Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL A1+’ rating to the commercial paper programme of Piramal Capital & Housing Finance Limited (erstwhile Dewan Housing Finance Corporation Limited (DHFL)) following transfer of the said instrument from erstwhile Piramal Capital & Housing Finance Limited (PCHFL) to DHFL pursuant to scheme of arrangement provided under the resolution plan in which PCHFL got reverse merged into DHFL with effect from September 30, 2021. DHFL has now been renamed as ‘Piramal Capital & Housing Finance Limited’.

 

On January 22, 2021, the Committee of Creditors of DHFL had declared PCHFL as successful resolution applicant vide the Letter of Intent from the Administrator of DHFL. PCHFL received approval from Hon’ble National Company Law Tribunal, Mumbai Bench (‘NCLT’) on June 7, 2021 for its resolution plan. As part of the resolution plan, PCHFL had agreed to pay an overall consideration of Rs 34,250 crore for the transaction with Rs 14,700 crore as upfront cash and Rs 19,550 crore through 10 year NCD issue.

 

On September 29, 2021, PCHFL had discharged the consideration to the creditors of DHFL. Subsequently, PCHFL on October 1, 2021 had announced the reverse merger into DHFL effective from September 30, 2021 as per the terms of the resolution plan.

 

CRISIL Ratings also notes that on October 7, 2021, the Board of Directors of Piramal Enterprises Limited (PEL) approved the composite Scheme of Arrangement (SOA) between PEL, its subsidiaries and their respective shareholders and creditors. Post implementation of the SOA, the financial services lending business will be consolidated under PEL. PHL Fininvest Pvt Ltd (PFPL), the non-banking financial company (NBFC) wholly owned by PEL, will be amalgamated with PEL, while PCHFL will remain a wholly-owned subsidiary of PEL.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has evaluated the business and financial risk profile of the overall financial services business under PCHFL and PFPL. CRISIL has also factored in the business, managerial and financial risk profile of Piramal Enterprises Limited’s (PEL) lending book. As on September 30, 2021, PEL had a loan book of Rs 718 crore.

Key Rating Drivers & Detailed Description

Strengths:

* Adequate capitalization metrics supported by financial flexibility of Piramal group

PEL, as the holding company of the Piramal group, has adequate financial flexibility driven by the sizeable value of its holdings mainly in the financial services businesses. The Group has raised about Rs 18,500 crore in fiscal 2020 and fiscal 2021 from sale of stake in various business, through rights issue and preferential allotment of CCDs. In June 2019, it sold its investment in Shriram Transport Finance Corporation (STFC) for about Rs 2,300 crore. Further in December 2019, the company has raised Rs. 1750 crore through preferential allotment of CCDs to Caisse de depot et placement du Quebec (CDPQ). In January 2020, the company successfully raised Rs 3,650 crore through rights issue along with divestment of HIA business, wherein the company received consideration of ~Rs. 6,750 crore. In fiscal 2021, the company has divested 20% stake in Pharma business to Carlyle Group for about Rs 3,500 crore. The funds raised have been used for deleveraging the balance sheet

 

The capital profile of the financial services business of PEL is adequate with a total capital of Rs 17,857 crore as on September 30, 2021 and which has increased from Rs 9,725 crore as on March 31, 2018. The adjusted gearing of the PEL Financial Services business was 3.1 times as on September 30, 2021 and the capital adequacy ratio of PEL Financial Services as on September 30, 2021 the was 26% (post-merger).

 

Further, PEL also has plans to divest its stake in Shriram City Union Finance Ltd (SCUF) and Shriram Capital Ltd (SCL) in the near term, which provides flexibility to raise funds through dilution of equity should the need arise. However, the same is largely dependent on prevailing market sentiments and movement in share prices of key investments, as well as performance of PCHFL.

 

* Strong market position in real estate financing backed by promoter group experience

Piramal Enterprises Limited (PEL), the parent company of PCHFL (erstwhile DHFL), has been into lending business only over the past few years. However, the group has longstanding experience in real estate covering project development, third-party private equity fund management and broking, distribution and market research. The third party funds managed by the Piramal group through Piramal Fund Management Private Limited (PFMPL; erstwhile Indiareit Fund) were started more than a decade ago. Brickex, a division of PFMPL, is one of the largest distributors in the real estate market with around 10,500 empanelled partners/ brokers.

 

PCHFL has a healthy market position in the real estate financing space, having significantly scaled up over the past few years. It also benefits from the presence of the group across related segments. The overall loan book for the PEL financial services was Rs 66,986 crore as on September 30, 2021 of which about Rs 20,277 crore was the acquired book of DHFL and the Rs 46,709 crore was the erstwhile PEL Financial Services book. The wholesale book of erstwhile PEL Financial Services was 91% of the overall book and within the same 90% was real estate funding, 9% was towards CFG and remaining 1% was ECL lending. Further, within the real estate lending more than two-thirds is towards late-stage construction finance. Post the merger with DHFL, the proportion of retail book within the overall PEL Financial Services improved to 33% against about 11% in June 2021, which in the medium term is expected to improve to 50%. The focus on the retail segments is expected to increase the granularity in the loan book.

 

As the book scaled up, PCHFL has also put in place strong risk management systems and processes to manage the risk in the portfolio. The credit appraisal process is strong with proposals being evaluated in two stages: deal clearance committee and the investment committee. The deal clearance committee comprises of the risk team, asset monitoring team, legal team, chief financial officer and external advisors. At the same time, inputs from reference checks, financial due diligence and industry experts are considered. The involvement of Brickex, which is able to provide detailed micro market insights, in the approval process also benefits PCHFL. Post approval from the deal clearance committee, the proposal is submitted to the investment committee for the final approval; the investment committee comprises of the chairman, certain Board members, and external experts/consultant. At each stage, feedback is considered with respect to the structure of the loan/covenants. The asset monitoring process is also very strong with PCHFL tracking early warning signals across all projects. Projects are placed in 3 buckets based on the potential risks envisaged over the coming 6 months- and actions taken, including continuous engagement with promoter at the Managing Director level, are based on the assessed level of risk.

 

Weakness:

* Impact on asset quality from sectoral concentration and acquired loan book to be assessed

The lending business of the Piramal group focuses on real estate credit, resulting in high industry concentration and sizeable single-borrower exposures. The exposure to top 20 accounts in the wholesale group exposures account for 27% of the overall loan book and about 40% of the wholesale loan book. While the reported gross stage 3 (GS3) for the overall loan book as on September 30, 2021 was 2.9%, the GS3 of the wholesale book of PEL financial services business was higher at around 4.3% while for that of the retail book of PEL financial service business (excluding the acquired DHFL book) was around 0.3% as on September 30, 2021.

 

CRISIL Ratings understands that the acquired book of DHFL has been taken at fair value basis after considering the existing NPA in the book and there has been sufficient buffer created in the valuation to absorb existing NPA accounts. However, the incremental impact from the overdue accounts of the existing book and the collection efficiency of the outstanding book both wholesale and retail is yet to be assessed. Any material impact from either the existing acquired book or any significant deterioration in the collection efficiency will be a key monitorable and rating sensitivity factor.

 

However, the company has put in place adequate credit appraisal and management processes which has supported the reported asset quality metrics so far. Further, the management has taken steps in order to reduce concentration risk in the portfolio with focus on growing the individual housing loans portfolio. However, historically asset quality metrics were supported by the ability to get timely repayments/pre-payments/exits via refinancing. In fiscal 2021, in addition to regular collections of Rs 7,290 crores the group has also received prepayments (including downsell) to the tune of Rs 6,932 crores.

 

* Impact on the profitability to be assessed with change in the portfolio mix

In fiscal 2021, PCHFL and PFPL reported a combined profit of Rs 1,526 crore against Rs 120 crore in fiscal 2020 (impacted by higher credit costs for creating covid related buffer). The RoMA of fiscal 2021 was 2.2% against 0.2% in fiscal 2020. In the first six months of fiscal 2022, PCHFL and PFPL reported a combined profit after tax (PAT) of Rs 640 crore and return on managed assets (RoMA) of 0.8%, primarily impacted by the transaction cost of Rs 143 crore for the acquisition of DHFL. Adjusted for this one-time cost, the RoMA for half year ended fiscal 2022 stood at 1.0%.  The earnings profile historically was supported by higher net interest margins from the wholesale business of the PEL financial services.

 

The GS3 provisioning cover of the PEL financial services was 51% as on September 30, 2021 which increased from 40% in March 2020 on account of conservative additional provisioning buffers. The overall loan provisions (GS1, GS2 and GS3) as on September 30, 2021 was Rs 2,683 crore which was 4.0% of AUM (6.3% as on March 31, 2021) and 138% of GS3 assets (139% as on March 31, 2021).

 

With the change in the portfolio mix and expected increase in the proportion of retail assets in the medium term, the impact on the interest margins is yet to be assessed. Any material change in the earnings profile of the company due to change in portfolio mix or due to impact of the asset quality of the acquired portfolio is a key monitorable.

 

* Improved liability profile; however, incremental fund raising at optimal rates is a monitorable

On a standalone basis, the resource profile for PCHFL is well diversified across instruments with bank and FIs loans (including ECBs) constituting around 25%, NCDs are around 62%, ICDs are about 5% and remaining 7% was from securitisation as on September 30, 2021. The share of CPs reduced to 1% as on September 30, 2021 from around 16% as on March 31, 2019.

 

The management has been taking steps to improve the resource mix and asset liability maturity profile through increasing long-term funding sources. As part of acquisition deal for DHFL, PCHFL had issued non-convertible debentures of Rs 19,550 crore at 6.75% with a repayment period of 10 years to the lenders. However, excluding the funds raised for DHFL acquisition, PEL financial services has raised about Rs 3,000 crore. The cost of funds was high for the PEL financial services historically, which has been coming down, however, the ability of PCHFL to raise long tenure funds at competitive costs remains a key monitorable as they further diversify into retail business.

Liquidity: Strong

Analysis of PCHFL’s asset liability maturity profile as on September 30, 2021 shows no negative cumulative mismatches in the upto 1 year bucket. PCHFL’s liquidity is adequate and the company improved the long term borrowings mix. As on September 30, 2021, PCHFL on a standalone basis had cash and equivalents of about Rs 6,600 crore and unutilised sanctioned working capital bank lines of Rs 750 crore. Against the same, PCHFL had debt repayments of Rs 3,580 crore in the next six months till end March 2022, thereby having a liquidity cover of 1.84 times for six months.  The future steps taken by management to further improve its borrowing mix and asset liability maturity profile will be key and critical monitorable.

Rating Sensitivity factors

Downward factors:

• Significant deterioration in asset quality metrics
• Material impact in the profitability metrics from asset quality challenges
• Inability to raise long term funds at competitive costs to diversify the borrowing profile
• Gearing metrics (based on gross external debt) increasing beyond 6 times with the current portfolio mix

Key Financial Indicators

Piramal Capital & Housing Finance Limited (merged entity and erstwhile PCHFL)

As on/for the year ended	Unit	Sept-2021 (6 months)$	Mar-21 %	Mar-20 %	Mar-19 %
Total Assets	Rs Cr	83,057	52,657	50,788	52,122
Total income	Rs Cr	2,347	5,088	5,623	5,572
Profit after tax	Rs Cr	363	1,034	30	1,443
Gross NPA / GS 3	%	2.1	3.5	2.1	0.4
Gearing ( Gross)	Times	4.3	2.7	2.3	2.8
Return on assets	%	1.1	2.0	0.06	3.0

% Refers to erstwhile PCHFL

$ Refers to merged PCHFL and DHFL

 

Dewan Housing Finance Corporation Limited (erstwhile pre-merger)

As on / for the period ended	Unit	Jun 30, 2021	Mar 31, 2021	Mar 31,  2020	Mar 31,  2019
Total assets	Rs cr	NA	70,367	86,147	1,06,475
Total income	Rs cr	2001	8,803	9,343	12,903
Profit after tax	Rs cr	314	-15,051	-13,612	-1,036
Gross NPAs	%	NA	NA	62.97	5.27
Gearing*	Times	NA	Negative	Negative	12.1
Return on assets (reported)	%	NA	-19.2	-14.1	-1.0

*Reported gearing

Based on public domain information

Status of non cooperation with previous CRA:

Erstwhile DHFL has not cooperated with Brickwork Ratings India Private Limited (BWR), which has marked it non-cooperative via rating rationale dated August 27, 2021. The reason provided by BWR is non-furnishing of information. At the time of being marked as non-cooperative, erstwhile DHFL was undergoing Corporate Insolvency Resolution Process (CIRP).

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity Level	Rating outstanding
NA	Commercial paper programme	NA	NA	7-365 days	5,000	Simple	CRISIL A1+