Piramal Enterprises Ltd

I am a new investor and have been following the company for about a year. At the cost of sounding optimistic, here is my take on PEL’s legacy book:

As of FY24:

• Gross legacy book: Rs. 14,572 cr
• Provisions: Rs. 2,516 cr
• Net legacy book on balance sheet ~ Rs. 12,000 cr

This implies that if the company recovers < 12K from the legacy book, it will have a negative impact on net worth and vice versa (I am not really hoping for a positive impact from this book).

In Dec 2023, due to an arbitrary RBI circular, AIF was rundown from Rs. 3,540 cr to Rs. 1,067 cr, resulting in a (hopefully) unrealistic loss of ~2500.
[Source: “impacted by net AIF provision of INR 2,473 Cr in FY24” in Q4FY24 presentation].

Gross legacy book (adjusted for AIF) = 14,572 + 2500 ~ Rs. 17,000 cr.

Between FY23 and FY24, gross legacy book value went from ~29K to ~17k, generating liquidity of 10,245 cr. This implies a recovery ratio of ~ 10k/12k ~ 83%.

Digressing slightly, I think the additional provisioning in Q4FY24 was required because, in FY23, this book had provisions of 10% (implying expected recoveries of 90%), whereas the actual recoveries in FY24, as we saw above, were 83%.

Required recovery ratio going forward for a net zero effect on net worth
= net on book / gross
= 12k / 17k
= 70%

If we assume that the AIF will be recovered in full, this ratio will be further down ~ (9.5K/14.5K) ~ 65%. But let’s not make this assumption.

Given the above, I think the legacy book should not have a material negative impact on the company’s net worth going forward. The pockets of value and the stock being available at less than the book value adds additional buffer.

I think what matters much more is the profitability and asset quality of the growth book. In my humble opinion, this is largely unknown at the moment. It is good that the company has started reporting separate profitability numbers for growth and legacy books – this will help in getting a sense of the growth book independently.