Piramal Enterprises Ltd

Following is the rational for 5 year growth period, contrary views invited -:

• Provisions:
  Legacy Wholesale Book – 54% of the Outstanding AUM.
  Stage 3 Book is ~ 10.7% of the Book and PCR is 72% which is conservative but what troubles me is the Stage 2 Wholesale Book addition which they did in Sep Quarter. This book stands at 19% and PCR on this is only 29%.
  Given in Infra loans the Loss Given Default runs high even with secured assets, low LTV etc which is evident from their distressed sales, so I don’t trust the Secured Assets commentary from Management on this. By the time you get hold of those assets there are new dead Skeletons.
  Some of this 19% is obviously going to flow in Stage 3 in the coming Quarters and there will be provisions.
  I have factored in 50% of the Stage 2 Book flowing into Stage 3 and same 70% PCR given elevated Provisioning in recent Quarters but supported by additional recoveries from DHFL book.
  So expecting ~ 1300 crores of additional Provisioning spread over the next 1.5 year.

• Growth:
  I’ve assumed ~ 20% growth over the next few years for Retail Side. Then at the end of five years I’ve backtracked their total Portfolio according to their own targets of 70% Retail and that leads to a Total AUM of 91000 Cr.
  This automatically adjusts the Growth in 2.0 and Degrowth in 1.0 Portfolio.
  Retail – 63750 and remaining Wholesale 1.0 and 2.0
  Net growth over the next 5 Years comes to around 7%.

• ROA Tree:
  Over the next five years given retail shift have assumed Yield on Loan Book tilting to 13% from 12.4% levels currently. Interest Costs at 8.35%.
  Have kept Credit Costs elevated to 2% of the AUM for the first few years and then 1.75% thereafter.
  OPEX continues to grow in line with Loan book growth at 7%.
  Other Income continues to grow in line with the growth in Retail Book since that is the Primary Driver.

With this Story their leverage increases at the end of five year and improves the ROE(8.3%) but still the ROE doesn’t manage to beat the Cost of Capital. I’ve assumed Terminal value at Y5.

Where will the Alpha come from? – For a company that has an OPEX/Total Assets Cost of 3.45% NIMs of ~6% don’t justify being in the business lending to relatively Risky Segments since there will always be elevated Credit Costs. The other Income as % of Assets is also low given there is low net growth in AUM. If the OPEX grows at a slower pace than Loan Book and Other Income growth there will be improvement in ROA. If their Credit Costs are controlled that will lead to additional improvement and they might be able to get to their Cost of Capital.

Investments – If they wind down their Shriram Investments and do a buyback at Current Price that will be value Accretive to Shareholders. Institutional Investors should push for this.Somebody suggested this in the latest Concall as well.

Taking the Investments and JVs at 0.75 * Book value the NBFC Biz trades at 0.5 times Book value. Market has already factored in a lot of Pessimism in the Price. If Jairam can turnaround the company in the next year by Controlled Provisions and Controlled Stage 2+3 there will definitely be rerating.