In the Financial Services (FS) business, the risk of default and non-payment by borrowers may adversely affect profitability and asset quality.

The Company may also be exposed to concentration risks across sectors, counterparties and geographies.

At PEL, each investment is assessed by the investment team as well as an independent risk team on the risk-return framework. The combined analysis of these teams is presented to the Investment Committee for investment decision.

The large part of our loan book is secured in nature, with healthy security cover obtained at the time of deal origination. Moreover, the deals are based on conservative underwriting parameters.

Concentration risk is partly mitigated by the concentration risk framework, which incentivises businesses to diversify portfolio across counterparties, sectors and geographies.

Some of the key measures we continued during the year to mitigate default and concentration risks in the FS business are:

In Q4 FY 2022, the Company re-evaluated its wholesale portfolio to detect any lasting impacts on its clients of the pandemic or recent stresses in the macro-economy. Based on this assessment, some non-real estate exposures were moved to Stage 2 and thus, the Company has made additional provisioning and interest reversal of ₹ 1,037 Crores for the same. This includes additional provisioning of ₹ 822 Crores and interest reversal of ₹ 215 Crores against loans of ₹ 2,292 Crores. These were high-yield, structured mezzanine loans done under the 'Holdco' structure. The Company has discontinued doing such kind of deals.

Hence total provisions increased to ₹ 3,735 Crores (5.7% of our AUM) as of March 2022, however, GNPA and NNPA ratios remain broadly unchanged qoq as of March 2022.

Client Concentration: Pharma business has some major contracts with few customers. Any set back at customers’ end may adversely affect the Company’s financials.

Product Concentration: Decrease in sale of products with a significant share in revenue may lead to adverse profit margins.

PEL’s business development teams continue to actively seek to diversify its client base and products to mitigate concentration risk.

The Pharma business continues to focus on backward integration, alternative vendor development and geographically-diverse production facilities, to ensure production is closer to end markets.

The Company also acquired niche products to reduce its dependence on inhalation anaesthesia in the Global Pharma Products business.

PEL is expected to maintain global quality standards in manufacturing as some of the products are directly consumed/applied by consumers.

Any deviation with regard to quality compliance of products would impact consumers worldwide, and hence, adversely affect the Company’s performance.

A dedicated Corporate Quality Assurance Group actively monitors adherence to prescribed quality standards.

PEL has a strong governance and escalation mechanism. The Company’s quality management system is independent of its businesses and reports directly to the Board.

PEL is on a quality advancement journey from 'Quality for Compliance' to 'Quality as a Culture', with a focus on systems, processes, technology and people.

PEL has successfully cleared 36 USFDA inspections, 269 total regulatory inspections, and 1,377 customer audits since the beginning of FY 2012.

PEL has significant revenues in foreign currencies through exports and foreign operations. Thus, the Company is exposed to risks arising out of changes in foreign exchange rates.

The centralised treasury function aggregates the foreign exchange exposures and takes prudent measures to hedge these exposures based on prevalent macro-economic conditions and in line with applicable regulatory guidelines.

Volatility in interest rates on investments, loans and treasury operations could cause the net interest income to decline adversely, affecting profitability of the Financial Services business.

ALCO (Asset Liability Committee) actively reviews the interest rate risk and ensures that interest rate gaps are maintained as per ALCO’s interest rate view.

With 79% of borrowings as ‘fixed rate liabilities’ and 63% of assets at floating rate, as of March 2022, the Financial Services business is well positioned to navigate the rising interest rate environment.

Mismatch in the tenor of assets and liabilities in the Financial Services business could lead to liquidity risk.

ALCO reviews the GAP statements and formulates appropriate strategy to manage the risk.

In the last two years, the Company has shifted its borrowing mix towards long-term funding sources and reduced its exposure to Commercial Papers. During FY 2022, the Company raised ~` 19,550 Crores via 10-year NCDs to fund the DHFL acquisition. As a result, the ALM profile has significantly improved, with positive ALM GAP between cumulative inflows and cumulative outflows across all maturity buckets as on March 31, 2022. The Financial Services business had cash & cash equivalents of ` 8,533 Crores, as of March 31, 2022.

The Company needs to be adequately capitalized both at the Group-level and in Financial Services.

This serves as a buffer to absorb any risks arising from a volatile market/business environment and helps the Company to meet regulatory requirements from RBI/ NHB.

Since the beginning of FY 2020, the Company has raised more than ` 18,000 Crores of equity capital and significantly deleveraged the balance sheet.

As a result, the net debt-to-equity reduced to 1.2 times as of March 2022 compared to 2.0 times as of March 2019.

Financial Services had an equity base of ` 17,006 Crores as of March 2022 and the net debt-to-equity for the Financial Services business stood at 2.7 times as of March 2022 versus 3.9 times as of March 2019.

PEL requires certain statutory and regulatory approvals for conducting businesses. Any failure to obtain, retain or renew them in a timely manner may adversely affect operations.

A change in laws or regulations made by the government or a regulatory body can increase the costs of operating a business, reduce the attractiveness of investment and/or change the competitive landscape.

Also, PEL is structured through various subsidiaries across various countries in a tax-efficient manner. Regulatory changes in terms of repatriation and funding may lead to adverse financial impacts.

The applicable regulatory framework is continuously tracked by various teams within PEL. Necessary and appropriate actions are undertaken to ensure compliance with all regulatory requirements.

PEL has equity investments in various companies in India which are exposed to systematic and unsystematic risks.

The Company continues to effectively evaluate various risks involved in underlying assets, before and after making any such strategic investments. These investments are re-valued and appropriate valuation adjustments are taken into consideration.

PEL is committed to conserving resources as it recognises the importance of preserving the environment.

Any non-adherence to the Company’s approved EHS practices and procedures may expose it to adverse consequences.

The Company has adopted the 'reduce, reuse and recycle' mantra for natural resources. Several sustainability initiatives are underway in areas such as reduction of carbon footprint, water conservation, waste re-use / re-cycle.

The Company has recently embarked upon a sustainability journey and an external consultant is helping it on the same. These efforts have helped the Company to significantly improve its Bloomberg ESG score and it was ranked 12th in the BW Businessworld India’s Most Sustainable Companies.

Client Concentration: Pharma business has some major contracts with few customers. Any set back at customers’ end may adversely affect the Company’s financials.

Product Concentration: Decrease in sale of products with a significant share in revenue may lead to adverse profit margins.

Our business development teams continue to actively seek to diversify our client base and products to mitigate concentration risk.

We continued to focus on backward integration, alternative vendor development and geographically-diverse production facilities, to ensure production is closer to end markets.

We also acquired niche products to reduce our dependence on inhalation anaesthesia in the global pharma products business.

Persons having permitted or illegal access to our information technology systems or infrastructure might do serious damage to our business and activities. This might cause legal claims, regulatory fines or reputational harm.

We use secure computers and servers, have the latest version of the software, and use data back-ups that include off-site or remote storage. We also use anti-virus, anti-spyware protection, and firewalls. We have a robust cyber security framework in place.

Our business is reliant on our manufacturing facilities. Any manufacturing facility shutdowns or other manufacturing or production challenges caused by unanticipated circumstances may result in lower sales and have a negative impact on our company.

We have multiple manufacturing facilities spread across different countries. So even if one of them temporarily shuts down, we can fulfil the customer requirement through the other facility. In terms of the supply chain, we are not reliant on a few suppliers. We have multiple suppliers to fulfil our requirements.

Our teams have been working on a project to broaden our vendor base and secure alternative suppliers attempting to mitigate supplier concentration and location risks in the event of an unexpected contingency in the future.

We must acquire and maintain licences, permits, product registrations, and other regulatory approvals from a variety of governmental authorities, as well as adhere to their operating and security requirements. Any failure may have a negative impact on the company.

We continuously track the requirements imposed by the licensing authorities or other authorities and necessary steps are taken to adhere to those requirements.

We may not be able to achieve the forecasted additional revenue post acquiring a company. We may incur significant extra debt and contingent liabilities, or our continuing operations may be disrupted.

Mergers and acquisitions are well-considered moves. We choose only those companies whose capabilities are complementary to us, who are synergistic to our company. We have had a lot of acquisitions, thus we are fairly experienced in making the right decision. Our global team is diversified across many cultures. We also put in conscious effort to align the culture and value system of the acquired business with ours.

During FY 2022, we successfully integrated and re-activated DHFL’s branches, rolled-out management hierarchies for the employees absorbed by the Company and harmonized grades and policies.

Pharma products have a specified shelf life. If the demand forecast is overestimated, it can result in leftover inventory. Also, demand is easily affected by external factors. For example, during the peak of COVID-19, there was a decline in elective surgeries and our Complex Hospital Generics business experienced a major impact.

We try to prepare most accurate forecast possible. To do so, we use various methods such as Artificial Intelligence, Pilot Studies, Regression Analysis, Sensitivity Analysis, Forecasting Models etc.