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Higher retail mix and improving profitability to drive gradual re-rating

* A watershed year! FY23 marked a significant turnaround year for Piramal Enterprises (PIEL). During this period, the company made substantial progress in multiple areas, including the completion of the asset recognition cycle, diversification of its retail book, and the implementation of technology-driven underwriting processes. These efforts led to improved asset quality, reduced concentration risk, and set the stage for achieving sustainable growth.

* Retail evolves dramatically…: PIEL has achieved remarkable progress in its retail franchise over the past three years. It has successfully ventured into several new product segments by conducting pilot programs and subsequently integrating those products into its mainstream offerings. The company's in-house originated retail loan book has surpassed the size of the acquired book. The digital embedded finance segment has grown materially aided by partnerships with Fin-techs and consumer techs with the same contributing ~9% to the retail AUM in FY23.

* …and so does Wholesale: PIEL is strategically transitioning towards Wholesale Lending 2.0 and aims to enhance the granularity of its wholesale loan portfolio. This shift involves narrowing its focus to mid-market residential projects located in Tier 1 cities as well as targeting the top 15-20 centers within Tier 2 and 3 cities. Further, it has stopped providing financing for high-yield, structured mezzanine loans under the "HoldCo" structure, and has redirected all the high-yield loans to the fund structure instead.

* Stressed wholesale exposures largely dealt with: The prompt recognition of stressed wholesale exposures in FY23 can be attributed to the transition of the listed holding company into a diversified NBFC regulated by the RBI. We believe the asset recognition cycle in wholesale assets is largely complete. However, it is important to note that certain standard wholesale accounts could experience stress and move into higher buckets in the normal course of business. Nevertheless, we anticipate that such transitions will not drive significant increase in credit costs.

* AUM mix improves in favor of Retail: We expect a retail disbursement/AUM CAGR of ~37%/~42% over FY23-25. Consolidation in Wholesale book and strong growth in Retail book will result in the proportion of Retail increasing to ~70% of the AUM mix by FY25E.

* Reiterate BUY with a TP of INR1,165: With a high capital adequacy ratio of 31% and proceeds from a potential stake sale in Shriram Finance later this year, PIEL will have its task cut out to decide whether to utilize the excess capital on the balance sheet for any inorganic opportunities or find means to return it to shareholders. We model an FY25E RoA/RoE of 2.1%/~6.0%. We have a target multiple of 0.8x P/BV for the lending business. Reiterate BUY with a TP of INR1,165 (premised on Mar’25 SoTP).

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