Detailed Rationale

Crisil Ratings has reaffirmed its ‘Crisil A1+’ rating on the commercial paper programme of Piramal Capital & Housing Finance Limited (PCHFL).

 

PCHFL is a housing finance company whose parent entity is Piramal Enterprises Ltd (PEL), a non-banking financial company (NBFC). Both these entities are together referred herein as the PEL group.

 

The rating continues to factor in the strong capitalisation profile of the PEL group, a diversified lending business as well as a diversified resource profile. Moreover, the rating also considers the fact that the group is increasing its share of retail loans in the overall assets under management (AUM), which has risen sequentially over the past few quarters. Over the last couple of years, the group has also increased its diversification across other asset segments such as secured and unsecured micro, small and medium enterprises (MSME), personal loans, used vehicle loans and microfinance. These strengths are partially offset by volatile asset quality and average profitability metrics.

 

Crisil Ratings has also noted the fact that on May 08, 2024, the board of PEL approved the composite scheme of arrangement for merger of PEL with its 100% subsidiary Piramal Capital & Housing Finance Limited (PCHFL); and renaming PCHFL as Piramal Finance Limited (PFL). Thereafter, PEL is proposed to merge with PFL, and PFL shall get listed on stock exchanges pursuant to merger. Consummation of the merger is subject to receipt of approvals from the concerned regulatory bodies i.e. SEBI and RBI, followed by NCLT. Crisil Ratings will continue to monitor the developments around the same.

Analytical Approach

Crisil Ratings has considered the consolidated business and financial risk profiles of PEL and PCHFL, together referred to as the PEL group.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Strong capitalisation profile with additional lever of financial flexibility

Capitalisation profile of the PEL group remains strong, backed by a networth base of Rs 26,924 crore as on December 31, 2024, and a gross gearing of 2.3 times. Strong networth has been backed by periodic capital accretions as the group had raised about Rs 18,500 crore in fiscals 2020 and 2021 from sale of stake in various businesses, through rights issue and preferential allotment of compulsory convertible debentures. The group sold its entire equity stake in Shriram Finance for Rs 4,823 crore in June 2023 and also in Shriram Investment Holdings Pvt Ltd for Rs 1,440 crore in January 2024, thus adding the surplus to its networth.

 

The capital adequacy ratio of the overall financial services business of the PEL group as on December 31, 2024, stood at 23.7% (post-merger of PHL FinInvest Pvt Ltd with PEL).

 

Further, Crisil Ratings notes that the PEL group enjoys additional financial flexibility through various means. These include their stake in the Shriram group (insurance business), potential upside from collections in the retail purchased or originated credit impaired book of erstwhile Dewan Housing Finance Ltd (DHFL) and deferred tax-related benefits. Consequently, the overall networth is likely to have sufficient buffers to absorb potential provisioning, if any.

 

Diversified lending book with established market position in real estate financing

The overall AUM for the PEL group, as on December 31, 2024, stood at Rs 78,362 crore, of which Rs 59,093 crore comprised of retail loans and Rs 19,269 crore comprised wholesale book.

 

The PEL group intends to maintain its share of retail loans to 75% of AUM as part of its five-year strategy. As on December 31, 2024, 75.4% of overall AUM was the retail AUM, predominantly comprising housing loans. The group has also forayed into various other asset classes including secured and unsecured MSME, personal loans, used car loans, digital supply chain finance and microfinance.

 

The group on a consolidated basis has a healthy market position in the real estate financing space. It also benefits from presence across related segments. Crisil Ratings notes that while the group has focused on accelerated recoveries and run down of the legacy wholesale AUM, termed as wholesale 1.0, it has also scaled up its fresh disbursements towards newly originated, lower ticket-size, wholesale AUM, termed as wholesale 2.0. Within the overall wholesale AUM, the share of legacy wholesale 1.0 (discontinued book) as a percentage of the overall AUM has declined sequentially to 13% as on December 31, 2024, from 66% as on March 31, 2022, while that of wholesale 2.0 increased to 11% from 1% during the same period. As such, going forward, the share and performance of wholesale 2.0 loan portfolio, vis-à-vis overall AUM of the group, remains a key monitorable.

 

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

On a consolidated basis, the resource profile for the PEL group is well diversified across instruments, with bank and financial institution loans constituting around 30%, external commercial borrowings constituting 7%, non-convertible debentures (NCDs) around 37%, securitization making up 16%, commercial paper about 9% and other borrowing at 1% of total borrowings.

 

During the quarter ending September 30, 2024, the group raised dollar denominated sustainability bond, amounting to USD 300 Mn with a further tap issuance of USD 150 Mn in October 2024. Also, given the rising interest rate regime, overall cost of borrowings for the group has inched up from 8.6% in fiscal 2024 to 9.2% for the nine-month period ended December 31, 2024. Thus, the group’s ability to raise incremental borrowings at optimal rate will remain monitorable.

 

Weaknesses:

Asset quality remains volatile, continue to be monitored

The lending business of the group in the past had a primary focus on real estate credit, resulting in high industry concentration and sizeable single-borrower exposures.

 

Post fiscal 2023, supported by accelerated recoveries and write-off towards the existing AUM, overall asset quality of the group’s loan portfolio improved with its gross non-performing assets (GNPA) ratio improving to 2.4% as on March 31, 2024 (3.8% as on March 31, 2023).

 

Nevertheless, while the stress in wholesale AUM has declined gradually, it remains monitorable owing to the high share of security receipts in the overall AUM.

 

During the nine-months period ending December 31, 2024, the overall asset quality profile of the group moderated with GNPA rising to 2.8%. As on December 31, 2024, while the asset quality profile of housing and LAP segment (making up 51% of AUM cumulatively) remained under control, the rise in delinquencies for the overall AUM was driven by increasing stress in other retail segments such as business loans, microfinance loans and unsecured digital loans, 90+ dpd for which stood at 2.2%, 5.5% and 3.0% respectively, during the period. 

 

The management has taken steps to reduce concentration risk in the portfolio with focus on growing the individual housing loans portfolio along with other retail loans. Consequently, going forward, ability of the management to ensure timely recoveries from the wholesale 1.0 segment, whilst focusing on maintaining comfortable asset quality metrics for the overall AUM remains a key monitorable.

 

Average profitability metrics

Profitability metrics for the group has remained volatile over the past few periods, on account of various one-off items such as gain/loss on sale of investments, provisioning towards legacy assets and tax adjustments.

 

During fiscal 2024, the group reported a net loss of Rs 1,684 crore, majorly driven by provisioning towards alternative investment funds (AIF) assets. During the year, operational profitability before provisions (PPOP) also moderated to Rs 1,197 crore (Rs 2,831 crore: FY23) on account of low interest yielding legacy wholesale loan portfolio creating a negative drag on overall earnings, clubbed with rising operating expenses towards retail loans.

 

Nevertheless, during the nine months period ending December 31, 2024, the group reported positive PAT of Rs 383 crore. As a result, return on average managed assets (RoMA) (including exceptional gains) improved but remained moderate at 0.6% during 9MFY25 from -2.1% during fiscal 2024. Profitability during the period was supported by reduced credit costs which stood at 1.7% for the nine months ending December 31, 2024, as against 5.0% for fiscal 2024.

 

Going forward, with the change in the portfolio mix, the impact on the interest margins is yet to be assessed. Further, owing to the underlying risk within the wholesale book, higher provisioning requirement could adversely impact the earnings profile of the company. With the increasing share of retail book within the overall AUM, the operating expenses may also remain elevated over the medium term. Any material changes in the earnings profile of the company due to change in portfolio mix or due to impact of the asset quality of the wholesale portfolio is a key monitorable.

Liquidity: Strong

Asset liability maturity profile as on December 31, 2024, is well matched with positive gaps across all buckets. On a consolidated basis, as on December 31, 2024, liquidity of the PEL group remains strong with a free liquidity of Rs 8,277 crore including cash and equivalents. Against the same, debt repayments amounted to Rs 6,429 crore for the two months ending February 2025.

Rating Sensitivity Factors

Downward Factors

• Significant deterioration in asset quality metrics
• Material impact in the profitability metrics
• 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

About the Group

Founded by Mr. Ajay Piramal, PEL is engaged in the financial services business through its subsidiaries.

 

In the financial services business, the company has three verticals: (i) real estate financing - lending to developers with established track record, with greater focus on providing loans for construction finance and lease rental discounting; (ii) Corporate Mid-Market Group that provides finance to mid-tier companies; and (iii) housing finance and other retail loans.

 

In 2022, the PEL group has undergone restructuring with the pharmaceutical business within PEL being carved out into a new entity -- PPL. Further, PHL Fininvest Pvt Ltd got merged into PEL, thus PEL is now an NBFC with PCHFL as its 100% subsidiary.

Key Financial Indicators: (Consolidated)

As on/for the year ended	Unit	Dec-24	Mar-24	Mar-23	Mar-22
Total assets	Rs crore	89,055	79,959	79,882	79,050
Total income	Rs crore	7,156	8,372	9,087	7911
Profit after tax	Rs crore	383	(1,683)	9,969	1,999
GNPA/GS 3	%	2.8	2.4	3.8	3.4
Gearing (gross)	Times	2.3	2.0	1.6	1.6
Return on assets	%	0.6*	(2.1)	12.6	1.3

*Annualised

Any other information: Not Applicable