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Asia Roadshow: Increased acceptance of gradual turnaround story

We hosted the management of Piramal Enterprises in Singapore and Hong Kong during 27-29 Nov-2024. The roadshow saw good interest from long-only investors and hedge funds, leading to nearly a dozen-and-half meetings. Key takeaways: 1. Investors appreciated the progression toward the 3% RoA growth business (retail and Wholesale 2.0) franchise over the medium term; 2. Increased investor comfort around divestment of the legacy book (Rs121bn as of Sep-24) without incremental hit to the P&L; 3. Investors viewed the regulatory environment as keeping a closer check on very high-growth segments and companies in the lending space; and 4. Investor remained curious about any likelihood of credit stress building up in more segments such as Micro-Business and Micro-LAP beyond Digital Unsecured, MFI, and Credit Cards amid slowing economic growth. Overall, PIEL’s RoA improvement journey is to benefit from reduced NII drag of the legacy book, CoF improvement, gradual improvement in fee yield, operating leverage, and the tax shield from carried forward losses of Rs100bn, only to be partly offset by the expected inch-up in the credit cost toward more sustainable levels.

Increased understanding and appreciation of turnaround progress

With the sustained reducing impact of legacy loan book and investments-led noises and improved segmental disclosures (Read: https://tinyurl.com/mr3ftz8d), the investors were appreciable of PIEL’s turnaround journey toward a retail and granular wholesale franchise. The investors were broadly in acceptance that the complete divestment of the legacy wholesale book (Rs121bn as of Sep-24) should not cause any material P&L impact, even if the experience turns worse than the past wholesale divestment experience, as this book currently has ~Rs20bn provisions and the expected recoveries from the written-off AIF (~Rs20bn) and Shriram General holdings divestment should be more than enough. Going forward, financial reporting will be further simplified with the impending conversion of Piramal Capital Housing Finance Limited (PCHFL) into an NBFC from HFC, and its subsequent merger with the listed Piramal Enterprises Limited.

Regulatory and macro environment remains on top of the mind

The continuous news flow on regulatory developments in the lending sector and a number of regulatory actions against the players and business segments has led the investors to believe that the regulator is very watchful of excessive growth in any particular business segment or by any player. Against the backdrop of the regulator’s recent actions across many loan segments to curb any ever greening practices, the investors remained worried about any further such move by the regulator covering more loan products. The deterioration in asset quality and rising credit costs in digital unsecured, Credit Cards, and MFI loans has led to investors being worried about any contagion effect to the segments, particularly to micro business loans and micro-LAP, amid slowing economic growth and the disruptive new age business-led threat to the micro enterprises.

Better visibility on profitability improvement following legacy divestment

The sustained volatilities caused by the legacy wholesale book and investments led to the underlying performance trend of the growth business getting lost in the noise. With the legacy book getting much smaller, the journey of RoA improvement aided by the reduced drag of legacy book on NII, lowering of CoF, gradual improvement in fee yield (dipped due to accounting policy changes), operating leverage, and tax shield from carried-forward losses is getting more visible, even if the credit cost is to inch up on the lines of the management’s guidance of ~1.8-2%.

Maintain ADD; will revisit estimates in the wake of new segmental disclosures

With the sustained progress in the gradual turnaround toward divesting the legacy wholesale book and building a profitable retail and granular wholesale lending franchise, we maintain our ADD rating on the stock with an unchanged Sep-25E TP of Rs1,150. In the wake of the recent detailed segmental financial disclosures (Read: https://tinyurl.com/mr3ftz8d), we shall revisit our estimates in due course.

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