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Strong retail loan growth; legacy book will be aggressively run down

* PIEL reported 1QFY25 net profit of ~INR1.8b (PQ: ~INR1.4b). This included an exceptional gain of ~INR1b from recoveries in AIF portfolio. Reported PAT in 4QFY24 included provision write-back on AIF investments of INR11.4b and stake sale in Shriram Investment Holding, resulting in gain of INR8.7b.

* NII rose 6% YoY and 2% QoQ to ~INR7.2b. PPOP at ~INR2.4b declined ~76% YoY. Total AUM grew 10% YoY and declined 2% QoQ. Wholesale 2.0 AUM grew 11% QoQ to INR70.7b, while Wholesale 1.0 AUM declined ~50% YoY/ 11% QoQ to INR130b. Retail AUM grew ~45% YoY to INR505b with its share in the loan book increasing to ~72% (PQ: 70%).

* GS3/NS3 increased ~30bp each to 2.7%/1.1%. Stage 3 PCR declined by ~5pp QoQ to ~60%. Total ECL/EAD declined by ~70bp QoQ to ~4.4% of the AUM.

* Total SRs declined ~6% QoQ to INR45.8b. As resolution processes continues, SR portfolio will continue to reduce in the near term.

* The implementation process for the proposed merger of Piramal Enterprises (PEL) with its subsidiary Piramal Capital & Housing Finance (PCHFL) and the renaming of PCHFL as Piramal Finance Limited (PFL) is on track and expected to be completed by 1QFY26.

* Management targets to reduce legacy AUM to <10% of total AUM by endFY25. We believe that this will entail elevated credit costs in FY25. The company pointed out that it has a) management overlay of ~INR6.9b on the legacy AUM, b) expects gains of ~INR12b from AIF over FY25, and c) residual stakes in Shriram Life and General Insurance will be monetized. It will look to opportunistically take the credit cost impact of running down the legacy AUM on P&L when there are one-off gains from the pockets of opportunity in its legacy business.

* We estimate a total AUM CAGR of ~24% and a ~36% CAGR in Retail AUM over FY24-FY26E. While its growth business (excluding one-off gains and exceptional items) is showing signs of improvement, it will still take at least 12-15 months for it to mitigate the earnings and credit costs impact of an accelerated decline in the legacy AUM.

* Pockets of opportunity, which we earlier thought will be utilized for some inorganic acquisition in retail businesses or for strengthening the balance sheet, will potentially be utilized to run down the stressed legacy AUM. We do not see catalysts for any meaningful improvement in the core earnings trajectory of the company. We maintain our Neutral rating with a revised TP of INR950 (based on Mar’26E SOTP).

Highlights from the management commentary

* The company has taken a PLR increase of ~25bp, effective Aug’24, across all its product portfolios. The management shared that its borrowing costs continue to rise and there will be pressure on NIMs over the next one-two quarters.

* Guided for an opex-to-AUM ratio of ~3.5%-4% in the medium term.

Valuation and view

* Our earnings estimates for FY25 and FY26 only factor in exceptional gains from the AIF exposures and low tax outgo 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 yet. It will, however, provide one-off gains, which can help offset the credit costs required to dispose of the stressed legacy AUM.

* We expect PIEL to deliver ~1.7% RoA and ~6% RoE in FY26. We value the lending business at 0.6x FY26E P/BV and maintain our Neutral rating on the stock with a revised TP of INR950 (premised on Mar’26 SOTP).

Strong growth in retail; retail mix improved to ~72%

* Retail AUM grew ~45% YoY to INR505b, with its share in AUM increasing to ~72% (PQ: 70%). The company calibrated disbursements in digital loans, which led to benign risk performance. Digital loan volumes are down ~50% from its peak in 1QFY24.

* Retail disbursements grew ~19% YoY to INR68b and yields improved ~40bp YoY to 13.8%. The improvement in yields in retail was due to a price increase taken across products, effective 1st Apr’24.

Minor deterioration in asset quality

* GS3/NS3 increased ~30bp each to 2.7%/1.1%. Stage 3 PCR declined by ~5pp QoQ to ~60%.

* Credit cost stood at ~1.6% vs. ~0.8% in 1QFY24. Credit cost in 1QFY24 had benefitted from one-time write-back due to a change in ECL policy. There is not even a single delinquency in Wholesale 2.0 book since the inception of this segment. In Wholesale legacy book, the management overlay of ~INR2.6b was utilized during the quarter.

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SEBI Registration number is INH000000412