply your own leverage assumptions of how much you think a business like that when executed well can leverage over time, and that can give you a good feel.
In current market environments, businesses of that nature are in the mid-teens ROE.
Okay. I mean, sir, currently our leverage is, I mean, 2.5. Once we get the disinvestment money there, what kind of a comfortable level in current kind of a scenario will be, would like to have a leverage?
The only thing we can say is that we are very comfortable with where we are from a leverage standpoint, and we are, we'll be comfortable increasing it a little bit. What is the exact limits to which we can increase it? It depends a lot on the liquidity environment and our expectations on the liquidity side going forward. It would be inappropriate for me to comment on where we would like to be 2, 3 years from now. Let's see how the market evolves.
Okay. Thank you, and all the best.
Thank you. Ladies and gentlemen, due to time constraint, we will take that as the last question. I now hand the conference over to Mr. Hitesh Dhaddha for closing comments. Thank you, and over to you, sir.
Thanks, everyone. If you have more questions, please reach out to the IR team. Thank you.
Thank you. Ladies and gentlemen, on behalf of Piramal Enterprises Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.