Piramal Enterprises Ltd
NSE:PEL
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
754.2
1 122.65
|
| Price Target |
|
We'll email you a reminder when the closing price reaches INR.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Piramal Enterprises Ltd
You don't have any saved screeners yet
Ladies and gentlemen, good day, and welcome to Piramal Enterprises Limited Q1 and FY '23 Earnings Conference Call. [Operator Instructions] 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.
Thank you, everyone. Good evening. I hope you are safe and in best of your health. I am pleased to welcome you all to this conference call to discuss Q1 FY '23 results. Our results material 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 with us, we have our Chairman, Mr. Ajay Piramal; Ms. Nandini Piramal, Executive Director of Piramal Enterprises and Chairperson, Piramal Pharma; Sir Khushru Jijina, Executive Director of Financial Services, PEL; Sir Jairam Sridharan, MD Piramal Capital and Housing Finance; and Mr. Vivek Valsaraj, CFO of our company.
With that, I would like to hand it over to our Chairman, and I would request him to share his initial thoughts. Thank you.
Good day. I really appreciate that all of you have joined us today. I know that today seems to be the busiest day for all meetings and there are several meetings are going on simultaneously. So what I'm going to do is to make a very, very brief statement, and I will leave much more time for you to ask questions and for us to respond to them. However, if there's any more details you want, please don't hesitate to ask us.
For our performance for the first quarter, revenues have grown by 22% over the previous year in the same quarter and now stand at INR 3,548 crores. In this, Financial Services grew by 33% year-on-year, and Pharma revenues have grown by 9%. Our net profit stands at INR 486 crores for this quarter.
The main thing this quarter is that over the last few quarters, we've taken several measures to prepare both our Pharma and Financial Services businesses to emerge as 2 separate listed entities. In the first quarter of the current year, we made further progress towards achieving this goal. We have received consent from RBI, SEBI and the stock exchanges earlier in the year. In July, we received clearance from our shareholders and creditors and earlier this week, we also received the RBI approval for the NBFC license for the year. We are now on track and the demerger and listing of Piramal Pharma is expected to get completed by the third quarter of this year, subject to, of course, a few remaining approvals.
Also, as we are moving towards 2 separate listed entities, we have been enhancing our disclosure, both in Financial Services and Pharma businesses over the last few quarters. In Financial Services, you might recall that we had categorized the transformation journey of our business into 3 phases. This completed Phase 1 and 2 of this transformation journey. We stated during the last quarter that this journey has achieved a major portfolio transition as well as significant growth through the acquisition of DHFL.
Our AUM grew 37% year-on-year to INR 64,590 crores with retail AUM growing 4.3x year-on-year to a high of INR 22,267 crores. Of that, the share of retail loans have also increased to 37% from 12% as of June 2021. As part of our transformation journey, we've also hired key top quality senior talent to ensure that we have a best-in-class team to help us build a large diversified financial services company. We have Mr. Jairam Sridharan, Mr. Rupen Jhaveri, Kalpesh Kikani, Yesh Nadkarni, Upma Goel, all with rich experience in their areas of specialization joining us. Mr. Khushru Jijina has retired from our company, but will continue as a senior adviser to our group.
The Phase 3 of our transformation journey now begins. We have put in place all the appropriate levers for improved performance in the future. And this has started reflecting the operating performance of our business during the quarter. I am not going to speak a lot about the businesses, whether retail or wholesale, and we'll be happy to answer any questions that you have.
I would like to just cover the Pharma business. The Pharma business grew 9%, delivering revenues of INR 1,485 crores. While the India consumer health care and complex hotel generics businesses grew 17% and 10% year-on-year, the CDMO business delivered a moderate growth of 6%, up 8% year-on-year due to some execution-related challenges and changes in order delivery schedule. The business broadly delivered in line with EBITDA margin at 11% during the first quarter versus 12% in the same quarter last year despite moderate growth in our CDMO business and increase in the raw material, packaging materials and operating costs. As we have mentioned earlier, the nature of our Pharma business is such that we generate significant part of our profit in the second half of the financial year. Last year, the second half contributed to nearly 17% of our profitability.
With this, I am going to now leave the floor open to your questions, and we'll address that any other issue that you have. But in conclusion, I would like to update that with a strong balance sheet, the uniqueness of business models and focus of our teams on delivering towards a strategic priority, I believe that both the emerging listed Financial Services and Pharma companies are well positioned to create long-term value for our shareholders. Thank you.
[Operator Instructions] The first question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.
Firstly, on the overall Pharma, typically -- and I mean did you share the overall revenue guidance for next 2 years? If you could share the similar number for [indiscernible]?
Tushar, considering the overall current volatility and...
Hello?
So Tushar, considering the overall volatility in the situation and as we have mentioned that there are certain execution issues also which we need to fix, we are in the process of revisiting this. And at this point in time, we would not like to give a guidance for FY '23.
Secondly, on the CDMO side with the inauguration of API plant or [indiscernible]. Am I audible?
Sorry to interrupt, but your voice is a little muffled, sir, if you can take the...
Is it better now?
Yes, yes.
So considering the new API plant in Canada where the initial production run has already started and upgrading of overall solid dosage capabilities, what kind of asset turn and what can be expected from these facilities?
So the investment that we have done in our CDMO facility at Canada has given us about 35% additional capacity, whereas we've got about 1.8 billion tablet capacity at our facility in Pithampur. So both of them have been augmented, keeping in mind the kind of requirements that the customer has. And we expect that over the next couple of years, we should be able to adequately utilize these capacities.
Understood. And then just lastly, there has been a good number of projects in the Phase 3 in the CDMO. So is there any kind of outlook by the customers to build up the product for the commercial part, where you want to typically in the development phase, the capacity part is very small. But as the product advances on the commercial side, so is there any kind of other will use the confidence of extending the development work to commercial in factories?
So it is an ongoing process and the kind of capacity expansions that we are doing now as well as what we propose to do in FY '24 is keeping in mind what could be some of these requirements that come up. So as you are aware that we are doing investments at most of our facilities, which offer these kind of niche capabilities and that's kind of keeping in mind the customers' requirements. So yes, while it's difficult to put a number to it, we have kind of augmented capacities to be able to serve it as and when required.
The next question is from the line of Prakash Agarwal from Axis Capital.
Yes. On the Pharma side, again, I understand last time you gave some revenue guidance of mid-teens to high teens, but margin guidance given volatility you had avoided. Would that be that or you are rethinking about it?
So as I mentioned, the situation is a bit volatile. And given the tough start that we have had to our CDMO business, we are reassessing there are a few things that we need to fix. And therefore, at this point in time, we aren't really giving a guidance for FY '23. But having said that, our long-term guidance still remains as we have maintained and there's no change from a long-term guidance standpoint. For the short-term guidance, we shall come back later.
Understand. But if you could give more color like what are the issues you are facing at CDMO? Is it supply chain? Is it deal negotiating contracts, suppliers or buyers? I mean just some color would have helped.
So there are a few issues, but I'll highlight the ones which are more pertinent. As you're aware, during the pandemic, we had significant attrition at our overseas sites. Being able to get the talent, fill up these vacancies and train those employees and get them productive takes some time. And these are like critical positions, which are required for day-to-day operations. So we are in the process of staffing and training of people. And second is some of our customers also changed the phasing. So what was supposed to be delivered in quarter 1, they requested that to be pushed out into the subsequent quarters within the financial year. So both of these have been the most pertinent reasons for us to kind of have some challenges in executing versus our plans.
Let me turn -- there was one more product, which was due for USFDA approval. Where are we in that?
Sorry, are you referring to Desflurane?
Yes.
As of now, the status remains the same. We don't have an approval yet. While we have launched in the other markets, the situation is the same as early as is concerned.
Were we expecting calendar '22 or '23?
No, it's difficult to say that, actually.
Okay. No worries.
It wouldn't be coming in this year at least. I don't think it will be coming in this year.
[Operator Instructions] The next question is from the line of Prasheel Shah from CapGrow Capital.
So in the previous quarter, we had moved some nonreal estate exposures to Stage 2 about INR 2,300 crores. And in this quarter, there were some slippages from Stage 2 to Stage 3. So are we talking about the same account? Or there is still some spread left in that Stage 2, which was moved -- sorry, accounts we move to Stage 3 in the quarter.
There's only one account that has moved to Stage 3 during the course of this quarter. There were a few accounts that moved to Stage 2 in the last quarter and one of them happens to be there.
So let stay Stage 3 at this point or...
Yes.
Okay. Fine. And on the retail business that we have dispersed this time about INR 2,500 crores, so what would be our focus amongst these 4 to 5 business segments? What would be our focus 3 years down the line? What products are we mainly banking on to grow in 3 years? What will be your NIMs? And what people are you guys targeting?
Okay. There are a few different questions there. See, our core business in retail is -- or the anchor products are going to be housing and MSME lending, particularly secured MSME lending. So those are going to be our 2 anchor products. So you should expect from a book composition perspective, housing to be maybe a little under 50% at the overall asset level and MSME to be a little under 1/4 of the book. So that -- those are going to be the big anchor products.
Then there's going to be a category of products, which are unsecured in nature, right? And there'll be 3 or 4 different form factors there. It could be digital unsecured and with the finance-type stuff. It could be personal loans, which was branch distributed, it could be microfinance. There could be a few other form factors, but unsecured lending. You should expect that to be a little over 20% of cost of book in the end-stage.
We request all the participants to please stay connected while we reconnect the management.
Ladies and gentlemen, the line for the management is reconnected. Over to you, sir.
Apologies for that technical delay. So I hope you heard the answer that I was talking about, portfolio composition, 45-ish percent housing, 20% to 25% MSME, about 20-ish percent unsecured and whatever is left will be the other secured learning products. So that's the composition that we are targeting.
Overall, at an FS level, we believe the kind of business that we are building, 2/3 retail, 1/3 wholesale, a multiproduct retail with the composition that we just spoke about, et cetera, this type of a business, we believe, should be able to deliver a high to low 3s kind of ROE. So that's where I'll leave it to go into individual line items or the [indiscernible].
The next question is from the line of Vivek Agarwal from Citigroup.
Although you don't give any revenue guidance, but is it possible for you to share any color on the investment front, especially in the CDMO and injectable space for a couple of years?
Sorry. The question was regarding the CapEx investments in the business?
Yes, yes, yes. So what is the overall CapEx that you are planning over the next couple of years and which areas actually, if you can clarify?
So our investment plan for FY '23 and FY '24 is about $200 million per annum. So in the midterm, we are stepping up our investments to create capacity. This includes expansion of our high-potent API capacities at Grangemouth. Sorry, our antibody drug candidates capacities at Grangemouth, high-potent API capacities at Riverview. And we are also looking at increasing capacities for our API facilities in India and for our potent injectables at Lexington.
Okay, understood. So overall $400 million you are standing over the next couple of years?
Correct.
And sir, on the Desflurane. Sir, you widely talked about product, but would you like to share the number of new product introduction in the injectable space for the next year, for the next FY '22 or FY '24.
Yes. We have indicated a pipeline of about 40 products. It's there on the presentation in terms of the various stages at which they are. You can please refer to Page #45, the details are there.
Okay. Perfect. So that I will do. And finally, sir, one thing I just want to understand, why the revenues in CDMO space are relatively more skewed toward second half? If you can clarify?
So it's slightly difficult to put a finger as to exactly why they are due to a second half. There are multiple reasons. It depends upon the overall phasing of the customers' requirements which has been over a period of time and also the kind of time period required to kind of being able to from the time you receive the order to be able to deliver, it gets skewed towards the second half. So it's just where the orders have been historically.
The next question is from the line of Abhijit Tibrewal from Motilal Oswal.
Yes. I just wanted to understand, I mean, I think in this quarter, we have kind of reported that we have launched the MFI business to the PC model. Not sure if you had enough in the past, sir that we're looking to enter the enterprise segment as well. I'm just trying to understand what are the newer -- other newer product lines that we are kind of looking enter because I'm not sure what kind of -- somewhere, I kind of heard from someone that we have also entered into more financing now through a partnership with gold and [indiscernible].
So what are other new product lines that will be to enter? And the other related question here is, I mean, are we not kind of trying to spread out just 2 things too fast into newer product lines for cash? I mean, over 20% of the book that we talked about, digital advertisements, personal loans, MFI and some of the other unsecured lending products. So that is my first question.
The second question is more on this wholesale account, which you suggested that moved from Stage 2 to Stage 3. If you can just give some color, what was the quantum, what was the nature of the account and what kind of led to the slippage from Stage 2 to Stage 3? And lastly, on this wholesale lending 2.0 strategy, I mean, I don't know -- I mean, in our wholesale lending 1.0 strategy, I mean we kind of clearly acknowledge that perhaps, I mean, it was not in the best interest of the company, which is why we have kind of decided to run it down and decided to make the book a whole lot more granular.
Now that we are again kind of building on a wholesale fees, understandably in mid-market residential products, much lower ticket sizes, do we have the confidence that this time around, the wholesale lending will be much, much better than what we did in the wholesale lending 1.0? So those are the 3 questions.
Thank you, Abhijit, for your questions. Your first one was around product strategy in retail, the intent of which is very much is to build a diversified portfolio in retail. Our belief is that through the cycle, for you to build a resilient book which can perform well across various risk cycles, it is important to have adequate level of diversification. Portfolios that are dominated by a single product, we believe, are going to be more fragile through the economic cycle. And hence, we've been quite clear that we will continue to build diversified book.
Now we are still at the stage where we will experiment with a lot of different products. You mentioned gold, for example, it's at a very, very low key experimental level, I wouldn't actually talk very much about it. We've barely done a crore of business in that partnership. So it's -- we will try a bunch of different things, see which has adequate traction in the market and just scale on those things.
Microfinance, we felt good about the feelers that we were getting in the market and how our early experiments panned out. So we are scaling that and hence, we made that announcement during the course of this quarter that we are -- that we are committing to that business now and are moving forward.
In terms of what next, into the other big business which we have chosen to commit to, we haven't actually started the business yet. So you should expect to hear about it next quarter, is a branch-led personal loans business. So unsecured salaried segment lending done out of our branches. That's the other business that you should expect to see. Apart from that, we don't have any major plans through the rest of the year.
There are a few different experiments. You spoke about gold. Yes, that is something that we are experimenting with. We will experiment a little bit with loan against securities, et cetera, but those will be very, very low scale just for us to learn something so that we know whether they are worth building out in the coming years. So that's your first question.
You had a sort of question 1B, which was around execution risk of trying to do a lot of different products at the same time. It's a very good point, Abhijit, and it's a really good risk to keep in mind, we are super aware of the fact that execution on multiple product lines is not easy. It requires specialized skills, et cetera. Thankfully, we have a fairly strong team with a very broad set of experiences and once something clears our experimental hurdle, then we are willing to commit to it by getting industry experts in and hiring the right people who will be able to lead some of these businesses.
And as you have seen over the last 1.5 years, as we started MSME lending first and then you start financing and now microfinance, et cetera. While it seems like a lot is going on, but essentially, we are launching 1 laser product every 6 months or thereabouts. So I think that pace is a pace that we can take from an execution risk standpoint and we feel pretty comfortable with growing that out.
The next set of questions you had was about the accounts that moved from Stage 2 to Stage 3 on the wholesale book. You might recall that there were some challenges that we have been facing. In the nonreal estate wholesale portfolio, it was 13% of our portfolio last quarter. It is now at about 12% of our portfolio, but one of the accounts in there was -- this quarter kind of migrated down to stage 3. the ticket size of the account was low INR 100 kind-of-crores. So that was the size of the account that moved.
Not much more to say like it's -- nonreal estate account had been facing payment challenges. The account continue to age of first Stage to Stage 2 and then it is further into Stage 3 as it went past 90 days. There was one other question. Last question -- wholesale...
Wholesale lending 2.0.
Yes, wholesale 2.0. See, the -- again, good questions on execution ability and confidence on executing it well. As you have seen so far, under wholesale 2.0, there are 2 parts with the real estate part where we have not yet done disbursement. We are at the stage where we're evaluating about INR 600-odd crores worth of deals. We will see when we make our first disbursement, et cetera, and there is a mid-market stuff, which is very low ticket size, like 50-odd-crore kind ticket size business where we have, over the last 6, 9 months, disbursed a total of about INR 650 crores.
So as you can see, we are being very slow and deliberate about the way we are building this. We are not going to rush into this. You aren't going to see us disburse thousands of crores all in a hurry. We are -- we recognize that the business that we are attempting is different in nature than what we have built in the past and hence requires a different model.
Internally from an organizational structure perspective as well, we have built a different cost structure where we have moved to a more traditional lending-type architecture where we have a separation of coverage team and credit team and we have an oversight from a risk team on top.
So the so-called 3 pairs of eyes type of architecture for underwriting as opposed to the 2 pairs of eyes architecture that we have had in the past, right? So that cost structure also needs some time to get adjusted and settle in. So we recognize that all this takes time and we are in no hurry. So we will be very careful and very deliberate and we will keep looking at signals from the market in terms of how the strategy is panning out before we hit on the accelerator to half.
Very, very useful. And if I could squeeze in just one last question. Are we in a position to kind of now answer whether all these unsecured loan portfolios that we are building, will it be housed in the listed NBFC business?
Yes, I think -- you will see a significant part of it being housed in the listed NBFC. Not all of it. Remember that regulatorily, the housing finance company, which is a subsidiary, has to predominantly have assets which are related to residential housing. So we will stick to the commitments that we have made to the regulator in terms of portfolio composition in NBFC versus HFC.
[Operator Instructions] The next question is from the line of Kunal Shah from ICICI Securities.
Yes. So firstly, with respect to this provisioning, so again, on Stage 2 assets, there is some provisioning, which is done of almost INR 300-odd crores. And I think maybe from the slippage, as far as slippage is concerned, maybe there, we have done 54, 55-odd percent now provisioning of the new slippage. So last time, I think you highlighted that at least this 5.7% seems to be quite comfortable, and there might not be too much of a need. But in fact, we are still seeing almost INR 260 crores, INR 270-odd crores incremental stage or ECL provisioning, which has been there. So I just wanted to understand what goes into this and what is the kind of further risk which we are seeing wherein there could be a more provisioning which will flow through?
Right. So Kunal, this is not coming out of any significant portfolio review or anything like that. The way to think about this now, Kunal, is that the big kind of revaluation, kind of relook at the portfolio in a post-COVID context was what we did last quarter, you saw the impact of that. And after that, as now a lot of the clients are -- have all sort of come out of either restructuring or whatever, they might have had with other lenders, et cetera. And now the situation is becoming a lot clearer in terms of what the different clients' financial position is.
And based on that, if we see some natural aging, you will see that getting reflected. You will see that getting reflected in Stage 2 and further kind of if the aging doesn't start, you'll see that reflected into [PFO]. So think of that as sort of a flow of stress, if I may. On the pool, this is not a one-off revaluation type exercise.
You might have noticed, Kunal, that this quarter, in terms of our disclosures, if you look at our presentation, on Page 34, we have made -- we have disclosed a new kind of way of looking at our provisions number. You see that we have shown our trailing 12-month credit cost as a metric and how it has trended over the last 8, 9 quarters. And if you -- 10 quarters. And if you look at that, you will see that in the calendar year '21, our credit costs kind of were slightly south of Rio, right?
And what you've started seeing in these last 2 quarters is sort of a trailing 12-month credit cost, which is in that sort of 1.5% to 2% kind of range. Not nearly at the levels that it was in calendar year '20, but not the sort of negative number that it was in '21. We will see how this goes and we'll see the financial health of our clients every quarter in terms of their ability to pay. You might have also noticed hopefully, that we have given a lot more granularity in terms of disclosures of our wholesale portfolio.
And if you're not, I'd encourage you to take a look at Slides 22 and 23 on our presentation where we have disclosed a lot of information about what the wholesale portfolio looks like. Our intent here, Kunal, is to show all the information to the investing public and allow you to make your own judgment calls about what the implied health of the portfolio might look like. We are not offering any specific forward guidance on credit costs, et cetera. But through some of these new disclosures that we have added, hopefully, that will give you a good sense of where -- how the portfolio is positioned.
Sure, yes. So it was just on the trend and I wanted to ask a follow-up question on that. In terms of when we look at this early-stage projects, almost like 24-odd percent exposure and even mid-stage, another 18-odd-percent. And when we look at it in terms of the bullet payment maturity, almost like 16-odd percent, what are the risks which are there with these projects, okay? So last time also, we said okay, we have reevaluated and then there was some further provisioning. Again, this time it is there. So are we done with the exercise or maybe this is going to continue, and we should see some flow-through in terms of the further provisioning? I understand in terms of the steady state credit cost and that chart which you have shown that it will not -- definitely not be a negative or low. But the overall behavior of the wholesale, are there risks coming out eventually?
So we had said, Kunal, is that the residential housing market went through some challenges around COVID. Now some of those challenges are over, but some of the projects in which one might have exposure are projects that are launched pre-COVID. And you know how consumer mindset is worse nowadays. Right now, sales are not happening on the consumer end in early stages at all. Sales are happening when the project is kind of well on its way to completion. And the consumer can actually see the property.
So the consumer behavior has changed, and we are also watching our sort of developer portfolio as well as all our other portfolios very closely to see what impact it has in terms of their repayment to us. You rightly pointed out the 24% early stage, the 16% kind of -- if you look at it differently, 16% in bullet payments, et cetera, those are all pockets there are pockets of vulnerability, and we are watching it just as closely in terms of what might come in.
So we will let you know as and when things develop. There is no one-off revaluation exercise that we are planning on taking up, if that's something that you're thinking about. And I'm inviting Mr. Jijina to add to this as well.
Yes, a couple of points here. I think in early stage itself, let's define early stage out of that, the 24%, 16% is actually under construction, but they are early stage, but they are under construction. That's number one. The second thing about your question was on the provisioning, which I'd like to answer a little differently. What is happening is that in real estate, and this is what -- let me attempt, I've done it before also for the same question.
While we have already done the entirely well last year, last quarter, what will happen in real estate is that there is value at the end when you complete the project. But in between, like you look at the additional provision this time in stage 2. Why do we do that? Because sometimes if we have to enforce or if you have to take some action to get the project off-hand and away from the developers. We may have to take it to stage 4, even to stage 3 to ensure that we take over the assets and complete the project.
So let's differentiate between what will happen quarter-on-quarter. Yes, there could be a case again in future while on an overall health of the portfolio, we can confirm that after we have done the reval and especially for the non-real estate, which happened in March, there shouldn't be any surprises in the future, but if we have to ensure that we recover our money in a real estate project and if you have to enforce, even if you have to take it the Stage 3 temporarily before we get our money back, we will do so.
One comment, if I may add on that on a sort of taking a slightly different angle Kunal, is that while these provisions come on these sort of more steady credit cost structure plays out, there is adequate level of other revenue streams which are creating the ability for the Financial Services business to still deliver a 2% plus ROE, right? Like you saw this quarter, the book and the recoveries from there are giving you the ability to actually take that and use for some of these provision requirements. And hence, even though these provision requirements are, you're still seeing a 2% plus ROE during the quarter. And hopefully, we'll be able to continue to generate the -- some of that cushion through foreseeing some of those other means in the future quarters as well.
Sure. And one last question on the DHFL again. So the recoveries, any lumpy recoveries from the wholesale portfolio this quarter from DHFL style book?
No lumpy recovery. There was a minor sort of small portfolio sale of a couple of deals, but nothing -- no big lumpy recovery. All the big lumpy stuff is going to go through a big long process of litigation, et cetera. So we'll keep using the space, we will do small ERP type transactions every now and then, but nothing huge yet.
Okay. And support of this recovery is somewhere around 1%, 1.5%, do we expect that to continue?
For the next few quarters, absolutely.
The next question is from the line of Vivek Ramakrishnan from DSP Mutual Fund.
I have a couple of questions on the Finance and the question on the Pharma business as well. In the Financial Services business, given the fact that you are experimenting with microfinance and also with gold finance, is acquisition a real possibility of some other company because these are all very physical touch point-oriented businesses typically and the branch network will be complementary to yours. So that's question number one.
In the Pharma business, is there -- I understand you're making CapEx and you've not given any guidance, but could you also broadly give in terms of the indices caps that you might have within the group, let's say, high-level debt-to-EBITDA numbers or any financial covenant that you would have?
So let me start with the IFRS thing and I'm sure Vivek will jump in and offer you guidance on the -- or offer you some thoughts on the Pharma side. See, firstly, one quick clarification. The microfinance business, we have now committed to it. It's no longer an experimental mode. We like what we see, you are going to see us make further investments. There, the gold one is absolutely an experimental mode, we might or might not go ahead with it. So we will see how that plays out.
To your question of how are we open to M&A in these spaces. Yes, we are. As you all know, we are an extremely well-capitalized company with a lot of spare capital available. And as a group, we have had a rich tradition of successful M&A. So it is -- and these businesses that we absolutely rightly point out are businesses which are very M&A friendly. So we will continue to watch that base for potential M&A opportunities, but I want to caution that as a group, we are generally kind of value-oriented M&A player, and some of these spaces are extremely rich from a valuation standpoint right now.
So it might not work out right now on that dimension. But if we find something which is a good product fit and it checks the box on values and valuation, I think we'll be quite open to it.
Vivek, while we have not given a specific guidance for pharma, let me reaffirm that the demand remains strong. In fact, we are seeing the highest inflow of RFPs ever than we have seen before. It's just that decision-making is taking a little bit more time at the customer's end. And with respect to your question on debt, well, the guidance we have given is that we will cap it at about 4x the EBITDA of the business.
The next question is from the line of Piran Engineer from CLSA.
Just a couple of clarifications on the 4C book first. I think how much of it is retail versus wholesale? And just so that I understand this correctly, the INR 3,300 crores of book. So what left is essentially your profit in the set?
So the 4C book is all retail, Piran. There is no wholesale in there. And the way to think about the 4C book is, there is a face value. We have disclosed this on the slide, if you see, there's a phase value of this asset, which is, let's say, about INR 9,500 crores, it has been marked down by 65-odd percent to about INR 3,500 crores. That's what we see. If recoveries are greater than the mark, then you get P&L flow. If it's less than the mark, then you get a P&L hit, right? That's the way to kind of think about it.
Okay. So this fair value is potentially part of your network debt? And then plus or minus of this fair value becomes debit or credit to the next one?
Yes. Yes. I mean the 3,500 is part of the balance sheet, if that's what you mean.
Yes. It's part of the balance sheet?
Yes.
Okay. Got it. And then the next question is that who will lead the wholesale business now that Mr. Jijina has retired?
Yes. Let me -- so Mr. Jijina is already retired. He continues as an adviser. And we have got now a wholesale 2.0, where we've appointed Mr. Yesh Nadkarni. Yesh was early on with KKR and he is also going to be involved. So the teams remain the same, and yes.
The next question is from the line of Deepak Gupta from SBI Pension Funds.
My first question is on digital disbursements. The one-offs from Dewan Housing book has been quite elevated in the last 3 quarters running at a run rate of about INR 1,600 crores to INR 1,700 crores per quarter. How do you see this going forward?
So we will trade runoffs are total runoff here, not just the Dewan book. Please remember that we are doing about INR 150 crores to INR 200 crores of disbursement of embedded finance. These are very short-term products and runoff there are pretty high too. So even in our organic business, the 23% of the organic business that you see on Slide 13, which is digital embedded finance, those are all very short-term businesses, and hence, the scheduled repayments are going to be quite high in there.
So essentially, a lot of the runoff that you see here, the mix is shifting more from attrition towards scheduled repayment as we continue to press the pedal on some of these digital pieces. So the attrition pressure has actually come down. In the last quarter, attrition pressure has been meaningfully lower. Of course, Q4 is always a very high pressure on attrition. So both seasonally as well as more structurally, attrition pressures are lower in Q1 than they were in Q4.
Sure. The second question is on incremental yield on the book versus incremental cost of funds. Somewhere in the presentation, I saw incremental disbursement yield is 12.6%. But in the next slide, it's also showing at 13.1%. So I was a bit confused on that.
Yes. Sorry. So maybe we were not super clear. So in the 12.6% that is on Page 13, we have excluded the digital embedded finance, the 23% of disbursement. The reason we have done that is that we don't want investors to be modeling in disbursement yield into a longer-term book because the embedded finance book will churn out very quickly. So 12.6% is all disbursements ex of embedded finance. When you include embedded finance into it, the yield increases to 13.1%. So from a margin perspective, if we're trying to model the full book, I would encourage you to keep 12.6% as a number rather than 13.1%.
Sure. And what will be the incremental cost of borrowings right now?
The 7.9% right now?
Okay. I understand. And the next question is on asset quality. If you could give a breakup of the GMP between retail and nonretail. And secondly, I know this question has been answered before, but just some more clarity on the increase in stage 2 loans. Because I thought last quarter, you had mentioned that you have done a review of the entire book and whatever have to slip has been slipped. But again, we've seen about 400 carors of slippages, at least moving from Stage 1 to Stage 2. How should we read this? Do you think Stage 2 -- what exactly is going on here, if you could give some more clarity on that?
Yes. So we were -- I don't think we sell last quarter, and we're not taking it this quarter either that whatever needs to slip has already slipped come into Stage 2, et cetera. They -- the way to think about it is that over time, the big reval exercises that the one reval exercise that happened 2 years ago in March 2020, and another one that happened last quarter, et cetera, threw up some specific accounts where you feel like, hey, you're under-provided and you need to do some work. That process is not going to happen every quarter. It will happen occasionally, maybe once a year or later, right?
But flow perspective, if there are specific client situations where the client actually goes through some trouble and some flow happens like this quarter, we have seen like a total slippage of roughly 1% annualized. So some level of slippage, some level of stage 2 creation, some rate of that, you should just -- you should expect to see these are idiosyncratic situations are not sort of any broad-brush sort of portfolio effects that are there. Mr. Jijina?
Yes. Okay. To give color to this Stage 2, let me divide into a few parts. Some of them were small loans where we actually did a onetime settlement. And maybe there was some INR 510 crores difference and that's what we provided extra and actually, those loans are getting settled. The -- actually, the 2 large ones, and again, here, there is an impeded value here. However, one was a real estate company in the south where the developer had some trouble. In fact, there was an ED inquiry. So we decided to take the loan to Stage 2.
So not that he has defaulted, actually, the account is standard, but we decided as a caution to take it to Stage 2. I think it would be -- you asked this question again so that we clarify it. The other one actually the -- again hotel, which has now started doing well. But since there has been some mismatch of cash flow, we decided to take it to Stage 2. I mean, if you ask me the value of the hotel, it's far more than the value of the loan. So if that clarifies you.
Sure. And if you could just share the breakup of GMP between the retail and nonretail.
We have not put it in the -- I mean we did it last quarter, I don't intend to do it every quarter, to be honest, like we do it once a year. We're not doing segment or full segment or reporting yet. So let these businesses settle down, we'll start to full segment reporting at that point of time.
The next question is from the line of Abhiram-A Iyer from Deutsche Bank.
Yes, sir. I had 2 questions. One is, could you just highlight your methodology in which you brought down the interest expenses from 8% to 7.1%? And the other question is, could you also highlight how capital adequacy ratio has gone from 21% to 25% over the last quarter?
See, on the first one, which is the cost of borrowings, there are a few different factors, mostly related to the point that back in 2019 and early 2020 when liquidity environment was quite challenging, there was a lot of higher rate borrowing that the company have had to take up. And now we are -- now that the liquidity situation in the company is just completely different. So we are -- and all of those borrowings have gone past their prepayment penalty days. We are prepaying more and more of them, and we are able to borrow in the market now incrementally at much cheaper prices. And that is slowly reducing the cost of borrowing.
So even though the market is seeing an increased or elevated interest rate environment, our cost of borrowing continues to come down.
I think he misunderstood. Here it was not 7.1%. That's it.
7.9% is the incremental borrowing is just in the last quarter. The portfolio level -- the average cost of borrowing is 8.88, now your second question was on capital adequacy. Capital adequacy is at 25% -- just over 25%. Two things have changed. One is, of course, the addition of profits in the numerator and the denominator, there's some risk-weighted kind of on a weighted average basis risk we have come down a little bit, and that has nothing other dramatic, but that's what has resulted in the move that you see.
Sir, could you just clarify on the risk weight coming down, is this because of the mix of loans? Or is there any other...
I mean post the DHFL acquisition. So post the DHFL acquisition and with the improving mix on the retail, you can see the mix of retail has gone up from 12% to 37%. So this is what is resulting in change in the risk weightage where the risk weightages have kind of improved towards the retail side and you're seeing the capital [indiscernible].
Are these -- but that should have been sort of reflected in the previous results as well, right? So I mean net-net, from a book perspective, this composition hasn't significantly shifted over the last quarter?
Yes. So last quarter, our provision, these are audited numbers right now.
Got it. Got it. So provisionally, we lower capital adequacy. Got it.
Yes, we were, right on that.
Yes. I just wanted to add on the cost of borrowing quickly. The other important thing which people should note that while the interest rates are going up, our spreads as a AA has been considerably going on because of the performance of the company and especially with retail coming in, et cetera. So that's the other point to note.
The next question is from the line of Nischint Chawathe from Kotak Securities.
I just want to understand the ROA target that you're putting out at around 2-odd percent. This includes the benefit of recoveries from the DHFL updated book or should we kind of expect that as a kind of further into these numbers?
So 2 things. Firstly, the guided or not guided, but the aspirations on the growth that we spoke about was high 2, low 3s. So 2% would be a bit on the low side. I don't think -- that's what we are putting out there. Now -- and that for kind of, let's say, between now and 5 years out, we should get there. The whole recovery story on the [indiscernible] book and all the DHFL book, et cetera, would mostly have played out by then. So in the interim, the -- all the recovery story, et cetera, will keep giving us the ROA boost. But the sustainable business should be giving that kind of ROA 4, 5 years out, right, without having to depend on recovery because there will be no more book to recover 5 years now.
Okay. So benefit -- so basically, what we're trying to say is that this is a benefit that you probably get in the interim period?
Correct.
And when you have evaluated the real estate and the wholesale book, you have kind of -- and we are saying that look it is now adequately provided. Are we taking any credits from this? Or is this something where you have provided it independently and this kind of maybe just provide to further buffer on that?
I'm not sure I fully understood your question, actually. Let's see, there's one consolidated balance sheet. I mean it's -- whatever comes in the provisions line, whether it comes in one part of the business or another, it goes to the same line. So we are not thinking of it separately. It is all one integrated a company and one integrated set of numbers.
Nischint, maybe you want to clarify the question, what you were trying to ask.
So I think what I'm trying to say is that when you have evaluated the book and probably going project by project and kind of made adequate provisions against it, are you taking any credit from the -- from this particular pool of recovery? Or are you kind of trying to say that, look, this pool of recovery is something which might in a quarter like this help you to offset the hit that we saw in this quarter? Or probably it may not. We don't want to take any credit of that. So when you're kind of trying to kind -- I mean, I'm sure internally, you have some number we talk to what recovery...
These are 2 different events. Like there is one team that will continue to focus on getting recoveries from the old books that is stressed. Hopefully, we'll be able to create through that team a steady flow of recoveries and a steady sort of P&L stream for the next few quarters. Independently, client behavior, our slippages, et cetera, might result in provision requirement. We don't want to color our judgment on one depending on the other. But as it happens, there will be situations like in the quarter where there is adequate money coming from one to pay for the other. But it is not something that we are sort of -- there's no master design that we are trying to do behind it. We will do whatever is prove it in any given quarter.
Also, Nischint from a disclosure perspective, if you see the earlier disclosed separate line items for credit cost and separate line item for recoveries from book. So I think that should clarify your doubts on that front.
That's definitely helpful.
The next question is from the line of Aditya Jain from Citi Group.
Could you talk about how large is the pool purchase? Just to get a sense of how much of the organic growth in retail and how much is being driven by pool purchase? And also what are the loans which are being bought?
Old purchase is about 5% of our -- or 5.2% of the retail book right now, Aditya. And it will always remain in that broad range. I don't think it's going to ever be a whole lot. The kind of products that we are doing in pool purchase are so far, we first started with microfinance because we are very keen on actually getting into the microfinance business ourselves. So we wanted to actually get a sense of how the book is performing with a lot of lenders. So we did some pools in microfinance. And that's what gave us the confidence and also gave us a little bit of a sense of which geographies are working well, et cetera. We are doing a little bit of small business, and we're doing a little bit of housing. What we are not doing is cars or trucks, et cetera, we have not done anything meaningful there.
Understood. So it was 5.2% of the retail book in the last quarter as well.
Say that again?
So this was the share of 5.2% of the retail book or the pool purchase which was the amount in the last quarter, is it?
Of the stock.
Of the stock.
Correct.
Got it. And then the OpEx decline quarter-over-quarter in Financial Services, I mean a material decline. So in terms of thinking about it going forward, do we think of it as a bulk of getting full activation in DHFL is done. So costs should be stable to a large extent in this year. Or is it more seasonality or some of the relevant?
In general, you'll see a little bit of seasonality in this, Aditya. Like you will see Q1 being a bit low. And then like, for example, we have not started our campaigns, et cetera, yet. It will probably start later in the year. Some of the staff that were set are still being hired for the completion of this year. All that cost will start coming in a little bit later. So I would say that just keep in mind, there's a little bit of seasonality with the Q1 lower and the Q4 high, right? But otherwise, to your point that our stabilization cost of DHFL, et cetera, fully baked in, et cetera, I think the answer is yes. Now you should think about it purely is kind of organically to fund growth.
All right. And then just lastly, the equity breakup that we have is on March. Is it possible to tell the equity in Financial Services as on June end?
So typically, we would be keen to disclose on 6 monthly period when the number of balance sheet gets audited.
Thank you. Ladies and gentlemen, due to time constraint, that was the last question. I now hand the conference over to Mr. Hitesh Dhaddha for closing comments. Over to you, sir.
Thank you, everyone. If you have further 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. Thank you all for joining us, and you may now disconnect your lines.