Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the commercial paper programme of Piramal Enterprises Limited (PEL).

 

CRISIL Ratings notes that on October 7, 2021, the board of directors of PEL approved the composite scheme of arrangement (SOA) between PEL, its subsidiaries and their respective shareholders and creditors. As per the SOA, there will be a vertical demerger of the pharmaceuticals business and simplification of the corporate structure. Post the implementation of the SOA, the pharmaceutical business of PEL and Piramal Pharma Ltd (PPL) will be housed entirely under the latter. Also, the financial services lending business will be consolidated under PEL. PHL Fininvest Pvt Ltd (PFPL), the non-banking financial company (NBFC) wholly owned by PEL, will be amalgamated with PEL. The housing finance company formed by the reverse merger of erstwhile Piramal Capital and Housing Finance Ltd (PCHFL) into Dewan Housing Finance Ltd (DHFL), with effect from September 30, 2021 and subsequently named PCHFL, will remain a wholly owned subsidiary of PEL.

 

The Carlyle group will continue to hold 20% stake in PPL and remaining 80% stake will be held by shareholders of PEL, following which PEL will cease to be the key shareholder of PPL. The SOA is subject to approval of majority of the shareholders and creditors of the companies, Securities and Exchange Board of India, Bombay Stock Exchange, National Stock Exchange, National Company Law Tribunal (NCLT) and other regulatory authorities as applicable and is expected to get concluded over the next 8-12 months.

 

The above transactions will help PEL to focus solely on the financial services business as well as improve the wholesale-retail mix of its loan book. At the same time, business synergies and overall asset quality of PEL’s financial services business remains a key monitorable. CRISIL Ratings will continue to track the progress of these transactions and engage with PEL’s management to understand the business synergies from the combined operations and business growth plans. CRISIL Ratings will also seek clarity on the overall asset quality of the financial services business and combined asset liability maturity profile and financials.

 

PEL’s pharmaceutical business, which is majorly housed under PPL, contributed 50% of consolidated revenue in the first half of fiscal 2022. This business segment witnessed revenue growth of 20% year-on-year in the first half of fiscal 2022 and 7% year-on-year in fiscal 2021. Operating profitability remained healthy at 22% in fiscal 2021, though it moderated from 26% in fiscal 2020, mainly due to lower out-patient department visits and hospitalization amidst the Covid-19 pandemic. PPL’s debt metrics remain healthy with interest coverage ratio of about 10 times and debt to earnings before interest, taxes, depreciation and amortisation (EBITDA) ratio of about 2 times in fiscal 2021.

 

PEL’s financial services business contributed the balance 50% of the consolidated revenue in the first half of fiscal 2022. The overall loan book was Rs 66,986 crore as on September 30, 2021, of which about Rs 20,277 crore is the acquired book of DHFL and Rs 46,709 crore is part of PEL’s financial services book. While the reported gross stage 3 assets for the overall loan book as on September 30, 2021 was 2.9%, the gross stage 3 assets of the wholesale book of PEL’s financial services business was higher at 4.3%. The gross stage 3 assets for that of the retail book of PEL’s financial service business (excluding the acquired DHFL book) was 0.3% as on September 30, 2021.

Analytical Approach

For arriving at the rating,

• Holding company approach has been followed for the wholly-owned financial subsidiaries, PCHFL (rated CRISIL A1+) and PFPL as they are significantly important to PEL
• The credit risk profiles of PEL and its subsidiaries engaged in global pharma and over-the-counter (OTC) consumer products businesses have been combined because these have common management and fungibility of funds. The 49:51 joint venture, Allergan India, has been moderately integrated.
• The funds raised through the issue of compulsorily convertible debentures (CCD) has been treated as equity as these will compulsorily be converted to equity.
• Assets and liabilities relating to the financial services business have not been considered in the analysis.
• Goodwill on acquisition has been amortised over a period of 10 years.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Strong business risk profile with diversified revenue streams:

PEL has diversified business profile, with presence in the pharmaceutical (housed under PPL) and financial services business (housed under erstwhile PCHFL and PFPL). Each of these businesses contributed 50% to the consolidated revenue in the first half of fiscal 2022.

 

Over the years, PEL, through its subsidiary PPL, has emerged as a leading contract development and manufacturing organisation (CDMO) player globally and has growing presence in the complex hospital generics and consumer healthcare segments. CDMO contributed 55% to the total pharma revenue while the complex hospital generics segment and domestic consumer healthcare accounted for 32% and 13% respectively, in the first half of fiscal 2022. The revenue growth in the pharma segment was strong at 20% in the first half of fiscal 2022 on a lower base of the previous fiscal. Operating margin remained healthy at 22% in fiscal 2021, aided by steady demand in complex products and healthy order book in the services segment.

 

PCHFL (erstwhile DHFL), a subsidiary of PEL, has healthy market position in the real estate financing space, having significantly scaled up over the past few years. The overall loan book for PEL’s financial services business was Rs 66,986 crore as on September 30, 2021, of which about Rs 20,277 crore was the acquired book of DHFL and Rs 46,709 crore was the erstwhile PEL financial services book. Post the merger with DHFL, the proportion of the retail segment within PEL’s financial services business improved to 33%, against about 11% in June 2021, and is expected to further improve to 50% over the medium term. The focus on the retail segment is expected to increase the granularity in the loan book.

 

• Experienced promoters and management team:

The promoters have extensive experience in the pharma and financial services industries. The pharma business also has the presence of the Carlyle group, a global private equity firm, holding 20% stake in PPL, along with Piramal family members. The segment has grown largely through expansion of wallet share of existing customers, healthy order book pipeline and acquisitions, and retaining of key personnel from the acquired entities to ensure streamlining of, and continuity in, operations. PPL has manufacturing facilities across the world, including some acquired with approvals from the US Food and Drug Administration (FDA) and Medicines and Healthcare products Regulatory Agency (UK) for key sites abroad and in India. For the financial services business, the group has longstanding experience in real estate covering project development, third-party private equity fund management and broking, distribution and market research. The third-party funds managed by the Piramal group through Piramal Fund Management Pvt Ltd (PFMPL; erstwhile Indiareit Fund) were started more than a decade ago. PEL will continue to benefit from the extensive experience of the promoters across its various operating segments, along with experienced professional team.

 

• Adequate financial flexibility as the holding company of the Piramal group:

As the holding company of the Piramal group, PEL has adequate financial flexibility driven by the sizeable value of its holdings in the financial services businesses, including the Shriram group. This enables the company to raise funds through dilution of equity should the need arise. PEL had invested Rs 4,583 crore in three Shriram group entities; which has increased materially in terms of value. In June 2019, it sold its investment in Shriram Transport Finance Corporation for about Rs 2,300 crore. As on March 31, 2021, the value of investment in other Shriram group entities was Rs 4,598 crore. In December 2019, the company raised Rs 1,750 crore through preferential allotment of CCDs to Caisse de depot et placement du Quebec. In January 2020, it successfully raised Rs 3,650 crore through rights issue and divested the healthcare insights and analytics (HIA) business for a consideration of ~Rs 6,750 crore. Additionally, PEL sold 20% stake in PPL in October 2020 to the Carlyle group for ~Rs 3,500 crore. Part of the funds raised has been used for deleveraging the balance sheet and funding the organic and inorganic growth plans while the rest have been extended as inter-corporate deposits to the group's financial services business.

 

Furthermore, PEL also has plans to divest its stake in Shriram City Union Finance Ltd (SCUF) and Shriram Capital Ltd (SCL) in the near term, which provides flexibility to raise funds through dilution of equity should the need arise. PEL’s financial flexibility largely depends on prevailing market sentiments as well as performance of financial subsidiaries. Any increase in systemic risks impacting financial flexibility will be a key monitorable.

 

Weaknesses:

• Moderate credit metrics and susceptibility to regulated nature of the pharma business:

The pharma business has grown largely through acquisitions (worth ~USD 500 million since fiscal 2016). While revenue has been ramped up, these acquisitions are yet to contribute materially to profitability and were largely debt-funded, leading to moderate credit metrics for fiscal 2021. Networth of PPL remains healthy and is expected to improve further post the implementation of the SOA. Capital expenditure in the pharma business is expected to be prudent as sufficient capacities exist, while the consumer healthcare business functions largely on the outsourcing model. Credit ratios are expected to improve with increasing contribution from past acquisitions and lower debt.

 

PEL is exposed to regulatory changes in the Indian as well as global markets, which are manifested by increasing scrutiny and inspections. However, the track record of the company is unblemished with no outstanding issues with regulatory authorities. The group has had about 40 successful inspections by the US FDA since 2011. In the domestic market, regulatory impact of fixed dose combinations remains a key monitorable.

 

Also, as a holding company, PEL has sizeable investments in financial subsidiaries, and loans and advances and investments in other subsidiaries, which too impacted RoCE (return on capital employed). Reduction in debt will lead to gradual improvement in RoCE over the medium term.

 

• Impact on asset quality in financial services business from sectoral concentration and acquired loan book to be assessed:

The lending business of the Piramal group focuses on real estate credit, resulting in high industry concentration and sizeable single-borrower exposures. The exposure to top 20 accounts in the wholesale group exposures account for 27% of the overall loan book and about 40% of the wholesale loan book. While the reported gross stage 3 assets for the overall loan book as on September 30, 2021 was 2.9%, the gross stage 3 assets of the wholesale book of PEL’s financial services business were higher at 4.3%. The gross stage 3 assets for that of the retail book of PEL’s financial service business (excluding the acquired DHFL book) was 0.3% as on September 30, 2021.

 

CRISIL Ratings understands that the acquired book of DHFL has been taken at fair value basis after considering the existing non-performing assets (NPA) in the book and there has been sufficient buffer created in the valuation to absorb existing NPA accounts. However, the incremental impact from the overdue accounts of the existing book and the collection efficiency of the outstanding book (both wholesale and retail) is yet to be assessed. Any material impact from either the existing acquired book or any significant deterioration in the collection efficiency will be a key monitorable and rating sensitivity factor.

 

However, the company has put in place adequate credit appraisal and management processes which have supported the reported asset quality metrics so far. Furthermore, the management has taken steps in order to reduce concentration risk in the portfolio with focus on growing the individual housing loans portfolio.

 

• Moderate refinancing risk:

PEL has deleveraged its balance sheet and improved its funding mix over the past two to three years. While debt levels have reduced, the debt obligation on long-term loans continues to remain considerable at over Rs 8,000 crore annually over fiscals 2022 and 2023. These are expected to be met from existing consolidated cash surpluses (around Rs 11,300 crore as on September 30, 2021), available consolidated unutilised bank limits, cash flow from operations, as well as part refinancing through long-term borrowings.

 

The management has demonstrated its ability to arrange for refinancing of debt in a timely manner and is expected to continue to do so. The company also continues to take steps to improve its funding mix by increasing long-term funding sources at consolidated level. The steps taken by management to further improve its borrowing mix and maturity profile will remain a key monitorable.

Liquidity: Adequate

Liquidity is supported by the healthy cash-generating ability of the pharmaceutical business, financial flexibility of the group in the form of investments in its financial business subsidiaries, and the Shriram group companies.

 
While debt levels have reduced, the debt obligation in fiscal 2022 remains high at consolidated and standalone levels. This obligation is expected to be met through existing consolidated cash surpluses, cash generation from operations, available consolidated unutilised bank limit and long-term borrowings.

 

At a consolidated level, outstanding commercial papers (CPs) declined to about Rs 1,670 crore as on March 31, 2021, from about Rs 18,020 crore as of September 2019. While the current CP balances are low, in case the company raises additional CP for working capital, PEL will continue to maintain liquidity backstop for the maturing CPs, in the form of cash and unutilised sanctioned bank limit. PEL has a robust track record of refinancing loans and raising funds to meet requirement across businesses.

Rating Sensitivity Factors

Downward factors:

• Reduction in pharma business operating profitability to below 13-15% on sustained basis
• Significant deterioration in asset quality metrics of the financial services business
• Inability to raise long-term funds at competitive costs to improve debt mix

About the Company

Founded by Mr Ajay Piramal, PEL is engaged in the pharmaceutical and financial services businesses through its subsidiaries. The company also holds substantial stake in the Shriram group companies.

 

In the pharma space, PEL offers services across the entire drug lifecycle - from development and commercial manufacturing to off-patent supplies of active pharmaceutical ingredients and formulations. Its critical care portfolio largely comprises inhalation and injectable anaesthetics. It is a leading CDMO globally. In fiscal 2020, PEL divested its HIA business for Rs 6,750 crore. In June 2021, it completed acquisition of Hemmo Pharmaceuticals Ltd for a cash consideration of Rs 775 crore, which has expanded its product offerings.

 

In the financial services business, the company has four verticals: (i) real estate financing - lending to developers with established track record, with greater focus on providing loans for construction finance and lease rental discounting; (ii) corporate finance group, which lends to corporate clients across sectors (infrastructure, cement, renewables, automotive, logistics, services and entertainment) with loan size greater than Rs 100 crore; (iii) emerging corporate group that provides finance to mid-tier companies with loan size of up to Rs 100 crore; and (iv) housing finance. PEL also manages a real estate-focused private equity fund and has strategic alliances with global funds.

 

The company is listed on the Bombay Stock Exchange and the National Stock Exchange. As on September 30, 2021, the promoters and group entities held 43.5% stake, followed by foreign portfolio investors with 35%; mutual funds, banks, financial institutions and the general public held the rest.

Any other information: Not applicable