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More stress ahead from rundown of legacy AUM; downgrade to Neutral

4QFY24 credit costs of ~INR33.5b from rundown of wholesale 1.0

* PIEL reported 4QFY24 net profit of ~INR1.37b (loss of ~INR23.8b in 3QFY24). Reported PAT included net provision write-back on AIF investments of INR11.4b and stake sale in Shriram Investment Holdings resulting in one-off gain of INR8.7b. FY24 loss after tax stood at ~INR16.8b, impacted by net AIF provision of INR24.7b.

* NII declined 18% YoY and 10% QoQ to ~INR7.55b. PPOP at ~INR2.9b declined ~25% QoQ and ~37% YoY. Loan losses and provisions stood at ~INR33.5b, which included impairment on investment property of ~INR6.6b.

* Total AUM grew 8% YoY and declined 3% QoQ. Wholesale 2.0 AUM grew 14% QoQ to INR63.5b, while Wholesale 1.0 AUM declined 50% YoY/22% QoQ to INR146b. Retail AUM grew ~49% YoY to INR479b, with its share in the loan book increasing to ~70% (vs. 64% in 3Q).

* GS3 was stable at 2.4%, while NS3 improved by ~30bp QoQ to 0.8%. S3 PCR improved by ~10pp QoQ to ~65%. 90+ DPD delinquency was stable or down across retail products.

* Total SRs declined ~3% QoQ to INR48.5b. As the resolution processes continue, the SR portfolio will continue to fall in the subsequent quarters.

* PEL has also announced a corporate reorganization through a proposed merger of Piramal Enterprises (PEL) with its subsidiary Piramal Capital & Housing Finance (PCHFL). The merged entity will be renamed as Piramal Finance. For each equity share of PEL, a shareholder would receive one equity share of Piramal Finance and a non-convertible, non-redeemable preference share of INR67, subject to RBI approval. We believe that this merger is a step in the right direction to simplify the organization structure.

* The management shared that it targets to rundown the legacy wholesale 1.0 AUM to ~INR60-70b by Mar’25 from INR146b as of Mar'24. We believe that this will entail elevated credit costs in FY25 as well. The company pointed out that: a) it has provisions of ~INR25b on the legacy AUM, b) it expects gains of ~INR17b from AIF over FY25-FY26, c) it has residual stakes in Shriram Life and General Insurance, which will be monetized; and d) it has assessed carry forward losses of ~INR106b, which can be utilized from FY25 onward. It will look to take the credit cost impact of running down the legacy AUM on the P&L when there are such one-off gains from the pockets of opportunity in its legacy business.

* We estimate a ~24% CAGR in total AUM and a ~36% CAGR in Retail AUM over FY24-FY26. While its growth business (excluding one-off gains and exceptional items) is showing signs of improvement, it will still take at least 12-18 months to mitigate the earnings and credit cost impact of an accelerated decline in the legacy AUM.

* Pockets of opportunity, which we earlier thought would be utilized for some inorganic acquisition in retail businesses or for strengthening the balance sheet, are being utilized to rundown the stressed legacy AUM. We do not see catalysts for any meaningful improvement in the core earnings trajectory of the company. Downgrade to Neutral with a revised TP of INR925 (based on Mar’26E SOTP).

Highlights from the management commentary

* The management shared the split of credit costs during the quarter. It utilized ~INR14b of fair value markdown on receivables and non-earning assets. Some large and chunky assets which were in Stage 2 and 3 legacy book have been settled and closed, which resulted in credit costs of over ~INR10b. Additionally, ~INR7b of management overlay was created and was added to Stage 1 of the legacy AUM.

* Guided for AUM of ~INR800b (~15% YoY growth) by FY25. This is including the rundown in the legacy AUM to ~INR60-70b. Retail: Wholesale AUM mix to improve to 75:25 by Mar'24.

* Guided for RoA of 3.0-3.5% by FY25; Assessed carry forward tax losses of INR106b will now be available for many years and will provide upside potential to RoA and RoE.

Valuation and view

* Our earnings estimate for FY25 and FY26 only factor in exceptional gains from the AIF exposures and no tax incidence in the foreseeable future. Because of the uncertainty and unpredictability around the timing of the monetization of the stake in Shriram Life and General insurance, we have not factored it in our estimates as well. It does, however, provide streams of one-off gains, which can help offset the credit costs required to dispose of the stressed legacy AUM.

* We expect PIEL to deliver ~1.5% RoA and 5% RoE in FY26. We value the lending business at 0.6x FY26E P/BV (earlier: 0.7x). Downgrade to Neutral with a revised TP of INR925 (premised on Mar’26 SOTP).

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