Ladies and gentlemen, good day and welcome to Q1 FY 2022 earnings conference call of Piramal Enterprises Limited. 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 touch-tone 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're safe and in best of your health. I'm pleased to welcome you all to this conference call to discuss Q1 FY 2022 results. Our results materials have been uploaded on our website, and you are able to download them 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; Ms. Nandini Piramal, Chairperson, Piramal Pharma Limited, and Executive Director of Piramal Enterprises; Mr. Rajesh Laddha, Group CFO and Executive Director of Piramal Enterprises; Mr. Khushru Jijina, Executive Director, Financial Services, PEL; Mr. Jairam Sridharan, CEO of our Retail Financing business; 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. Despite the headwinds from the second wave of COVID, we have delivered a resilient performance during the quarter. Our revenues remained largely stable at INR 2,900 crore, this is amid reduction in the wholesale loan book, which is in line with our strategy of making our loan book more diversified and granular. Despite a stable top-line performance, our net profit has grown by 8% year-on-year to INR 534 crore. We continue to maintain a strong balance sheet with our equity base now at approximately INR 35,000 crore, and our net debt has gone down by 50% since March 2019, thereby bringing down our net debt to equity to 0.8x as of the end of this quarter versus 2 x in March 2019.
It would be a good thing to look at the journey of our Financial Services business since September 2018, when the financial crisis hit the NBFC sector. Our journey can be categorized under three phases. The phase one is consolidation. We have now largely completed the phase of consolidation with significant progress over the last two years. We have built a resilient business model in the wake of the liquidity tightening in COVID-19 and other macroeconomic headwinds. We have achieved four major outcomes in this phase. First, improving of our capital adequacy. We've raised significant amount of capital and deleveraged our balance sheet. Our capital adequacy ratio today stands at 39% versus 22% as of March 2019, making us one of the most well-capitalized NBFCs and HFCs in India. We have adequate growth capital for the next five years, even after the completion of the DHFL acquisition.
The second point is how we have reduced our loan book concentration. Our top 10 exposures have gone down by 30% since March 2019, from INR 18,000 crore to INR 12,800 crore in June 2021. Today, no amounts exceed the regulatory threshold of 15% of net worth. In addition, we have built conservative provisions. As of this quarter end, our total provisions stood at INR 2,750 crore, that is 5.8% of our total AUM. We have diversified and shifted the borrowing mix towards a stable long-term funding sources. We raised INR 34,000 crore of long-term borrowing since March 2019, and replaced most of our short-term CP borrowings. As a result, we now have a much stronger ALM profile with significant positive ALM gap across all buckets. As part of our efforts to diversify the borrowing mix, we raised debt through our maiden public bond issue in July of this year.
This issue received a healthy participation from retail investors and HNI, and we could raise INR 804 crore. The phase two of the journey of Financial Services business is our transition and a quantum growth. With the phase one largely behind us, we are now in phase two, our transition from a wholesale NBFC to a well-diversified Financial Services business. There are three components in this phase. The first is the DHFL acquisition. This acquisition, I'm happy to say, has been progressing well. Our resolution plan received the approval of NCLT in June 2021. Post the NCLT approval, a Monitoring Committee has been formed, which includes members from the CoC, the administrator, and members from our management team. As per the IBC law, the Monitoring Committee has a duration of 90 days from the NCLT approval to complete the acquisition, and we feel confident that we will achieve this.
With the DHFL acquisition, our retail AUM is expected to grow by 5x. We expect to become one of the top five HFCs in India. The second part of our transition is the reduction in the wholesale book. As part of our strategy of transitioning our book from a largely wholesale to a well-diversified Financial Services business, we are consciously bringing down our wholesale book. Our book has come down by 27% in the wholesale from INR 51,400 crore in March 2019 to INR 38,000 crore in June 2021. We are also building an organic retail engine, a technology-driven multi-product retail lending platform. In 2020, we embarked on the journey of building this technology-led retail lending business, which is digital at its core and phygital at the customer's end.
We are building this platform with next-gen technology capabilities with AI and machine learning deeply woven into the fabric of the business. In November last year, we launched our multi-product retail lending platform. Since then, the business witnessed a healthy traction. We also launched multiple retail lending products, thus expanding our product portfolio and have formed partnerships with fintech and consumer tech firms. We have onboarded top quality talent from large Indian banks, global tech giants to take the business forward. Most importantly, as part of our journey, we have incorporated learnings from the current environment to build a sound business model for the post-COVID world. In fact, our new lending strategy of pivoting towards affordable and mass affluent categories in Tier 2 and Tier 3 cities has made our retail book more granular.
The average sanctioned ticket size in retail for our secured lending products has declined from INR 75 lakh to INR 20 lakh. The end-to-end digital unsecured lending now contributes 6% of new originations by value and 75% of new customers originated into the Piramal Retail franchise. All these initiatives will result in significant change in our loan book with a share of retail lending moving closer to 50% in the near term. The third phase of our journey is to have a sustainable growth and profitability. First of all, in this third phase is the integration of DHFL and leveraging its vast network to grow the multi-product retail lending business in the future. With the DHFL acquisition, we would have access to a vast network of 300+ branches, with majority of them being in Tier 2, Tier 3 cities with 4,900 employees and a sizable customer base of 1 million.
Our teams will be working towards integrating our existing multi-product retail lending platform with DHFL's network during the year. We aim to leverage DHFL's platform to cross-sell multiple retail products offered as part of our digital platform, thereby ensuring the continued future growth in the business. This would help us gradually increase scale in retail lending while addressing the diverse financing needs of the growing Bharat market. We now move towards the profitability in this next phase. We aim to deliver measured growth and profitability in the long run while maintaining our focus on risk management, asset quality, capital adequacy, and our technology infrastructure and customer experience.
The key factors that are expected to boost profitability in the near term post the DHFL transaction include an immediate decline in the cost of borrowing post the completion of the DHFL transaction, as this transaction will be partly funded by NCDs worth INR 19,550 crore at 6.75%. Post the completion of the DHFL transaction, the leverage of our Financial Services business will increase from 1.6x as of June this year to 2.5x. Further, with the growth in the retail loan book, the leverage could increase to 3.5x in the near to the medium term. Increased loan diversification as well, we will have about 50% retail in the near term, and growth will potentially lead into lower borrowing costs in the coming years.
Our change in product mix with the expansion of the product portfolio and through differentiated higher-yielding products, we expect profitability of the retail lending business to improve in the medium term. Now, I want to comment on our asset quality. The GNPA remains stable QoQ, with no major slippages despite the headwinds from the second COVID wave, and in absolute terms remains stable.
Our wholesale book declined during the quarter, as I said, in line with our stated strategy, resulting in a marginal increase in the GNPA ratio. Also, we did not see any material slippages or write-offs in the first quarter despite the challenging business environment. The key factors that have resulted in the asset quality remaining stable on this quarter are: first of all, in the wholesale loans. The real estate sector saw a revival of demand in the second half of last year. However, in the first quarter of the current year, the real estate sector has been impacted by the second wave of COVID in April and May. The performance of our developer clients in the first quarter of FY 2022, the sales declined quarter-on-quarter in line with industry.
While sales dropped in April and May owing to the lockdown, we have seen an improving sales trend in June and July. Our developer collections from home buyers saw no major impact despite a quarter-on-quarter decline in sales. Collections at 85%-90% of average of the past two quarters were there primarily because of the strong sales in the second half of 2021. The construction activity and availability of labor too was not materially impacted. We are now close to pre-COVID levels. However, given the potential risk of a third wave of COVID-19, we continue to remain vigilant across our portfolio and maintain conservative provisioning to take care of any contingencies arising in the future. On the retail loans, the collection efficiency saw some impact due to the partial lockdowns imposed in the second wave.
In June 2021, it has bounced back to 96%, that is nearly back to December levels. In July of this year, collection efficiency further improved to 98%, and bounce rates have normalized as well. Coming to the retail loans at DHFL. The collection efficiency at DHFL, which saw some impact in April and May, has also seen a healthy pickup in the month of June. In fact, the DHFL retail portfolio is performing broadly in line with our expectations. Our near-term focus now is to first effectively integrate DHFL with our financial services organization, ensure that the collections and asset quality of the combined entity remain healthy, and generate synergies by cross-selling our innovative product by leveraging DHFL's platform. I now want to turn to the Pharma business. Our Pharma business delivered a robust performance during the quarter.
The business registered a 31% revenue growth during the quarter, delivering revenues of INR 1,360 crore. The Pharma business contributed now 47% of PEL's top line for the first quarter. This performance indicates the strength of our business model in a challenging business environment. Our EBITDA at INR 170 crore was up 56% compared to the same period last year. Fundamentally, in our Pharma business, we observe seasonality in the EBITDA margin performance every year. A careful look at the trend over the last few years indicates that margins generally improve as the year progresses. The first quarter, our margins have broadly in line with that trajectory, in fact, improved over the last year. Coming to each of the businesses in the pharma space, our CDMO business grew by 17% during the quarter.
We are witnessing a strong growth in the development order book, driven by robust demand of sterile fill finish in North America and strong demand for our API services across all geographies. We completed the acquisition of Hemmo Pharma, a peptide API manufacturer, during this quarter. We are carrying significant capacity expansion projects across multiple sites. Our integrated projects order book increased 8x from FY 2017, and our patent development program saw a 3x increase in the number of phase III molecules from 10 in FY 2017 to 30 in the current year. Coming to our Hospital Generic business, which largely recovered from the COVID impact and grew 43% during the quarter. We have now maintained our market share in most markets and products. We saw strong sales of sevoflurane as demand recovered in the U.S. and expansion of key products in Europe and East Asia.
The revenue of the India Consumer Healthcare business grew by 73% year-on-year during the first quarter, despite a challenging environment. The performance was also helped by strong growth in the COVID care portfolio. We have witnessed a 40% year-on-year growth over the last 12 months, driven by our strategic initiatives. We have navigated the pandemic with agility. We have reinvested our profits for future business growth. We launched 20 new products since March 2020. We are now able to sell our products across 22 e-commerce platforms and are continuously investing in brand building through brand ambassadors for our key products. Each of our businesses in the pharma space has a compelling plan for their growth. We expect to grow by around 20% in the current year. We have delivered a 22% EBITDA for FY 2021, and we expect to deliver a similar margin for the full year.
Additionally, we plan to do a few more acquisitions in the next two to three years. In summary, I would say in conclusion, our performance over the last two quarters reflects the resilience and the significant effort made towards building a solid foundation for our long-term success. We remain cautiously optimistic for FY 2022, and are in a stronger position to tap growth opportunities across both our businesses. I am confident that both businesses will emerge as two strong companies with a good runway for growth in the long term. Thank you.
Operator, we can take questions.
Thank you very much. We will now begin the question- and- answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Participants, you may press star and one to ask a question. The first question is from the line of Kunal Shah from ICICI Securities. Please go ahead.
Congratulations, sir, for the resilient assets quality in this quarter as well. Two quick questions. The way we have highlighted in terms of net debt to equity post to DHFL transaction going up to 2.5x from 1.6x. That indicates in terms of maybe the net assets getting added INR 60,000- odd crore. If you can just highlight maybe what is the kind of the retail plus wholesale mix and what is the kind of markdown which we are taking, and ideally what could be the structure which we can see that now most of the approvals are in place? That's the first question.
Yeah. Good evening. I think answering about the net debt to equity, we will be adding about INR 19,500- odd crore of debt, versus the DHFL transaction. That debt will get added to the overall debt. Therefore, our leverage will increase from roughly about 1.62x close to about 2.5x. As far as the retail and the wholesale mix, et cetera, DHFL book is concerned, we will be doing the purchase price allocation n ow, based on our total consideration of some INR 33,500- odd crore. At that point in time, we'll be able to share the exact number in terms of how we are going to allocate to the retail book and wholesale book of DHFL. Also you wanted to know about the process, you said?
Yeah, in terms of the structure. Will it entirely maybe wholesale plus retail will get merged with our entity or there are different structures which we are evaluating?
No, no. The structure is already finalized. In fact, it's a part of the overall resolution plan. What we have proposed and what has been approved, both by CoC and the regulators, including RBI, that Piramal Capital & Housing Finance Limited, which is our company right now, will be merging into DHFL. Therefore, by that merger process, DHFL will become 100% subsidiary of Piramal Enterprises Limited. The shares of DHFL will get delisted and the existing NCDs also will get canceled. Basically, PCHFL will be issuing INR 19,500- odd crore of NCDs to the existing lenders of DHFL.
Name will change.
Of course, we'll change the name of DHFL too. We'll try and get Piramal Capital name back.
Sure. Okay. Second, if you can just highlight the asset quality. S tage 3 has been very steady. In terms of the restructuring, last time you said it was INR 1,700 odd crore. Any more restructuring or what is there in the pipeline? The movement in the Stage 2, did you see some stress building up on the Stage 2, or it was maybe as stable as Stage 3?
I'll take that. Basically, again, there has not been any significant movement in this quarter because as we have been sharing with you all from the time this first COVID has come, we have been doing the stress testing. If you see the major two hotel deals which moved to Stage 2. There I want to qualify that the value of that asset remains. It's just that we wanted to move it because we saw some stress in that portfolio, not that the asset. The value of the asset remains, so we just moved it to Stage 2. Actually, Stage 3 was a very small deal which we moved to Stage 3. I can confirm that the value of that will be fully recovered. There's not going to be any worry on that.
Restructuring?
What's your question on restructuring?
Any additional pipeline or something which we will.
No. No. No. No.
Okay.
Thank you. Participants, you may press star and one to ask the question. The next question is on the line of Alpesh from Motilal Oswal. Please go ahead.
Hi. Thanks, and congrats for the good set of numbers. First question, just to the extension to Kunal 's question. We would be acquiring assets of roughly INR 60,000 crore and paying around INR 33,000 crore. How the difference would be recorded at the time of merger, around INR 27,000 crore?
Currently, whatever is the book value of DHFL, we will be restating those values in our books or in the books of PCHFL based on the fair valuation of all the assets of DHFL. That will include the retail, wholesale, and everything else. We are now going to record it at INR 60,000 or INR 70,000, whatever is the carrying value of those assets are there in DHFL's book. We will be doing purchase price allocation to these assets based on the fair valuation or realizable value of these assets into our books.
Okay. Is it fair to assume there would be a decent amount of capital reserve that could be created because of this transaction?
There will not be a capital reserve, but there will be some amount of provision which will come. That's the outcome which is going to be based on the purchase price allocation, as I said.
Okay. Are we going to enjoy the tax benefit for the losses which the DHFL has recorded in the past?
They have not recorded tax losses in their books right now. Whatever markdown we are going to do, we will get those tax losses. How recording, et cetera, will be done, we are still working on those numbers. Yes, as we mark down the numbers, those losses will be available to PCHFL.
Alpesh, we will be able to give you more understanding and detail once we announce the transaction upon the completion of this whole thing, the entire process. That time we will be able to give you more clarity on some of these things.
Got it, Hitesh. Another question for Rajesh, either of you. On slide number 16, then where we show that the wholesale book declined by around 27% from March 2019. Right? There is a footnote over there that it does not include the asset taken over or the AIF outstanding of around INR 4,400 crore. How this entire thing works? In the sense, this entire INR 4,400 crore is our share, or the total amount of assets which have been transferred to AIF. How does it work?
It's less than 50% is ours.
Around INR 8,000 crore out of this INR 51,500 crore. So, the difference, which is around INR 14,000-INR 15,000 crore. INR 8,500 crore or INR 8,800 crore transferred to AIF. There would be certain asset, I guess, last quarter we talked about around INR 1,300 crore-INR 1,400 crore related to the Omkar exposure. INR 5,000 crore would be the proper repayment that would have come. Is my understanding correct?
Yeah, Alpesh, I'll take that quickly. We can confirm the exact numbers to you. This includes our 50% share in AIF, which we created with Apollo. This also includes the Majas transaction which we explained to you all during the March results. It's a combination of these two, but our share in AIF is 50%.
Okay. Last question, related to the fintech partnership or the consumer tech partnership. Are all these partnerships exclusive to us? If not, then what are the terms, and what ensures that we get the first right of refusal for the loans which have been originated by those fintech or the consumer tech companies?
Jairam, do you want to take that?
Sure. No, Alpesh, these are not exclusive partnerships. There are no exclusive partnerships right now in the fintech world. The way to actually think about this is there are going to be a few different lenders on the platform. Each lender is going to have a set of products available and a set of tech linkages or APIs that are set up. The APIs that work the best or that give the most seamless digital experience are the ones that will end up getting a lot of the business. You have to assume that you are doing your diligence from a modeling perspective and a credit risk management perspective at your side. In general, there is a lot of infrastructure that is put in place to make sure that there is no cherry-picking of assets.
Not just us, but every bank in the deal is going to be making sure that there is no cherry-picking of assets. Cherry-picking is very rare. That's not something that one should worry a lot about. What one should worry about is, are you able to give the best and most seamless integration to the customer? That's when the first round of leads will actually come through to you rather than the leftover leads.
Okay. Jairam, for consumer, you are the face, right? For consumer, it is the Piramal Enterprises?
It's both, Alpesh. It's both the lender as well as the fintech party. The consumer can download my app, and actually see everything. The consumer can see some of the details on the customer-facing app as well. It's both. The customer signs, of course, the agreement just with us. All the loan information, et cetera, on the loan pages will all be branded Piramal. They can actually access this particular loan's details usually on the fintech's platform as well.
Okay, great. I'll come back with the question. I'll come back with the queue. Thanks, and all the best.
Thank you. The next question is from the line of Tushar Manudhane from Motilal Oswal. Please go ahead.
Yes, thanks for the opportunity. Just on the pharma side. For the quarter, how much the Hemmo Pharma would have added? Any ballpark number you would like to share?
Hemmo Pharma, the transaction closed on 22nd of June. For the quarter, the revenue is just INR 5 crore, so it's insignificant overall from the quarter's performance.
Got it. Accordingly also, if you could just extend it for the outlook for this Hemmo Pharma in terms of integration with Piramal?
The integration activities right now have commenced and the management teams are working with Hemmo's management for execution of the plan for the current financial year. In due course of time, we could also be merging Hemmo as a legal entity with Piramal Pharma. Our business development teams have already commenced selling our peptide capabilities, both from a contract manufacturing side as well as from a generic API side to all our existing customers.
Got it. Just secondly, would like to understand the seasonality nature for CDMO business.
Right. Historically, we have seen that a lot of our contract manufacturing customers do tend to have higher uptakes in the second half of the year, which is after September, is typically when they have a lot of requirement for commercial volumes. That's the reason why you see that a lot of sales and therefore higher quantum of margins happens in the second half of the year. This you would observe last as many years, if you pick up the results of Pharma business, you will see that that kind of cyclical trend is noticed.
Got you. Just lastly, about the two orders.
Sorry?
Just lastly, on the two orders which you have won, which are more than $10 million. This would be spread over what period?
The one which is there in Lexington would be delivered within this fiscal year. The second, which we have won for our Digwal facility to a significant extent, would be delivered within this fiscal year and the balance would move to the next fiscal year. Of course, this depends upon certain other operational aspects also, but we do expect the split to happen between current year and next year. 50/50.
Good. Just lastly, while the margin guidance is given, would it be possible to share the overall revenue outlook as well for FY 2022?
Yeah. We have already guided that our revenue growth will be in excess of 15%. 15%- 20%, we've already guided that.
Thank you. That's it from my side.
Thank you. The next question is from the line of Abhijit Tibrewal from Motilal Oswal. Please go ahead.
Yeah, thank you for taking my question. If I hear all the discussion on DHFL, will it be fair to say that at this point in time, maybe we are not in a position to disclose the net attrition which will be there in the loan book?
Net accretion to the overall loan book will be to the extent of close to INR 30,000 crore. As I said, the allocation is yet pending, which we have to do for different set of assets which DHFL has, including the insurance stake, et cetera. The allocation part is still pending. It will be INR 30,000 crore-INR 32,000 crore net accretion on total assets.
Okay. That is useful. The second question that I had is, because Mr. Chairman also said that after this acquisition, maybe it will become among the top five HFCs within the country. I think with this transaction, I'm not sure if you will be getting that deposit license that DHFL has, which would mean maybe you'll have to apply for a deposit license separately now or any thoughts around that?
As we speak, deposit-taking license still continues with DHFL. It's just that RBI has told them not to accept any deposits. We still believe or we still hope that we will get it. What we have been told is that we have to go back to RBI after the process is completed. We are still hopeful, but let's see.
Sure. The last question that I had is, because we've been guiding investors that we will be looking at a separate listing of our Financial Services and Pharma business. I was just trying to understand, what is the structure of the listed financial entity could be like? Large part of your, let's say, the DHFL loan book will come and sit in PCHFL, which will obviously be reverse merged into DHFL. Then you'll also have this multi-asset platform, and I'm guessing you want to kind of park all the other products which are non-HFC related in your NBFC. When it eventually gets listed, how will it work? Will it the HFC maybe get listed and you'll have a NBFC subsidiary which will house your multi-product platform products, or how will it work?
I think first things first, I think pharma demerger is the simplest one because that's a straight vertical demerger. After that, what we'll be left with is Piramal Enterprises Limited, which is a list co. Underneath that, we will have Fininvest, which is an NBFC, as you rightly pointed out. We will have this merged DHFL stroke PCHFL which is an HFC. We are still figuring out as to what will be the best structure from a regulatory standpoint, because there are regulatory requirements which an HFC needs to fulfill in terms of retail mortgages, in terms of overall real estate lending, et cetera. We are still figuring out as to whether it makes sense to have NBFC, HFC separately. Whether to merge those, et cetera. I think we are on the drawing board.
As Hitesh mentioned that once this merger is completed with DHFL, we will then come back and probably announce as to what is the structure we are going to follow. This will happen in, say, two parts. Pharma, as I said, is a simple one. This part which is more dominated by regulations, we have to find a right choice and right answer at this stage.
I would just like to add one sentence that in all of this, interest of minority shareholders will definitely be taken care well and protected.
Yeah, sorry. That's useful. Just one last question to Jairam. Maybe if you could remind us what are the new products that you're planning to introduce in FY 2022 ? If there are any thoughts at all around how do you plan to cross-sell some of your retail products, organic retail products to DHFL customers? Thanks. That will be all from my side.
Yeah, Abhijit, absolutely. Let me take the second question first. 100%, we plan to cross-sell the rest of our retail products to DHFL customers. It would be our intention that the cross-sell should start pretty much in the very first quarter post the integration. We are making all the plans towards that. We are coming up with both the technology as well as the cross-sell propensity models, et cetera. I'm fairly confident that we'll be ready to start cross-selling some of our products, particularly on the unsecured shorter duration side to the DHFL base pretty much in Q1 post-integration. In terms of what is our sort of product mix that we are sort of thinking about. Needless to say, the moment the integration gets completed, our retail business will become very heavily home loans dominated.
Let's say about 80% will be residential home loans, about 10%-15% will be loan against property and some other sort of property-backed lending, and there will be a little bit of other stuff. In general, our belief is that going forward, we want to still retain or in the foreseeable future, given the size of the DHFL transaction, you will probably still see secured businesses. Whether it is housing or LAP or small business lending or used car financing, et cetera. All of that put together will roughly be about 80%. Some of the end-to-end digital unsecured lending stuff will probably be around 20% of our book is probably where we are headed. In terms of specific product categories, used car financing is our most recent product category, which we launched last quarter. We are putting a lot of focus on that.
We've got now two platform tie-ups there. We are tying up with two more, and then we are also starting to do on-field physical tie-ups with dealerships. That's an area we're putting a lot of focus on. We are also keenly evaluating the two-wheeler financing and education financing space, where we believe there are a lot of opportunities. We will see how that goes. We've not made up our minds, whether we're going to launch them yet. We might do a few pilots, but those are areas we are evaluating very closely right now.
Sure. This is very useful. All the best to the entire Piramal team.
Thank you. The next question is from the line of Vinod Jain from Wells Fargo Advisors. Please go ahead.
Sir, congratulations on the resilient set of numbers. My question is related to the net interest margins. The NIM for the financial year 2021 was 5.6%, but has gone down to 4.5% in Q1 FY 2022. What is the view going forward on the NIMs?
Let me start by saying that as a strategy, we have said and we are following that strategy where we are saying that we will be reducing our wholesale book. If you compare first point, the yields and the margins whether it is March quarter, then you'll find that we are almost at the same level or slightly better than March quarter. As we are reducing our wholesale book, so the mix of the book is changing. As the structured yields are going away, which were at high yields earlier, and the fresh disbursements which are happening are happening on a very minor scale. But t hey're happening for construction finance, and now much more stronger deals, so to say.
That's where you will find that the yields have come down. Whether it's last quarter, which was March 2021, now they're stable. If you compare with June, where from that quarter on, the book has come down, so have the yields. If you look at the March last quarter, they're stable or slightly better than March quarter.
I'll just add to what Rajesh said. We have consistently been saying about this strategy that the wholesale book will come down, the single borrower will come down, which we are achieving quarter-on-quarter. Also, what to add to what Rajesh said, we have been also consistently quarter-on-quarter saying one thing, that we are collecting a lot of money and we are also using it to complete our other projects. Because in real estate, you need to complete the project. As our portfolio becomes more and more mature, the interest rates will come down, and which is actually a good thing because ultimately the portfolio becomes far more safer.
The view is that going forward, the NIMs will be maintained?
Yes, more or less it will be maintained, yes. As of now, yes.
Yeah. Sir, my second question is related to the ROE. Can it reach double digit in 2022- 2023?
Yeah. I think you must appreciate that the last two years' focus has been around balance sheet strengthening and preserving cash. All what we have said has been done in last two years in terms of balance sheet numbers and ALM, et cetera. As far as ROEs are concerned, if you see even this quarter, I think it took us a little while, but if you see the cost of borrowings is now coming down. This quarter, the cost of borrowings have come down from 10.8% for the whole year last year to about 10.1%.
Yes.
As soon as DHFL happens, we are going to issue this INR 20,000 crore of liability to the existing lenders of DHFL. Our overall cost of borrowing will drop to about 9.2%-9.3% immediately.
Yes.
To add to that, our incremental borrowing, what we are doing currently is in the range of 8.50%-8.75% levels, even on PCHFL's balance sheet.
Yes.
We will be going for or we'll be pitching very strongly for a rating upgrade because our concentration between retail and wholesale would become 50/50. The minute we get a rating upgrade, another 50 basis points- 60 basis points or on a conservative side even 50 basis points will get applied to the entire borrowing. It will come down from that level onwards, but that's six months away. It is coming down. That's going to make a major impact on ROEs. Number two, as our debt to equity improves, as Mr. Piramal also said that immediately with DHFL merger is going to move from 1.6x to 2.5x. As our book grows, that's going to get funded through debt. Therefore , the debt to equity will move from 2.5x to 3.5x in, say, 12months, 15 months time.
Our product mix also is going to change, as Jairam was mentioning. That's going to improve our yields in terms of retail lending towards the products which are going to get us higher yields. Mix of all these three. We anticipate that ROEs will, from this level, should be definitely double digit in near future.
Very well. Thank you.
Thank you. Next question is from the line of Prakash Agarwal from Axis Capital Limited. Please go ahead.
Yeah. Hi, good evening. My question is on the growth guidance for the Pharma business. We grew about 31% for the quarter, and we also would have Hemmo full consolidation of the acquisition. We are talking about some acquisitions over the year, and years after. Are we talking about 10%-12% growth for the remaining nine months? I mean, it works out to be around 10% kind of growth.
If you are considering the full impact of the existing acquisition, that accounts for about 5% - 6% of the total growth that we are talking about.
Yeah, I mean some growth from any future acquisition and Hemmo acquisition and the fact that you've already done 31%.
Our growth guidance does not include any future acquisitions. It's only based on what we have, businesses in hand right now.
Yeah. Even if we take just Hemmo and 31% for the quarter, Q1, the remaining nine months, are we being too conservative?
Prakash, we would rather be keen to beat the guidance than be very close to the margin or something like that.
Okay. No, I was just thinking if there is any competition in any-
No, as a policy, our company would tend to give conservative guidance, and then we perform better than the guidance that we generally give. That's the policy that we generally try to follow.
Okay. Second observation was on the margin trajectory. As you mentioned and shown in the presentation also, it picks up given the seasonality. Seasonality is more so in which business? Is it only the CDMO, or you have this Complex Hospital Generics business in that also? I understand the share is already high in these two businesses. It's got to do with operating leverage, right? The top line is also higher. I'm just trying to connect the dots.
The seasonality is primarily in our contract manufacturing business. Though if you look at the other two businesses also, you would see that generally the sales towards the second half. It's overall at the pharma level, about 45% comes in the first half and about 55% comes in the second half. From an operating margin perspective, you will also see that it's about 35% in the first half and 65% in the second half. Those primarily driven by the contract manufacturing business.
Okay. Okay, thank you.
Thank you. Next question is from the line of Tejas Parekh from Citi. Please go ahead.
Hi. Thanks for the opportunity. Post- DHFL integration, your branch network will reach to close to 300 branches. If you could provide some color on your branch expansion strategy. The second question would be, if you could provide us the current restructured book, where does it stand?
Jairam, you want to take the?
Let me take the branch thing and then you can jump in, Rajesh. On the branches, we will start with about 300 odd branches of DHFL, plus our existing branches. We stated this a couple of quarters ago as well. I'll restate that our intention is in the next sort of three to four years, we want to be present in about 1,000 centers in the country. You will see us expanding on that. Now, the 1,000 centers might not necessarily need 1,000 branches. It might be a little bit less than that. You are looking at a significant expansion of the branch base even post- DHFL over the next three to four years.
Got it. It would mostly be concentrated in the Tier 1 and Tier 2 cities?
No, Tier 2, Tier 3 and Tier 4 cities, Tejas. Tier 1, likely we'll not be doing a whole lot.
Okay.
Let me take the second question on your restructuring. In fact, I forgot to mention to Kunal Shah also this question, which he had asked. Last year, we had actually taken four accounts in restructuring. As we speak today, ultimately, we only did two accounts. One in real estate, which is around INR 158 crore, and the other is the Mytrah Energy, where all the lenders did the restructuring. To tell you what is happening on the ground, the real estate project actually has started once again. I think we will be actually finishing the project in December 2021 itself.
Coming to Mytrah Energy, we had said this last quarter also that we were getting ready to put this asset and company up for sale, because with the interest in renewable energy again today worldwide. This is one of the few assets now in India, which gives a real good scale for somebody to take over. That exercise has already started. In fact, we should be receiving, before the end of September, the non-binding bids. As of today, more than 15 top renewable companies have signed the NDAs for looking at this company. This is the status of those two restructure accounts.
The one you said was INR 158 crore, and the other one, the Mytrah Energy, what?
INR 1,062 crore.
INR 1,062 crore.
Both are active accounts. They are not NPAs.
Okay. Thank you, sir. Thanks a lot.
Thank you.
Thank you. The next question is from the line of Bharat Sheth from Quest Investment Advisors. Please go ahead.
Hi. Congratulations, Mr. Piramal and the Piramal team. Sir, my question first is on the pharma side. When we are talking of Hemmo margin, is that fair understanding, is it higher than our overall Pharma business?
Can you please repeat the question?
Hemmo margin, which we acquired in this June 2021, is better than the overall our whole Pharma business?
Yes. The overall margin profile of Hemmo is higher than what is the rest of the Pharma business. For this quarter, Hemmo is insignificant in terms of overall financials, as I mentioned. It's just INR 5 crore in terms of sales.
No, I understand. Going ahead, we are also maintaining a margin of same as FY 2021 level when our Generic business, which is a higher margin, were lower. With growing all these two business, so don't we think... Is it not fair to understand that margin may go up?
There are two things. One, of course, is Hemmo currently constitutes less than 5% of the total sales of our Pharma business.
Correct.
Secondly, the growth in the margins in the quarters ahead is largely driven by enhanced sales that will come in the second half of the year. We've already given a stated guidance that in our consumer products business, we will be significantly increasing our sales promotion in the form of reinvesting the EBITDA so that we can get higher exponential top-line growth. To that extent, we will see erosion of margin as far as our Consumer Product business is concerned. That's why we've given a guidance of overall maintaining margins nearly the same level as it was at FY 2021.
Second point. With a lot of new products coming in phase III, and which will start contributing over time, do we think that over a period of two years, three years, our seasonality will not be much there?
It is difficult to predict in terms of seasonality whether all of these phase III molecules eventually becoming commercial. Ultimately, seasonality is driven by the fact that, when is the customer actually taking the products for manufacturing the end formulations at their end, and it depends upon their demand requirements. Product moving commercial from phase III is not necessarily an indication of the seasonality going away.
Okay. Is it fair understanding to our previous participant question, the split of the company where pharma will be disintegrated and will be listed separately. Shareholder of Piramal will get the share of Pharma business. Is that fair understanding?
Yes. The existing shareholders of Piramal Enterprises Limited will get shares of the Piramal Pharma Limited separately.
Okay.
Incrementally. Sorry.
Okay. Now coming to this technology platform. One is that we are partnering, and second, is it fair understanding that we are also building our own platform?
Jairam.
Yes. Absolutely. That is the right understanding. We are building our own platform. In fact, we have built our own platform. We took six months, seven months last year-
Right.
... before we went live to actually build the platform. As Chairman mentioned in his opening remarks, we have put together a very strong team of engineers based out of Bangalore. We've got a full team in Bangalore, which does our own engineering, for a lot of our software development we are doing in-house. We have the intention to use that team to do all of our platform development. For example, in this quarter, we went live with our customer service app for our existing Piramal customers, and that app went live and we were able to develop it ourselves within 90 days. It's a technology product that we just created ourselves without any need to work with an external party or partner with anybody.
Is it fair understanding over a period once our full app will be in a place, we may not go for a partnership and we'll leverage our whole business through our own app?
I'd say that there are different kinds of needs that are fulfilled by different partnerships. Each partner has their own customer access and distribution muscle. You do want to use some of their strengths as well. There will be some things which we will just do ourselves, which will probably be the bulk of it. There will be niches where you want to leverage the strengths of existing partners.
In that scenario, how do we cross-sell, I mean, for our customer on the partner platform and same customer on our own app?
See, when we get into a partnership, we work out all the commercial arrangements with respect to customer ownership right upfront. Usually, the arrangement is that for the specific products that we are selling, let us say it's a short duration unsecured lending product that we are selling with a partner, that particular product, if we want to cross-sell again to that customer, we will probably go through the same partner's route. For every other product, we are at full liberty to go ahead and cross-sell to the customer on our platforms.
Okay. How much investment do we plan? Because we saw in annual report that last year in these two technology company, we had incurred a loss of-
I request you to kind of join the queue again-
Sure.
... give other people as well to ask. Yeah.
Thank you. The next question is from the line of Saket Mehrotra from Tusk Investments Limited. Please go ahead.
Thank you. I have a question for Jairam. Jairam, could you throw some light on the granularity of the retail book mix? In terms of these fintech partnerships that we have, say, for this business lending. J ust want to understand how do the commercials work, do you get something which is upfront and how are the risks sort of managed?
Sure. The granularity question first. The Chairman referred to this as well in his opening remarks. Granularity has been increasing quite substantially ever since we started this new gen business. On our home loans business, our average ticket size has now fallen to about INR 20 lakh. Home loans and small business all sort of put together, our average ticket size is now about INR 20 lakh for new sanctions that we are doing, as opposed to the INR 75 lakh average ticket size that we used to have in the previous generation of our business. In this post-COVID environment, the new business that we have launched, it's a INR 20 lakh average ticket size business on all of the secured side. As far as the partnerships-driven or direct-to-customer digital unsecured is concerned, there our average ticket size is INR 17,000.
It's a much, much smaller ticket size that we are doing, and obviously it's a much shorter duration as well. Anywhere from 6- 12 months. That's the way we are looking at these two pockets. To your question of risk management in unsecured, where if it is direct to customer, the unsecured from our side, then it's pretty straightforward. You know how that works, I'm not going to repeat that. In a partnership-driven model, what tends to happen is there is some partnership credit scorecards that are used, and we have our own credit scorecards that we overlay on top of that. That combined thing is what is being used to actually underwrite the customer at the front end.
Usually, in the initial stages of the partnership, right now we are in initial stages with all partners. In practically all of these cases, there'll be some sort of an FLDG type arrangement where initial losses are covered through the partnership arrangement itself. Once we develop enough confidence in the pipeline that we are seeing through a partner, that's when we actually go past that and start taking the entire risk on our balance sheet.
Okay. Would you be in a position to sort of maybe tell us the split between the products, or is that too detailed?
Not right now. We can talk about it offline at some point if you want.
Okay. I have a question on your pharmaceutical business. We had sold our business to Abbott a while back. We've spoken about the priority of re-entering the domestic formulations business. The question is, do we have any pipeline for doing some sort of inorganic acquisition, or are we doing it in-house? Is there any non-compete that we have with Abbott?
Last thing first, the non-compete which was there got over in 2018. We are free to go back in domestic markets. We keep looking at opportunities as far as inorganic opportunities are concerned. At the right time, at the right valuation, et cetera, we will decide. Pipeline is there. We keep evaluating those opportunities.
Okay. Thanks a lot.
Thank you very much. Participants are requested to ask two questions per participant. The next question is from the line of Anand Shah from Jay Anand Securities. Please go ahead.
Yeah. Thanks, sir. Thanks for the opportunity. Sir, I have just one question pertaining to DHFL. As per the approved resolution plan, the company has committed to infuse equity of INR 3,800 crore in DHFL within one year. How the company plans to infuse this amount of INR 3,800 crore? If you can throw light on that.
As it is, when we are acquiring DHFL, we are supposed to be paying INR 14,700 crore of cash consideration out of INR 34,200 crore. Out of INR 14,700 crore, the cash available on DHFL balance sheet will be about INR 10,000 crore-INR 10,500 crore. As a matter of fact, we will be paying from PCHFL balance sheet close to about INR 4,000 crore on day one itself.
Yeah. sir, this would be the equity capital infusion that would happen?
While it's written that we will be infusing equity, from a structuring standpoint, it doesn't have to necessarily go as equity, because in balance sheet we already have enough net worth. It will not go as equity, it will go as infusion.
Okay, sir. Thanks.
Thank you very much. Ladies and gentlemen, due to time constraint, that will be the last question for today. I will now hand the conference over to Mr. Hitesh Dhaddha for closing comments.
Thanks, everyone. If you have more questions, please feel free to reach out to the IR office. Thank you.
Thank you very much. On behalf of Piramal Enterprises Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.