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PIEL reported Q4 earnings of Rs1.36bn (adjusted for the impact of MTM losses of Rs3.75bn in Shriram Group Investments). Retail disbursements maintained healthy momentum. In line with the retailization strategy, the wholesale book continued to run down, with the resolution phase well underway. Operating expenses were elevated during the quarter, as PIEL builds its retail franchise.

We assume coverage on PIEL with a BUY rating and a Mar-24E TP of Rs1,080/share, using the SOTP methodology for its valuation: 1) The financial services business at Rs788/share, assigning a multiple of 0.7x its Mar-25E BVPS, 2) Investment in Shriram Finance, post holdco discount, at Rs130/share, 3) Investment in Shriram Insurance at Rs63/share, and 4) Investment in AIF and the insurance business at allocated book value of Rs47/share and Rs52/share, respectively. Key risks: Further stress in wholesale 1.0 pool remains the key risk to our forecast.

Retail disbursements rose by 33.6% QoQ to ~Rs68.3bn, driven by strong growth across all product segments. As a result, retail AUM stood at Rs321.4bn (+15.2% QoQ/+49.1% YoY). Within retail, on a QoQ basis, the share of digital unsecured loans, MSME unsecured loans and microfinance rose, while that of housing and secured MSME loans declined. The wholesale book continued to decline, in line with PIEL’s strategy of achieving 2/3rd of retail and 1/3rd wholesale by FY27E. The wholesale 1.0 book declined ~17.2% QoQ to Rs290.5bn. PIEL concluded four stressed asset-monetization transactions in Q4: 1) It exited a large holdco loan – Mytrah Energy (Rs19.08bn), 2) It concluded the sale of a NPA portfolio in cash, and 3) It concluded the sale of certain stressed assets through two separate ARC transactions under the 15:85 structure. As the resolution processes continue, PIEL expects more ARC sales over the next two quarters and related continued enforcement efforts. The wholesale 2.0 book, which is more granular and being focused upon by PIEL for growth, now stands at ~Rs27.9bn (+49.2% QoQ), of which new real estate loans stood at ~Rs12.9bn and corporate mid-market loans stood at ~Rs14.9bn. NII declined sequentially by 11.2% QoQ/18.1% YoY, as calculated NIM + Fees declined ~60bps sequentially to ~6.4%. Interest income declined 4.3% QoQ/16.2% YoY, as calculated yield declined ~60bps. Calculated CoF rose by ~10bps QoQ on account of the transmission of repo rate hikes by the RBI. Management expects CoF to rise moderately in Q1. Fee income was up 13% sequentially, with a higher share of retail. Operating expenses were elevated, up 19.8% QoQ/48.7% YoY, as PIEL continued to make investments to expand its retail franchise. Opex-to-AUM rose by ~70bps sequentially to ~4.3%, with cost-to-income ratio at 59.6% (Q3: 48.1%). The sequential growth was driven by other expenses, which were up ~30% QoQ. PPOP came in at ~Rs4.7bn (-24.5% QoQ/-43.2% YoY). While calculated credit costs for Q4 stood at ~4.2%, credit costs excluding the Rs3.75bn MTM loss in Shriram Group Investments was ~1.9%. GS3 for the quarter saw a significant decline of 336bps QoQ to 3.2%, as the aforementioned resolutions resulted in a 52% decline in stage-3 assets to Rs20.5bn. PCR on stage-3 assets declined to ~49.5% from 67.2% QoQ on account of resolutions. NS3 stood at ~1.7% (Q3: ~2.4%). Wholesale GS3 stood at ~4.8% in Q4 vs. 10.2% in Q3. PCR on wholesale stood at 34% in Q4 vs. 45% in Q3.

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