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Volatility in earnings behind; gradual improvement ahead

We interacted with the senior management team of Piramal Enterprises (PIEL), represented by Mr. Jairam Sridharan, CEO of Retail Lending and MD of Piramal Finance, to gain insights into the company's future growth plans and other strategic developments. The key takeaways from our discussion are outlined below.

* PIEL is now more confident about its Retail business strategy and has emphasized that legacy challenges are largely behind. The company plans to further reduce its legacy wholesale loan book from INR70b to INR35-40b, over the next one year, without any impact on its net worth. Additionally, it expects to receive a deferred consideration of USD120m from the sale of Piramal Imaging within the next 3-6 months. This, along with recoveries from its AIF, will further improve the company’s ability to accelerate the run-down of the legacy AUM.

* We believe that the phase of earnings volatility is now comfortably behind, and that there will be no negative surprises or volatile quarters going forward. With the legacy stressed book expected to be largely addressed/run down by FY26 end, the portfolio will increasingly shift toward a stable, retail-dominated mix. We now expect PIEL to exhibit a more predictable and consistent performance trajectory from hereon.

* The company is prioritizing RoA enhancement through multiple structural levers such as NIM improvement (with a better product mix and a decline in CoB), better operating efficiency and improvement in the fee income profile. Management acknowledged that its RoE in the near term will stay in mid-to-high single digits due to excess capitalization and low leverage on its balance sheet. However, it continues to focus on sustaining RoA improvement in its growth businesses, including Retail and Wholesale 2.0.

* While we anticipate greater earnings stability and an improved outlook going forward, its return metrics remain modest, with RoA and RoE estimated at 1.9% and 8%, respectively, for FY27E. We value the lending business at 0.8x FY27E P/BV. Reiterate our Neutral rating on the stock with a revised TP of INR1,250 (premised on Mar’27 SOTP). 

Multiple levers for NIM expansion; rate cuts to ease CoB

* PIEL is intensifying its efforts to expand its NIMs through multiple strategic levers in order to improve RoA. The company expects NIM expansion to be driven by three levers: (a) linear improvement in fee income, aided by its previously unrecognized trail fee income; (b) increase in the share of unsecured retail assets to ~30% from ~23% currently in the next few years; and (c) a reduction in the cost of borrowings (CoB) aided by repo rate cuts.

* Around 25% of the company's borrowings are linked to MCLR and have already been repriced at lower rates. Management expects 70% transmission of rate cuts from banks, albeit with a six-month lag. 

* The company plans to launch co-branded credit cards in FY26 to further strengthen its fee income profile. This product offering will generate both origination-based and transaction-based fee income.

Moderation in opex ratios driven by operating efficiencies and productivity.

* PIEL continues to focus on enhancing its operational efficiency as a key lever to reduce operating expenses. Over the last eight quarters, the company has successfully brought down its opex-to-AUM ratio by ~220bp from around 6.5% in FY23 to 4.3% in FY25, reflecting the impact of scale benefits, digitization, and tighter cost controls.

* The company intends to continue leveraging its existing branch infrastructure over the next 2-3 quarters, with no new branches opened in the last three quarters and a stable headcount during this period. Concurrently, productivity has been improving across branches and employees, which should boost operating efficiency and improve opex ratios.

* PIEL aims to reduce its opex-to-AUM ratio to ~3.5-4% over the long term, with the wholesale segment expected to operate at a lean cost structure of 100- 120bp.

Asset quality to remain largely stable; credit costs under control

* PIEL has demonstrated consistent improvement in asset quality, with trends remaining stable in the recent quarters. The period of high volatility and high credit costs appears to be largely behind, reflecting the effectiveness of its risk management.

* Credit costs in the growth business stood at ~1.8% in 4QFY25, a slight uptick from 1.7% in the previous quarter, and management expects them to remain broadly stable going forward. Asset quality metrics remain healthy, with retail 90+ dpd contained at ~0.8% in 4QFY25 and the wholesale 2.0 portfolio maintaining strong collection efficiency at 100%.

Strengthening growth businesses; accelerated rundown of legacy book

* PIEL remains firmly focused on scaling up its core growth engines — the retail lending and Wholesale 2.0 businesses — while systematically running down its legacy wholesale portfolio. The company has reiterated that the run-down of legacy assets will be executed without any material impact on its net worth.

* The company has guided for overall AUM growth of ~25% in FY26. It is witnessing robust demand in both the LAP and micro-LAP segments, with risk metrics remaining stable. It initially launched the micro-LAP product in two geographies and expanded to 10 additional locations in the previous month, with plans to scale up to 10 more. Further, LAP remains a focus segment in the company’s product portfolio.

Expansion into new product segments to drive profitability

* PIEL has successfully completed pilots in the gold loan business and might look at a full-scale launch by the end of the year.

* As part of the gold loan rollout, PIEL plans to establish 25-50 dedicated gold loan branches, which will be equipped with the requisite physical infrastructure.

Capital and balance sheet optimization

* Management acknowledged that the company is overcapitalized and is mindful that high net-worth will constrain RoE expansion over the next few years. Given its strong capital position, the company does not anticipate any need for raising additional equity capital in the foreseeable future.

* The company has strategic investments of ~INR20b in Shriram Life and Shriram General Insurance, and has no urgency to monetize these holdings in the current fiscal.

* The conversion of its housing subsidiary into an NBFC will increase risk-weights, which will increase the capital requirement. On the other hand, the holding company investment in the subsidiary, which attracts higher risk-weights, will get released after the amalgamation. Both these factors will largely offset each other and will not have any significant impact on the capital adequacy of the company, which stood at ~24% as of Mar’25.

Valuation and View

* PIEL’s strategic shift toward building a granular and diversified retail franchise, alongside a calibrated wholesale 2.0 book, continues to gain traction. The company has demonstrated steady progress on asset quality, with volatility now largely behind and credit costs expected to remain stable. With new product launches such as co-branded credit cards and gold loans in the pipeline, the company is expanding its fee income base and diversifying its earnings profile.

* Our FY26 earnings estimate factors in exceptional gains from the Piramal Imaging business, gains from AIFs and no tax incidence in the foreseeable future. Because of the uncertainty and unpredictability around the timing of the monetization of its stake in Shriram Life and General Insurance, we have not factored it into our estimates. It does, however, provide streams of one-off gains, which can help to offset credit costs required to dispose of residual (if any) stressed legacy AUM.

* While the company anticipates greater earnings stability and an improved outlook going forward, its return metrics remain modest, with RoA and RoE estimated at 1.9% and 8%, respectively, for FY27E. We value the lending business at 0.8x FY27E P/BV. Reiterate our Neutral rating on the stock with a revised TP of INR1,250 (premised on Mar’27E SOTP)

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