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This is the first note in our new series Corner Office View, which offers interviews/meeting notes with CEOs, founders, and leaders of our coverage companies. We will bring you curated views from companies across multiple sectors. We recently met Jairam Sridharan, MD - Piramal Capital & Housing Finance, for an update on the developments in the company as well as in the NBFC sector amid the recent regulatory changes by the RBI in unsecured retail lending. Key views: i) The branch-led retail lending business is on track to deliver operating leverage, leading to OpEx-to-AUM reducing to ~3.5% in the next three years from ~6% now and retail RoA inching up, to ~3%. ii) The Wholesale 1.0 rundown remains in acceleration mode, with no negative surprise on credit costs. iii) Given the strong capital position (CRAR: 31% as of H1FY24) and the company’s proactive approach of slowing unsecured retail loans for the last 3 quarters, impact of the recent move by the RBI is likely to be negligible. iv) Considering the high capital base and the large Wholesale 1.0 book running down, RoE will see gradual improvement as the leverage is likely to remain benign, unless a large synergistic acquisition materializes.

Piramal Enterprises: Financial Snapshot (Consolidated)

Operating leverage to drive down cost, improve retail RoA to ~3% in medium term

PIEL’s retail business will be branch- & employee-driven, and its secured business is likely to be the core of its business model, with its unsecured business playing a supportive role at times, in helping improve returns and accelerate growth. With the growing AuM, operating leverage is likely to lead to OpEx-to-AuM improving to ~3.5% in the next 3 years from the current ~6%, and aiding in retail RoA reaching ~3%. The Wholesale 1.0 rundown remains in ‘acceleration mode’, with the book shrinking by ~Rs35bn a quarter. Given the excess capitalization (CRAR:31% at H1FY24) and the optionality of further capital being freed up from exits in Shriram Insurance’s ventures, we believe the leverage will remain sub-optimally low over the medium term, unless a synergistic acquisition at a reasonable price pans out. Owing to the lower leverage, RoE improvement is likely to be gradual, in the absence of any inorganic transaction.

Excess capital and putting a proactive brake on unsecured retail insulate PIEL from RBI’s recent actions

Recent RBI action to increase the risk weight on retail unsecured is aimed at checking any excessive growth in some pockets of consumption loans, amid emerging signs of stress seen by leading lenders. However, PIEL’s considerably strong capitalization (CRAR: 31%, as of H1FY24, post the Buyback) and its proactively slowing down of unsecured retail disbursements starting Q1FY24 would mean that the company is unlikely to see a meaningful impact from such regulatory changes. PIEL is likely to start seeing pickup in unsecured retail, as the hit from its tightening the credit filters is already in the base.

Retail growth and accelerated rundown of Wholesale 1.0, on the right track; valuation remains highly undemanding

Various parts of the PIEL story: a) Profitable growth in Retail and Wholesale 2.0. b) Accelerated rundown of Wholesale 1.0 without a major credit cost shock. c) Optionality playing out in non-core asset exits (stake in Shriram Insurance, land parcels and deferred tax matters) is progressing well. The current overcapitalization would mean that RoE improvement would be gradual, unless the company does a synergistic acquisition at a reasonable price. However, PIEL’s collected approach towards ascertaining the right acquisition candidate and returning excess capital to minority shareholders via the ‘Buyback route’ adds to our comfort. Trading at 0.63x FY25E P/BV for the core NBFC, PIEL’s valuation is extremely undemanding and does not yet factor-in the progress on strategic goals.

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