Piramal Enterprises Limited (500302) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Piramal Enterprises Limited Q2 and H1 FY 2022 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.

Hi. Good evening, everyone. Hope you are safe and in best of your health. I'm pleased to welcome you all to this conference call to discuss Q2 and H1 FY '22 results. Our results materials have been uploaded on our website, and you may like to download and refer 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; Mr. Nandini Piramal, Executive Director of Piramal Enterprises and Chairperson Piramal Pharma Limited; Mr. Khushru Jijina, Executive Director of Financial Services, Piramal Enterprises; Mr. Jairam Sridharan, Managing Director of 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 would request him to share his initial thoughts. Over to you, sir.

Good day, and welcome to our meeting. During the last quarter, we have made significant progress on our strategic priorities and has been transformational for our company, marked by the achievement of 2 major milestones. First, we completed the DHFL acquisition on actually 30th of September. And this acquisition has created one of the largest HFCs in India that is focused on the affordable segment. The second thing we did was announced the Pharma demerger and simplification of the corporate structure, which we did in October. The demerger will create 2 separate pure-play entities in the Financial Services and Pharmaceuticals in line with our commitment to the shareholders and investors. The DHFL acquisition is a major step in the transformation journey of our Financial Services business, which we have characterized in 3 phases. The first phase is consolidation. Prior to the DHFL acquisition, we had completed Phase I, where we made the business more resilient by: a, improving capital adequacy; b, reducing the loan book concentration; and c, building adequate provisions; and finally diversifying the borrowing mix. The second phase is what we are going through now, which is a transition and quantum growth. We have achieved significant growth through the acquisition of DHFL, that would have otherwise taken several years to accomplish through the organic route. Moreover, this growth has been achieved without infusing or raising any additional equity for the acquisition. The impact of the DHFL acquisition can be seen, firstly, in growth. Our total AUM has increased by 42% quarter-on-quarter to be INR 67,000 crores, and our retail loan book has increased by 4.3x to INR 22,200 crores. We've now got diversification, and the share of our retail loan book has increased to 33% from 12%, which was at March -- end of March. Besides that, we've got significant increase in scale and granularity and has created a platform with a pan-India presence with 301 branches across 24 States and Union Territories. We have an access to a customer pool of 1 million, and the average ticket size of the combined retail book is INR 16 lakh, making the book more diversified and granular. The consideration that was paid for the acquisition as compared to the gross value of the book needs some explanation. The DHFL loan book has witnessed a significant markdown by the administrator prior to the acquisition. Over the last 2 years, the book had already been marked down from INR 88,000 crores. Prior to the acquisition, the gross loan book, excluding the fraudulent assets, was INR 44,000 crores. We have paid a net consideration of INR 20,000 crores for the asset for DHFL. This valuation serves as an adequate buffer to mitigate any unforeseen asset quality risk. Since the DHFL's loan book is largely retail and has high granularity, it leads to overall derisking of the portfolio. Also, there are no additional GNPAs or NNPAs as the loans acquired from DHFL have been fair valued. Consequently, the amalgamation of the DHFL book has made our overall asset quality metrics noticeably stronger. As a result, NPA ratios declined post the DHFL merger. GNPA for the combined entity has improved from 4.3% in June to 2.9% on September 30, and NPA has reduced from 2.2% to 1.5%. Coming to provisioning. You would recollect that in the last quarter of the financial year 2020, at the onset of COVID-19 pandemic, we had created provisions of INR 1,900 crores incrementally. Despite conservative accounting of the DHFL loan book, improvement in the overall loan book mix and a favorable real estate market scenario, we continue to maintain these provisions even after the DHFL merger. Provisions have been stable at INR 2,683 crores as of September '21. Total provisioning stood at 4% of the combined AUM, and provisioning against wholesale assets stands at 5.8%. The DHFL portfolio has an average yield of 11% and has been acquired with 10-year borrowings at 6.75% per annum. And there has been no additional equity against this. Hence, we expect it to boost overall profitability going forward. Our Phase 3 of our strategy is a sustainable growth and profitability. And this with the DHFL acquisition now complete, we have put in place the appropriate levels for superior performance in the future. Borrowing costs have declined immediately after the acquisition as the deal was partly funded by NCDs worth INR 19,550 crores at 6.75%. With a higher loan book diversification and growth, there could be further reduction in borrowing costs in the coming quarters. Post the DHFL merger, the leverage of the Financial Services business has increased from 1.6 as of June '21 to 2.7 as of September '21. With growth in the retail loan book, the leverage could increase to 3.5 in the near to medium term. We are also building a technology-led retail lending business, which should help us in improving cost efficiency as well as better manage asset quality. Moreover, the change in the product mix by launching new differentiated higher-yielding products should also add to the profitability. Now I come to the second major strategic initiative, which we have done, which is the demerger and simplification of the corporate structure. This was approved by our Board in October. This was a long-awaited announcement by our stakeholders as we have been taking several measures to simplify the company's organizational structure over the last 2 or 3 years. The Pharma business will get vertically demerged from PEL and can consolidated under Piramal Pharma Limited. PPL will become one of the larger pharma companies listed on the NSE and BSE post the demerger. Our Financial Services, PHL Fininvest Limited, the NBFC, which was a 100% subsidiary of PEL, will get amalgamated into PEL to create a diversified NBFC, which will remain listed on NSE and BSE. Piramal Capital and Housing Finance, the HFC post the DHFL acquisition, will remain a wholly-owned subsidiary of PEL. We expect this demerger to be done between 9 to 12 months from the date of announcement, subject to all the various required approvals. Coming to the overall financial performance of PEL, we continued to deliver a resilient performance in this quarter and the first half despite the COVID second wave and are cautious -- and our conscious strategy to reduce the wholesale loan book. Adjusted net profit was stable at INR 1,090 crores for the first half. It's important to note that the P&L performance for the period does not include the DHFL financials. Organic retail lending disbursements grew 2.6x Q-on-Q versus the same first quarter of FY '22, showing a strong rebound from the impact of wave 2. We launched 2 new product categories in this quarter, and our partnerships are also scaling up well. Collection efficiency in our retail portfolio recovered to 99% in September '21, similar to that of March '21 levels. In the wholesale lending, the performance of our developer clients significantly improved compared to the quarter -- the previous quarter FY '22 reflecting the trends in the overall real estate market. However, in line with our strategy to make the wholesale loan book more gradually -- granular, we are consciously bringing down our wholesale book. In fact, no account exceeds 10% of the net worth of financial services. Our Pharma business delivered a robust revenue growth during the first half of this year at 20%, delivering revenues of INR 2,983 crores. The Pharma business contributed to 50% of PEL's overall revenue. The EBITDA margin was lower at 13% in this half. We expect a better performance in the second half, which is expected to offset the lower margins in the first half. Historically, the second half has been better and is expected to be on similar lines this year. During the financial year FY '21, H2 contributed to 55% of revenue and 65% of EBITDA. We did witness some execution-related challenges during the quarter related to logistics and availability of raw material and manpower. The CDMO business grew by 11%, and our development order book is up by 50% as compared to the same period last year. We are witnessing a robust demand of sterile fill finish in North America. In the Complex Hospital Generics business, our first half revenue grew by 26%. The business witnessed recovery despite the impact of the Delta variant on demand for our key product lines in a few predominant geographies. We have delivered strong sales of Sevoflurane in the U.S. and continue to gain market share. There was a strong demand for injectable pain management products and maintain market share in the U.S. Intrathecal business. In the India Consumer Healthcare business, the revenue in the first half grew by 54%, which was driven by strong performance in key brands. We have launched 6 new products in this first half and have a strong pipeline for the year. We are reinvesting our profits for future business growth. In closing, I would say that this has been a transformational quarter and have -- for our company and the steps taken by us have significantly strengthened the foundation to support future growth. Our balance sheet strength and uniqueness of our business models sets us apart, enabling us to create long-term value for our stakeholders. Thank you.

[Operator Instructions]. The first question is from the line of Kunal Shah from ICICI Securities.

So congratulations on all the business developments. Firstly, in terms of the breakup, if you can share this INR 20-odd-thousand crores between the retail and wholesale? And so -- and similarly, in terms of -- from where the wholesale book was marked down to what level? And same with like retail? So INR 88,000 crores to INR 44,000 crores and now maybe INR 44,000 to INR 20,000 crores, and breakup between retail and wholesale.?

We have added -- out of the INR 20,000 crores, we've added about INR 18,500 crores for the wholesale -- for the retail book and the balance is for the wholesale book.

So wholesale is coming nearly at INR 1,500-odd crores?

About INR 2,000 crores, yes.

Yes, about INR 2,000-odd crores. Okay. Okay. And the gross value of these assets would have been?

I think this is a sufficient enough detail, Kunal.

Okay. Because that estimated value was around about INR 25-odd-thousand crores for wholesale and INR 27,000 crores retail. So is that like...

I think we have gone exactly on the basis of how we had bid for this thing. In the bid, this is what the bid we had done for both the wholesale and retail, and we have just followed that.

Okay. And in terms of cash, I think last time, the sense was it should be around about INR 11,000 crores, INR 12,000-odd crores. Currently, it seems to be almost like INR 15,500 crores, and net maybe of the liabilities, it seems to be like 14-odd-thousand crores. So is it more of a repayment, which has happened, and we have got the cash since March as that component seems to be higher than the expectations and net consideration or asset acquired that seems to be lower than the expectation? That's the only thing, yes.

So it's a combination of both. There have been some repayments. There have been some -- I mean the repayments have been good, and more robust than what we had thought, and there have been some prepayments as well.

Okay. Sure. And if we look at this retail, so then INR 18,500 crores...

I can answer all at one time now. I can't keep answering. You ask all questions at one time now. I'm sorry.

Yes, sure. So firstly, in terms of when I look at overall retail book and then ex this INR 18,500 crores of DHFL, then the organic retail seems to be relatively lower or there is not much of a growth out there. So definitely, we have shared the disbursement number, but I would want to understand the outlook on the organic side. And lastly, in terms of -- if you can give a more granular color in terms of how much would be the Stage 2 to and the restructuring now on this expanded base? So was there any restructuring, which was done in the DHFL book? Or maybe there was any restructuring, which was done even in PEL book, ex of DHFL? Yes.

Well Jairam, can you answer these questions?

Yes. So Kunal, firstly, if you look at the quarter that has just gone by, your observation is accurate that the disbursement growth is very strong in the organic retail book, but AUM growth is not. And the reason it's very similar to what we saw in the previous quarter, which is that runoff of the old book continue to be quite high. Going forward, there is -- the way we are going to disclose is to show one consolidated number for the entire business, and you're no longer going to see separation between, let's say, legacy PCHFL both versus legacy DHFL part of the portfolio, et cetera. This is all one business now, and you are going to see the overall disbursement numbers and AUM growth numbers on the consolidated business going forward. Our expectation is that growth at the AUM level will start coming through once we stabilize the book that we have just acquired through DHFL and once all our policies and risk management infrastructure is put in place. So you should see that AUM growth coming through in a little while. In the interim, we will continue to show you disbursement growth as a precursor to AUM growth. As you know, disbursement growth comes first in the Retail business and AUM growth comes a few quarters later, that's exactly what you're going to see here as well. So you will start seeing us talk a lot more about disbursement growth in initial quarter, and it will slowly translate into AUM growth in the times to come.

Sure. Any color on restructuring?

Our restructuring -- the overall restructuring in the book is just about 2%, so you'll know that our book is of the retail that is a lot more self-employed than what you will see in the external market. So this is exactly what we are seeing in the market. We feel very good about the restructuring performance. New flows in this quarter have been relatively low apart from the legacy DHFL book, where there have been some. But otherwise, this quarter, there was fairly limited amounts.

The next question is from the line of Nishant Shah from Point72 Asset Management.

Congratulations for the acquisition and also the corporate restructuring -- or the carve-out of the Pharma business. It's a good team structure now. I have a question on the Shriram part of the business. Is this still considered like a strategic investment? There is talk in the media about like some kind of reorganization over there. If given an option to exit, would you consider an exit from that? Or do you continue to be happy to stay invested and like enjoy the growth in that business? Yes, that's my only question.

We have said this before also. It's not a strategic investment for us. But at the same time, it's not that we are desperate to sell it at any time, at any price. So at the appropriate time, we will exit. In the long term, this will not be on our books, but at the moment, we will evaluate, but it's not strategic for us.

The next question is from the line of Piran Engineer from CLSA.

Congrats on the quarter. Just a couple of questions. They might be a bit repetitive, but -- so first, I'd just like to understand on Dewan's book of INR 40,000 crores, INR 42,000 crores, what were the NPAs that resulted in you all valuing the INR 20,000 crores? And my second question is the loan book -- the home loan book specifically...

I am sorry to interrupt you, Piran Engineer. Your audio is breaking from your line, sir. Please check.

Operator, is this better?

Yes, sir, please go ahead now.

Yes. So the home loan book would be about INR 15,000 crores. And how do you expect to beat the 50% of HFC license by 2024? And then lastly, how do we think of net interest going forward from this 4.3% level after accounting for Dewan? That's from my side.

Jairam, you want to take these questions?

Yes, yes. Happy to. So your first question was -- if I recollect your 3 questions, your first one was on -- was it retail...

So Jairam, basically, what I'm saying is that Dewan's book is -- was INR 40,000 crores, INR 42,000 crores, you revalued it at 20,000. What were the NPAs that resulted in...

I'll tell you. One important to keep in mind is the way the accounting has worked is through reflection of the fair value that was discovered in a bidding process. So this is unlike the situation where you have an existing book, you do a risk assessment of the book, and then you say, okay, I'm going to discount the book by X percent because I believe X percent of loss is going to come here, and that discounted value is what you see as a net book value. This is not that situation. This is a situation where a book exists. The book was transparently bid. In the bidding process, a final outcome came in terms of the discovered value of the full book. Now we are reflecting that discovered value in our balance sheet and then allocating the purchase price across the various asset categories, right? So trying to do a pure mathematical calculation to say what does this imply in terms of our expectation on NPA recovery or new NPA formation, et cetera, would be incorrect. Because that's not the way this number has been arrived. This number has been arrived as a part of a price discovery process, right? Now that's why discovery has been appropriately allocated. That said, to your question of how much was -- how much is the NPA book in Dewan, et cetera. The June numbers of Dewan are well known. So you can see it, it's in the public domain. The retail book of Dewan had NPA ratios of upwards of 25%. Of course, the way we have incorporated and amalgamated it into our book, the NPA ratio at which we have amalgamated it is basically 0% because we have only amalgamated a good part of the book. So that's the way this has happened.

Okay. But then again, if the NPA ratio is 25%, the maximum hit you can have is 25%...

No, no, no. If a surprise discovery process results in, let's say, $0.10 on the dollar on a portfolio, $0.10 is what you can reflect on the book. It doesn't mean that $0.10 is what you expect to recover, but $0.10 was the discover value of the book in my hypothetical example. In this case, $0.40 unchanged was the discovered value of the book, and that was reflected. And we will allocate that price across various asset class.

Also to add, Piran, what Jairam mentioned, a large part of this book is secured book. Secured by assets, which are house properties. And then what Jairam is trying to explain you is that what you ended up paying for asset was INR 20,000 crores after the cash if you direct the cash that you've got at DHFL balance sheet. So in all, you paid INR 20,000 crore for assets. And hence, we are valuing the entire pool of assets is INR 20,000 crores. It has got nothing to do with asset quality of that asset pool. We wanted to remain conservative in terms of how we wanted to account for. We did not want to account for a value more than what we paid for and hence, we've accounted for INR 20,000 crores, the price that we paid for assets.

Okay. So there could be upside potentially?

Yes, yes.

And anymore questions please?

Sorry to interrupt you, this is the operator. Sir, your audio is breaking from your line, please check.

Yes, Piran, your another question on HFC percentage, and you made the valid observation that in the HFC, our ratios are below the regulatory arc right now. However, the regulator has been on a glide path on how to get there. We are going to be striving to achieve those, and we will be in constant conversation with the regulators in this regard.

But it's by FY '24, regardless of anything, right, even for you all?

Yes. Of course, that is the regulatory guideline. We will -- of course, on a case-to-case basis, the regulator, I'm sure we'll have conversations with individual players. So we will continue to engage with them on that point. Right now, there is no immediate sort of looming deadline in front of us. We will continue to strive towards increasing the retail ratio, as we have mentioned multiple times. So hopefully, just organically, our strategy itself will push us in that direction. And we will be guided by what the regulator requests us to do.

Got it. Got it. And as for...

This is the operator. Sorry to interrupt you Mr. Engineer. We are not able to hear you. Request you to please rejoin the question queue. We take the next question from the line of Alpesh Mehta from IIFL Securities.

Congrats on the good set of numbers. All the questions are related to the accounting of DHFL. First is, I can see the goodwill increasing by almost INR 10 billion. Is it on account of DHFL? That is first. Secondly, what is this transition cost of 1.43 billion for the DHFL merger? Third is, if I see the segmental reporting, the Financial Services total assets have increased by around INR 27,600 crores -- around INR 27,600, whereas the loan book added is around INR 20,300 crores and our core balance sheet is largely flat quarter-on-quarter. So what explains this difference of around INR 73 billion? The fourth question is, when DHFL reported FY '21 earnings, at that point in time, there was DTA outstanding of around INR 102 billion, whereas in the consolidated numbers that we have reported, there is no increase in the DTA. So how the tax losses are going to be utilized? How the tax assets are going to be utilized after the merger? And the last question related to Pharma. In the segmental reporting, Pharma assets versus the debt reported, the Pharma sector liability versus the debt reported in the footnote, the difference is around INR 23 billion, what is that difference on account of?

Alpesh, I'll take some of your questions. The first question that you had asked was with respect to increase in goodwill. So the increase in goodwill year is not DHFL. This is largely the good Hemmo acquisition. So we acquired Hemmo. The total consideration paid and payable is about INR 1,000 crores. Currently, the purchase price allocation has not been done, and all of this has been parked into goodwill. After purchase price allocation is completed, this will get regrouped into their respective heads. The second question was with respect to the transaction cost for DHFL. This is largely the stamp duty that will be payable in the state of Maharashtra as well as other cost payable to various consultants. That's what's accounted there. It also includes the transaction cost for the Hemmo's transaction, which has happened.

Tax? You take that question.

Yes. With respect to the deferred tax asset, again, this has been fair valued and marked down as we deemed appropriate in the purchase price allocation, and that's what's factored in terms of the increase.

Yes. So sorry to interrupt you here. So this -- are we -- will we be able to utilize the deferred tax asset in future?

So we are not valuing because we wanted to remain conservative, Alpesh, and we value the assets only to the extent of what we are paying. Anything over the above will actually be upside, and we don't want to quantify upside in any form right now.

Yes. But it is fair to say that there is a potential tax benefit component to this, which we have not quantified and put in here. But as you have seen, we have taken a book at a particular face value, and we have done fair value adjustments to a significantly lower value. And so the losses that get created because of that, that do give you eligibility for potential tax covers in the future. We are not quantifying that right now.

Okay. And this will not -- Jairam, this will not reduce the reported tax rate, right? It will be just a tax output that will come down. It is more of a cash flow accounting rather than the reported tax rate, in future.

Right.

Okay. The segmental reporting difference between the loan book and the gross asset increase because of DHFL around almost INR 73 billion?

Yes. So it's primarily DHFL in terms of the increase that you see in the segment assets and it also includes the other assets. So it has AUM and the other assets both put together, that's what you see the increase of about INR 26,000 crore, INR 27,000 crores?

Yes, I agree. But that INR 70 billion large core component of that, can I assume that it's more on account of cash and bank balance? Or it's more to do with some other assets? Because obviously, the fixed assets will not be that high.

It's got a combination of both, cash as well as other assets.

Okay. Great. And the Pharma liability, segmental liabilities versus the reported debt?

Yes. So if you're referring to the comparison of September '21 versus September '20. Then earlier, the debt related to Pharma was shown under unallocated. And after the push down of the Pharma business into Piramal Pharma, we've started reporting the number under the Pharma segment. That's why you see a difference between September '20 versus September '21.

No. My question was related to, if you come to the notes to accounts, capital employed segmental reporting. When you see the Pharma sector liabilities, the total liability is around INR 57 billion, whereas in the same table below the notes to account, it's written around INR 33 billion or INR 34 billion related to the Pharma sector. So the difference of almost INR 23 billion in the Pharma liabilities, what would that be on account of?

We will get back to you offline on this.

Okay. Great. And any -- just a last question sorry -- any recovery from all this wholesale book written off or the markdown value of the retail loans as well in future, there won't -- so everything is the upside for us, right? There won't be any we'll be sharing of those with the creditors on this part?

Yes, yes.

[Operator Instructions]. The next question is from the line of Abhijit Tibrewal from Motilal Oswal.

Just two questions. The first one is a clarification, wherein we had commented that the overall restructuring was 2% of the loans. Just wanted to clarify whether this 2% is in retail or as a proportion of the overall AUM?

Overall.

Sure. The next 2 questions that I have raised to Jairam. So Jairam, in this quarter, I see that we have started this merchant BNPL and unsecured business loan in partnership with some of the fintechs. So if you could just dwell on both these products a little bit in terms of what are the commercials and what is it that we are exactly trying to do here? And the second question, again, is on disbursements, while we've been sharing disbursements that we've been doing under retail ex on DHFL. I mean -- on maybe a conservative basis, I mean, what can we assume? What can the disbursement levels look like in retail loans with DHFL under the fold in the subsequent quarters?

Sure. So to your question first on the -- let me start with the second question, fresh in my mind. The piece on disbursement trajectory, if you generally think about the size of network that has actually gotten added and the fact that -- you can see that the overall network has increased by a fairly large number. However, a lot of the network increases from smaller locations, et cetera. So keeping that all in mind, once the engine starts really running from a disbursement trajectory standpoint and people come to sort of target levels of brand productivity and people productivity, it wouldn't be surprising if you had the overall disburse -- monthly disbursement rate go up 5 to 7x over the next 1 year or the above, but it will take -- it will be a gradual journey to go from here to there. But that kind of increase in monthly disbursements is certainly on the cards, and it is something that we would want to do. To your second question -- or your first question on product trajectory, where you spoke about the merchant BNPL and unsecured BL and some of these other products that we have started. We've been talking about this for a little while. We want to be a multi-product retail lending platform. And while we will be focused on affordable housing as our core pillar, there will be other products around it that we will create. And as an organization, we have appetite for around 20-ish percent of unsecured lending in our portfolio. Now it's not something that we are going to get to now or in the next 1 year or thereabout. But over time, solely, that's directionally where we will head to make sure that we have an adequate earnings buffer in the P&L as well. Now in that direction, we are experimenting with a lot of different product categories apart from plain vanilla unsecured personal loan, which, of course, is something that we will do digitally. But apart from that, we have been trying consumer BNPL in the quarters past. This quarter, we started merchant BNPL, which is essentially merchants on a platform connecting with their buyers. So -- and that platform actually offer a BNPL to the merchant. That's one thing that we are trying. And on the unsecured BL side. One of the things that you find in small town midtown India is that small merchants very often don't have collateral to actually offer. So to go ahead and do a lending relationship with them, you have to come up with an unsecured business loan -- unsecured MSME lending product, which is what we have launched this quarter. It is purely focused on the MSME category. And needless to say, it is at a price point, which is very different from what some of the other secured MSME lending, like LAP, et cetera, would be. So this would be about 500 basis points higher priced than what a LAP might be, for example.

And if I can just squeeze in a follow-up question in the context of the response that you gave to the disbursement that they could go up to 5 to 7x kind of disbursements from the current levels, monthly disbursement run rate. Would it be fair to say given that our old book -- old retail book ex DHFL kind of continues to run off at a swift pace and the fact that the DHFL retail book, which you have brought on your balance sheet, again, is a -- I'm assuming it's a pristine book, which will always obviously again continue to run off at a swift pace. Would it be fair to say that, I mean, EVM growth then would remain relatively muted, given that our stance that we will be looking to continue to run down the corporate book?

I think that is going to be true for the next quarter or 2, but not beyond that. By that time, the disbursement trajectory will be sufficiently strong to offset potential runoff. The other thing that is also -- that also needs to be kept in mind is that in the last 1.5 years, 2 years in the DHFL book, the portfolio retention activities have been relatively weak. We have designed fairly strong retention activities, and we would also undertake those and implement those in the coming months to make sure that the runoff is also reduced from where it is. But the overall mechanics of what you're saying is correct that currently, the repayments are higher than new disbursements, which means AUM growth is going to not be there. However, as the disbursement keep increasing and the prepayments keep decreasing, the lines will cross over the next few months. And once that happens, you will start seeing AUM growth again, which is, of course, a natural trajectory of all such transactions that happened.

And what's also important to see is the long-term targets that we are targeting of nearly 2/3 retail and 1/3 wholesale in 3 to 5 years. And you can see the kind of equity that the company has and the potential of growth that it can have. So in a matter of few quarters, as Jairam is mentioning, the business is going to pick up the growth trajectory at a decent run rate and to start delivering for its long-term targets.

And sorry, just one other thing to add. It's also important to keep in mind and not lose sight of the fact that what we have delivered in this quarter is a 40-plus percent growth in AUM. So this is the sort of growth, which would take many, many, many quarters to deliver. And all that has come in, in 1 quarter because it was true in an organic transaction. And that has completely changed the baseline for us as an entity without having to put in any incremental equity from our side. So we -- there is a lot -- this onetime big growth spurt that going to hold up for a little while. However, on an incremental basis from this new baseline, you'll need to -- give us a few months for us to stabilize the book and get to a point where the disbursements are higher than repayments.

The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.

Firstly, on the CDMO business, now that the number of molecules in the Phase 3 has ramped up from 10 to almost 34 over a period of last 3 to 4 years. Any indication in terms of any of these molecules coming up for the commercialization and then provide a reasonable boost to the CDMO business? That is first. Second is, while the Complex Hospital Generics sales has been pretty stable for last 2 to 3 quarters, but given that the COVID cases are on the rise over past 1 month, you see some impact on the business over the near to medium term? And thirdly, the Riverview facility expansion will take how much time frame?

Okay. So on the CDMO business, firstly, as you rightly pointed out, there is a increase in the number of Phase III molecules, which obviously increases the probability of these going commercial. So of course, there is a probability associated it because it's in Phase III. But yes, that definitely will provide a boost to the CDMO business in terms of greater stability of revenues coming from the commercial. In terms of Complex Hospital Generics, while in U.S. we are seeing significant improvement and recovery, especially for our inhalation anesthesia portfolio, and that has helped maintain growth. As far as our Hospital Generics business is concerned, in Europe and some of the other key markets, there are still some challenges, while we are hopeful that things would improve, but it's going to be a wait and what situation. U.S. is our largest business as far as inhalation anesthesia is concerned and for adjacent injectables and that's where a large part of our business comes from. But yes, we would want to wait and see how it performs in the other markets. With respect to Riverview, the CapEx was a bit delayed because of the COVID scenario. And now it would be sometime mid-FY '23 when the facility would be ready post expansion.

The next question is from the line of [ Sumit Chowdhury ] from [indiscernible].

Congrats on a good set of numbers. A question from me on the Dewan side. So just from my understanding, the current quarter numbers don't reflect the P&L impact of the Dewan transaction. So if you could just help us understand what kind of yield should we expect to be delivered on the INR 20,000-odd crores that you have taken over from Dewan and what kind of operating expense increase should we expect going forward because of this transaction?

So if you look at the average yield of the book, mostly we have what we have consolidated as the retail book, just sort of it's easier to just focus on that. The average yield is a tad over 11%. And almost all of it is funded through 10-year NCDs issued at 6.75%. So that should give you a little bit of a sense of what the spread is on this part of the business and what impact it should have on profitability. As far as OpEx is concerned, the OpEx level -- the current OpEx level of the erstwhile DHFL business are extremely low, abnormally low because a lot of -- because of 2 things: one is that new business has not been happening. So cost of acquisition has been real. And a lot of people have left. So it's a very understaffed team. So staffing costs are relatively low. So what you're likely to see in the -- in very initial stages, you might see OpEx ratios which are quite attractive for a retail business. However, you will see us making the right investments and making sure that we build a long-term franchise here. In the long run, you should expect to see at the overall organizational level, cost-income ratio for us between [indiscernible] data given the mix that we are targeting at somewhere around the mid-20s is what you should expect to see. And that's the level at which we want to keep our disclosures over time, let's see. But right now, we don't have an intention of specifically talking about individual business level, cost-to-income ratios, et cetera. Let's see how this develops.

Understood. And second would be on the Pharma side. On the CDMO, I think you alluded to the fact that there were some logistics and manpower-related issues, which kind of delayed some of the delivery. So -- is that something that you expect to be resolved within this year? And should we therefore expect the overall business to grow on the Pharma side at the run rate, which has been indicated before? And the margins for the full year should we expect them to go back to the north of 20% to 25% sort of range for the year?

So the CDMO business, historically, if you see, has always been lumpy. Roughly, we have about 45% of our business coming in the first half and 55% of the business coming in the second half of the year. But more specifically, if we were to look at the EBITDA, then you have 35% of the EBITDA coming in the first half and 65% coming in the second half. So this year, we expect it to be no different. It will be on similar lines. A little bit more pronounced in terms of EBITDA towards H2 because we've had a slightly adverse mix when it came to H1. So yes, we would see growth coming back. We delivered 20% growth overall for the Pharma in H1. And the overall Pharma growth for H2 would be on similar lines. Though in terms of margin, it may -- we may see some modest decline because input prices have been going up. And obviously, we are not insulated from that completely. Likewise, expenses on distribution and logistics have also been going up. So there may be some impact of that, a modest decline. But yes, more closer to what it was in FY '21.

Okay. So overall, like, so the margins for first half have been closer to 13%. Full year, we should expect it to be closer to FY '21, which is north of 20%, if I recall correctly, around that level, okay.

The next question is from the line of Utsav Mehta from Edelweiss AMC.

Just wanted to understand a little bit more granularity on the Pharma business revenue. Is it possible to sort of share some insight into what percentage of revenue would be commercial? How much would be CRO and how much would be manufacturing for clinical phase market?

So overall, if you look at it, about 75% of our revenue comes from commercial, about 25% comes from development and the 25% includes about 3% from what we call as discovery. Commercial by the very fact that each consignment is the larger ticket size is higher in value. So that's how typically the mix is.

And this 75% currently would be dominated by generic molecules? Or is there a fair share of NCDs as well?

So it's a mix of both. We would put the mix at about 55% generics and 45% innovator.

Okay. Understood. Is there -- last question on the margins. Is there any element of pricing pressure or pricing erosion faced by clients on the generic commercial side, which is causing difficulty to pass through the raw material prices?

So as of now, right now, there has not been a very material pricing pressure on the kind of products that we have been dealing as far as our API generics is concerned. But on some of our injectables, we've been seeing significant pricing pressure, specifically in the U.S. market.

Understood. Understood. And one last question, more strategic from my side. I saw in the long-term targets that entering the India domestic formulations market is a priority and its something you all have maintained for while. How does that sort of stack up with wanting to run a CDMO, wherein they have complex or even innovator molecules. Would clients be comfortable with something like that, having dealing with an organization that has footprints across both?

So I think our domestic formulations business is primarily India based, as you are aware, and it primarily caters to the India market, whereas our contract manufacturing customers are those who are based outside and who sell products for the local markets in North America and Europe. As you are aware, almost 75% of our revenues comes from North America. So domestic formulations, what we do, if at all, we enter the space again, would be very different market, different kind of products versus what we are doing in our CDMO space.

The next question is from the line of Prakash from Axis Capital.

A quick one here on the Pharma side. I heard you saying that typically, it's about 30%, 35% of the profit for the first half and the remaining in the second half and there is a seasonality, which I totally understand. But when I compare the first half of last year and this year, there is a major difference. Could you explain that? First half of last year showing about 17% plus margin. And this year, first half is about 12.5%. So what is really changing here from a like-to-like first half?

Yes. So as I mentioned before, this time in the first half, we had a very adverse product mix, which means enough CDMO space, the contracts which were invoiced, where comparatively lower margin come back to what we had last year. We expect this to get reasonably corrected towards H2. So it's an adverse product mix. Secondly, in line with our stated strategy, this year, we have increased our sales promotion spend in our consumer products business to boost sales. As we've been saying we'll reinvest profits to grow the OTC business at a faster pace. So that spend has gone up. And in some of our overseas sites due to various execution and operational issues, revenues had been lower, and we expect this also to catch up in the second half. As you are aware, overseas overheads are on the higher side, and therefore, absorption of fixed assets has been lower in the first half. These we expect to get corrected in the second half.

So within CDMO, when you say the product mix has changed, when we see comparable like [ DVs ] and all the innovator business has gone up and margins have actually gone up. So could you elaborate a little more on the product mix change in the CDMO space?

So I'm only talking of product mix change from a timing standpoint. So what got delivered during the first half were the comparatively lower margin contracts. The higher-margin contract would get invoiced and delivered in the second half of the year. That's what caused the mix issue. Otherwise, overall, our mix has largely remained similar to what it was last year.

Okay. And on the Complex Hospital business side, since U.S. -- still U.S. and other export markets still seeing COVID cases. Have you seen this business seeing full traction? Or is it still -- I mean, could you see a faster growth going forward? Or this is the growth one should expect?

So our inhalation anesthesia portfolio, which is a significant part of our Complex Hospital Generics business saw a good recovery post COVID, especially in the U.S. market now. In fact, Sevoflurane has come back nearly to pre-COVID levels with us having a market leader position in the U.S. market. Some of the adjacent injectables we, as I mentioned earlier, we were seeing some pricing pressure or lack of demand in some adjacent injectables. So in the U.S. market, overall, the growth has been better and is coming back to pre-COVID levels. It's in the other markets in Europe where we've been seeing some challenges because of sporadic lockdowns or issues related to COVID.

Okay. And how is the pipeline looking for this Complex Hospital Generic businesses. We had a couple of products, which we are expecting U.S. approval. Are we on track to get it by end of fiscal '22? Or how do we see that?

So in terms of approval for the product that you're referring to, it has currently been delayed and we don't expect that to come within this fiscal year. In terms of the other pipeline for other generic injectables in the form of either in-licensing or sourcing from our own CMOs, we continue to work on that, and there is good traction in the pipeline. Obviously, the sales have got delayed because of COVID in some of the key markets, especially in the U.S. market. Hopefully, this should start improving as overall position improves.

Okay. And lastly, just reconfirming for full year margin on the Pharma side, it would be at par or a little better is what you said. Is that understanding right?

I said we would see a modest decline, and that's largely driven by input -- rising input costs, raw materials as well as logistic and distribution expenses. So it will see a slight decline versus previous year level.

Okay. And next year, we should probably get back to normalcy.

I would refrain from commenting for next year right away. We'll wait and see how things go. [indiscernible] to expand margins. So we remain committed to our long-term strategy of expanding margins to the levels that we have stated earlier in our Pharma Day.

The next question is from the line of Bharat Sheth from Quest Investment.

Congratulation on lot of restructuring -- reorganization rather. Sir, on the financial side, what will be our directionally if you can give some color on blended NIM with the change in mix of the business and post-DHFL?

We are not offering forward-looking NIM guidance right now. Just as you have seen -- you can see the books and I am today in a pre-amalgamated form. The deal that is getting amalgamated, as I mentioned before, the gross yield is about just over 11%. And the cost of funds incrementally on that piece is about 6.75%. So putting that together, that should give you a little bit of a view of what margins and spreads are going to look like in the coming 2 quarters. We are not offering any specific guidance at this point. In the next quarter, you will see the full quarter financial performance of the amalgamated entity, so it'll be pretty straightforward from there on. And in the fourth quarter, we might consider offering guidance for this year. But right now, we don't have a guidance out on March.

In the last question, see, we had acquired on land parcel against loan. So what is the status of that and monetization plan?

So that was a land parcel in Andheri, East, as we had explained last time, and it's a large parcel. In fact, there has been progress on that. And I would not like to divest much right now. We actually -- there are some approvals, which we are getting from the government, with some new approvals also coming. So in the next 6 months, probably, we will talk more in detail. But needless to say that we have progressed in the matter, and we will share the details at the right time.

The next question is from the line of Abhijit Tibrewal from Motilal Oswal.

I'm referring to Page #34 of your presentation. Just trying to understand, I mean, after we include this 10-year NCDs that we raised at 6.75%, what is our stock cost of borrowing? And what are -- what was the incremental cost of borrowings? The reason I ask this is -- in one of the other slides, you have mentioned that the yields of our retail portfolio, including DHFL, was about 11.2%. So now if we were to look at you as one of the largest HFCs in the country, I mean, with the current cost of borrowings, I mean, how do you see it trending down in the coming quarters, which would make you competitive to be doing housing finance, given that 75% of your retail book is indeed housing loans?

Yes. So first, on your first part of your question, which is what is the stock cost of borrowing, that is the number that you actually see on Page 34, right? So the decline that we see, the 60 basis point decline in cost of borrowing from last quarter to this quarter is because of the addition of the -- on a pro forma basis, obviously, you have not seen the impact of this in this quarter's P&L. You will see the impact in the coming quarter P&L. But on a pro forma basis, if you were to just create a version of the stock, this is what it would look like. Now on an incremental basis, the lending rates have clearly improved materially for us. We had come out with retail NCD issue recently, in which the cost of borrowing had a low rate handle. So that gives you a sense of incrementally what has happened. Now with the inclusion of DHFL and aggregation into our book, with the improvement in the NDA profile as was the improvement in granularity of the portfolio, our hope and expectation is that incremental cost of borrowing will continue to improve from where it is with or without any action -- favorable action on the rating side. Either way, we should see improvement in the cost of borrowing. And that will continue to strengthen the overall NIM trajectory. Now in terms of your question on competitiveness of the Housing business, I want to reiterate that the Housing business that we enter and that we are big in, is the lower end, the smaller towns, the self-employed and cash salaried type of customers. Our average yield in the Housing business even today is 11%. So this is not the 6.5%, 7.5%, 8% housing business that banks do. We are not in that business at all. We are targeting a completely different segment, which is -- which is fairly underserved by banks, et cetera. And that is the business model that you're going to see us pursue in the foreseeable future.

The next question is from the line of Gautam from Deutsche Bank.

I just wanted to -- just a couple of questions. I guess the first one was, I think you already captured the fact that the DHFL acquisition book is captured at acquisition cost. Will there ever be a, I guess, a fair value or -- fair valuation for that book done? Or would it be maintained at acquisition cost? That's one. And the second question was, when you -- when we talk about, I guess, the -- sorry, the margins on the DHFL book, how would we -- how do we think about it? I mean, technically, you have an INR 88,000 crore book that's been valued at just about INR 20,000 crores at PCHFL, whereas the debt when you talk about the 6.75% borrowing, that's a one-on-one basis to the INR 20,000 crores, but the -- I guess the 11% yield that we get on the book will be on something that is going to be between INR 20,000 crores and INR 88,000 crores. So I guess just wanted to get a sense of how that would flow in a subsequent...

Both your points are valid ones. Like see, on the first one, it is currently at -- it is a fair value -- on surface it's a fair value process. But yes, it's heavily determined by purchase price consideration. And that's what you see here, a fair value process formerly with the auditors, et cetera, is ongoing, and it will continue over the course of the next 6 months, we will finalize it. But I would be surprised if there will be any outcomes, which are materially different from purchase price consideration. So you should assume that valuation processes are by and larger closed, even though the audit process on that and creating the final fair value reporting -- reports, et cetera, will continue over the coming months, along with the auditors. Now that leads us naturally to the second question that you have, which is the interest that you're earning is on a book, which is larger than INR 20,000 crores. The interest costs that you are bearing is on roughly INR 19,000 crores, INR 20,000 crores. And so the margins might be a little bit larger than what the spread actually indicate. That point is absolutely valid. That is one of the underlying business cases of why you would do a transaction like this. And so what the actual impact of that might be, you just have to wait and watch, like when you see next quarter's number, you will get a little bit of a sense of what that expanded things might look like. We don't want to speculate on that at this point.

Understood. And I guess lastly, on -- just a quick follow-up on that on, I think the rating -- the grade ratings was kind of, I guess, put on review of both the acquisition and second, the restructuring. Any sense on, I guess, what the timing for the rating agencies to complete that might be -- might look like?

We will be having conversations with the rating agencies now that the results are over, et cetera, we will have a quarterly conversation with them. But this is not a thing that we control or we would want to push from our side. There's a lot of things that the rating agencies will take their own call and in their own time. If they deem the level of progress in the company to have been adequate, they will take the calls that are appropriate. We don't want to duly influence that process. But we are confident that we're doing all the right things. The balance sheet is moving in the right direction. And all the metrics that rating agencies typically tend to care for, all metrics are trending in the right direction. So hopefully, we will see some favorable outcomes over the next few quarters, but it is there for to make, not ours.

Thank you. Ladies and gentlemen, due to time constraint, we will take that as a last question. I now hand the conference over to Mr. Hitesh Dhaddha for closing comments. Thank you, and over to you, sir.

So thanks, everyone, for coming to the call. If you have any more questions, please feel free to reach out to the IR team.

Thank you, ladies and gentlemen, on behalf of Piramal Enterprises Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.