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-      PIEL reported 3QFY24 net loss of ~INR23.8b (vs. ~INR482m profit in 2Q). Reported PAT included provisions of ~INR35.4b on AIFs. The management exuded confidence in the full recovery of its AIF investments.

-      Normalized PAT (excluding exceptional and one-off items was flat QoQ at ~INR1.2b. PPOP (excl. dividend income and one-offs) grew ~30% QoQ to ~INR2.6b. Opex/AUM remained broadly stable at ~3.8%.

-      NII declined ~20% YoY (but grew ~11% QoQ) to INR8.3b. Other income included interest income of ~INR640m from income tax refunds in 3QFY24, but the core fee income trajectory continued to improve.

-      Annualized net credit cost stood at ~1.6% in 3QFY24 (vs. 1.2% in 2Q). Total ECL provisions improved by ~30bp QoQ to 4.3% of total AUM.

-      Total AUM grew 6% QoQ and 9% YoY, excluding the impact of AIF provisions. Wholesale 2.0 AUM grew 24% QoQ to INR55.6b, while Wholesale 1.0 AUM declined 47% YoY to INR187b.

-      Total SRs declined ~6% since 1QFY24, led by cash realization of ~INR9.1b. As resolution processes continue, SR portfolio will continue to decline in the near term.

-      PIEL announced sale of Shriram Investments Holdings for ~INR14.4b to Shriram Ownership Trust. The transaction is expected to close in 4QFY24. PIEL still has stake in general insurance (beneficial interest basis, ~13.3% stake) and life insurance (beneficial interest basis, 14.9% stake ) businesses of Shriram Group. We believe that PIEL will continue to monetize its non-core assets and utilize the proceeds for acquisition opportunities in the lending business.

-      We estimate a ~25% AUM CAGR over FY23-26, including a ~43% CAGR in Retail AUM over the same period. Its core business (excluding one-offs and exceptional) is showing signs of improvement. Reiterate our BUY rating on the stock with a revised TP of INR1,100 (based on Mar’26E SOTP).

Highlights from the management commentary

-      Guided for credit costs of 1.7%-2.0% and opex to AUM to moderate to ~3%

-      Fintech business is being done at 14.0-14.5% IRR and ~90% of fintech business is largely protected by FLDG. Business done through partnerships has better economics, but PIEL will continue to invest in further scaling up its own distribution/origination channels.

Valuation and view

-      Over the past two years, PIEL has strengthened its balance sheet by running down its wholesale loan book; has improved texture of its borrowings (driving lower cost of borrowings); and has fortified itself against contingencies with ECL provisions at 4.3% of AUM.

-      PIEL is cognizant of sectoral stress in personal loans and has only ~10% of its unsecured consumer loans book in the <INR50k ticket size segment. Product diversification within Retail will help PIEL deliver strong growth and reduce concentration risks. We expect PIEL to deliver ~2.1% RoA and 8% RoE in FY26. We acknowledge that PIEL possesses pockets of value: a) deferred tax assets relating to the time of DHFL acquisition, b) recoveries from written-off exposures, and c) recoveries from the completely provided for AIF exposures.

-      We value the lending business at 0.7x FY26E P/BV. We reiterate our BUY rating on the stock with a revised TP of INR1,100 (premised on Mar’26 SOTP).

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