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Piramal Enterprise Ltd (PEL) is transforming itself into a retail-led franchise by changing its portfolio mix and running down its wholesale 1.0 book. PEL, like other NBFCs, has weathered multiple storms over the past few years (NBFC-liquidity crisis post IL&FS in 2018, Covid-19). It has since decided to pursue diversified growth in its wholesale 2.0 book (wholesale 2.0 are loans sanctioned post FY22), which is granular, has lower concentration risk and takes on calibrated risks. PEL has comfortable capital adequacy (CAR at 34.3% in 1QFY24), partly also benefiting from the sale of its strategic investment in Shriram Finance Limited. In addition, asset quality has normalised with overall GS3/ NS3 at 2.32%/1.21% in 1QFY24 vs. 3.66%/ 1.67% in 1QFY23. Wholesale segment's asset quality improved sharply with GS3/ NS3 at 2.98%/ 1.29% in 1QFY24 vs. 4.85%/ 2.03% in 1QFY23, with proactive rundown of the wholesale 1.0 book with write-offs and additional provisioning. PEL has also focussed on improving its processes and building its digital infrastructure to have ‘High Touch & High Tech’ strategy going ahead. The company is well-placed to benefit from the benign credit environment, diversified profile and driven by its transformation towards high yielding assets, we believe PEL should be able to deliver avg core RoA of 0.7% translating into avg RoEs of 4.8% over FY24/25E (high capitalization levels, Tier1 of 30% as of FY23). Strategic changes at key leadership positions, strengthening of the governance standards and meaningful process improvements should ensure continued delivery on growth and profitability. This should enable PEL to witness meaningful valuation upside. We initiate coverage with a BUY rating and a TP of INR 1250 (valuing core PEL business at 0.9x FY25E P/BV). Relapse of asset quality pressures is a key risk to our call.

Retail-led transformation: PEL's transformation into a retail-led NBFC is silently taking shape. PEL has a retail customer base of 3.3+mn customers with 47% belonging to tier 2/3 towns, median age of the borrowers being 39 years. Housing segment remains mainstay of the retail business forming 53% of the retail book (27% of overall). In addition, PEL is scaling up its other products such as secured MSME, used cars and unsecured loans (personal loans, MFI, business loans) which are scalable and RoA-accretive. Retail AUM saw robust growth of 57% YoY (1QFY24). In contrast, the wholesale book shrank by 31% YoY (1QFY24) where in PEL’s wholesale 1.0 contracted by 38% YoY while wholesale 2.0 saw accelerated growth of 3.5x YoY. In its wholesale 2.0 portfolio, PEL anticipates opportunities due to sectoral dynamics, sectoral tailwinds and under-penetration. We expect PEL to witness retail CAGR of 35-40% vs. decline in wholesale book by 21% over FY24-25E, translating into overall CAGR of 10% over FY24-25E

Asset quality on the mend: PEL’s underwriting and collection methods, combining ‘High Touch and High Tech’, has allowed it to avoid risky sanctions and detect potential risks at an early stage. It has established an independent risk management and governance framework, which plays a pivotal role in implementing a rigorous credit approval process and enhancing the asset quality of the portfolio. PEL's wholesale book is now has undergone a leadership change (bringing in experienced management) and risk management remains a key priority. We expect PEL to continue with moderation in credit cost going. We build in credit cost of 1.1-1.3% over FY24-25E.

Valuations benefitted by structural improvements: PEL is expected to benefit from a. retail led credit growth, b. diversified high yielding portfolio, c. low credit cost and d. benign credit environment. Strategic changes at key leadership positions, strengthening of the governance standards and meaningful process improvements should ensure continued delivery on growth and profitability. Near-term RoE looks suppressed due to high capital adequacy; we expect avg. core RoE/ROA of 4.8%/ 0.7% over FY24- 25E. We value PEL at 0.9x FY25E P/BV and initiate coverage with a BUY rating and TP of INR 1250. PEL’s inability to execute growth plans while maintaining asset quality or sharp broad-based deceleration in economic activity are key risks to our call.

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