Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the commercial paper programme of Piramal Enterprises Ltd (PEL).

 

The rating continues to factor in the strong capitalisation profile of the PEL group and its dominant presence within the wholesale lending space, especially the real estate market. CRISIL Ratings has also noted the fact that the company is increasing its share of retail loans in the consolidated assets under management (AUM), which has risen sequentially over the past few quarters. Post the acquisition of erstwhile Dewan Housing Finance Ltd (DHFL), the PEL group substantially expanded into the housing loans segment. Over the last year, 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. Further, liquidity of the group continues to be comfortable.

 

CRISIL Ratings has also taken note of the recent measures by the Reserve Bank of India covering the banking and non-banking financial companies (NBFC) sectors. Firstly, on the asset side for NBFCs, there is an increase in risk weights for unsecured consumer loans (including credit card receivables), by 25 percentage points to 125% from 100% earlier. This regulation applies to all retail loans except housing loans, vehicle loans, educational loans, loans against gold and microfinance/self-help groups loans. The increase in risk-weighted assets will lead to a decrease in the capital adequacy ratios but is not likely to materially impact the ratios.

 

Secondly, there is an increase in risk weights for the bank’s exposure to NBFCs by 25 percentage points (over and above the risk weight associated with the given external rating) in all cases where the extant risk weight as per external rating of NBFCs is below 100%. Herein, loans to housing finance companies (HFCs) and loans to NBFCs that are eligible for classification as a priority sector are excluded. This development may potentially lead to an increase in the cost of bank borrowing for the NBFC sector. This could diversify the borrowings mix with higher share of capital market instruments and securitisation. The ability of NBFCs to raise funds from alternate sources as well as to pass on the potentially higher borrowing costs will be monitored.

Analytical Approach

CRISIL Ratings has taken a consolidated approach by combining the business and financial risk profiles of PEL and its 100% HFC subsidiary -- Piramal Capital and Housing Finance Ltd (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 levers of financial flexibility: Capitalisation profile of the PEL group remains strong, backed by a networth base of Rs 28,710 crore as on September 30, 2023, and a gross gearing of 1.7 times. High 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 business, through rights issue and preferential allotment of compulsory convertible debentures. Also, recently in June 2023, the group sold a part of its equity stake in the Shriram group for Rs 855 crore, thus adding the surplus to its networth. The funds thus raised have been used for deleveraging the balance sheet, with overall gearing of the group reducing to 1.7 times as on September 30, 2023, from 3.9 times as on March 31, 2019.

 

Further, the entire pharmaceutical business has been carved out and a separate entity, Piramal Pharma Ltd (PPL), has been formed as a part of the group restructuring strategy in fiscal 2023. The capital adequacy ratio of the overall financial services business of the PEL group as on September 30, 2023, stood at 31% (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, potential upside from collections in the retail purchased or originated credit impaired book of erstwhile DHFL and deferred tax-related benefits. Consequently, the overall networth is likely to have sufficient buffers to absorb potential provisioning, if any. While the group intends to grow the retail book rapidly over the next 1-2 years, gearing is expected to remain below 4 times in the near team and will continue to be monitored.

 

• Established market position in real estate financing backed by promoter group experience: The group on a consolidated basis has a healthy market position in the real estate financing space, having significantly scaled up over the past few years. It also benefits from presence across related segments. The overall AUM for the PEL group, as on September 30, 2023, stood at Rs 66,933 crore, of which Rs 28,328 crore comprised wholesale book (85% being real estate funding).

 

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 PEL group through Piramal Fund Management Pvt Ltd (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 empaneled partners/brokers.

 

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 (around Rs 170 crore), wholesale AUM, termed as wholesale 2.0. Within the overall wholesale AUM, the share of legacy wholesale 1.0 has declined sequentially to 84% as on September 30, 2023, from 98% a year ago, while that of wholesale 2.0 increased to 16% from 2%. 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.

 

The PEL group also intends to increase its share of retail loans to 60-70% of AUM as part of its five-year strategy. As on September 30, 2023, Rs 38,604 crore (58% of overall AUM) was the retail AUM, predominantly comprising housing loans from the erstwhile DHFL book. The group has forayed into various other asset classes including secured and unsecured MSME, personal loans, used car loans, digital supply chain finance and microfinance.

 

• Improved 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 (including external commercial borrowings) constituting around 29%, non-convertible debentures (NCDs) around 55%, commercial paper about 10% and other borrowing at 6% of total borrowing.

 

Consequently, with the group raising incremental borrowing of around Rs 1,875 crore during the first six months of fiscal 2024 across NCDs and term loan instruments, borrowing cost for the group has remained about 8.6%.

 

Weaknesses:

• Asset quality, albeit improving, remains average and continues 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. Consequently, exposure towards top 20 wholesale group borrowers, as a percentage of overall wholesale loan portfolio remained high at 41% as on September 30, 2023.

 

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 2.7% as on September 30, 2023 ( from 3.7% a year ago and 3.8% as on March 31, 2023). The improvement has been led by, primarily, decline in asset quality stress within the wholesale segment with GNPAs for the segment declining sequentially to 3.1% as on September 30, 2023 (from 4.7% a year ago and 4.8% as on March 31, 2023), with the management focusing higher on recoveries via asset sale, whilst decreasing average ticket size towards the segment.

 

Nevertheless, while the stress in wholesale AUM has declined gradually, it remains monitorable owing to increasing share of security receipts, as the outstanding security receipts increased substantially to Rs 3,630 crore as on March 31, 2023, and further to Rs 4,862 crore as on September 30, 2023 (from Rs 1,014 crore a year ago), translating into a rise in its share (as a percentage of AUM) to 7.3% as on September 30, 2023, from 1.6% a year ago,.

 

Additionally, with the group’s increasing focus towards growing the housing loan and retail loan portfolio, asset quality of the retail segment has remained range-bound with it increasing marginally to 1.7% as on September 30, 2023 (from 1.5% a year ago and 1.6% as on March 31, 2023). Consequently, with the limited seasoning profile of the retail AUM, asset quality trend within the retail segment continues to be monitored.

 

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, sustenance in operational profitability a key metric: In the first half of fiscal 2024, the PEL group (excluding gain or loss from exceptional items and income from associates and joint ventures) reported profit before tax (PBT) of Rs 713 crore, which was majorly driven by gain on sale of investments in the Shriram group, amounting to Rs 855 crore. Excluding the same, the group would have reported operating loss of Rs 142 crore during the period, as compared to operating losses of Rs 2,317 crore for the corresponding period of the previous year. Although, on a quarterly basis, the PEL group reported operational profitability, with PBT of Rs 53 crore in the quarter ending September 30, 2023.

 

Operational profitability has been impacted owing to moderation in net interest margins for the group, which declined to 4.7% as on September 30, 2023, from 5.8% as on March 31, 2023, on account of reducing interest income from the wholesale segment. Additionally, with the rising share of retail loan portfolio, related operating expenditure towards expanding the book has remained elevated. Consequently, cost-to-income has increased to ~72% as on September 2023 (from ~49% a year ago and 44% as on March 31, 2023) and is expected to remain elevated in the near term with the growing share of branch count and employee headcount towards the retail loan portfolio.

 

Nevertheless, in the upcoming quarters, profitability cushion via reduced credit costs is expected to aid the bottom line of the group. During the first half of fiscal 2024, credit costs, as a percentage of average total assets declined substantially to 1.0% (6.3% in fiscal 2023) on account of additional provisioning made in earlier periods.

 

With the change in the portfolio mix and expected increase in the proportion of retail assets over the medium term, 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 remain elevated over the medium term.  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 wholesale portfolio is a key monitorable.

Liquidity: Strong

Asset liability maturity profile as on September 30, 2023, shows no negative cumulative mismatches in the up to one year bucket. On a consolidated basis, as on September 30, 2023, liquidity of the PEL group remains strong with a free liquidity of Rs 4,972 crore including cash and equivalents and unutilised sanctioned working capital bank lines. The inflows were further supported by near-term asset inflows from the retail AUM. Against the same, debt repayments amounted to Rs 6,997 crore for the three months through December 2023.

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 Company

Founded by Mr Ajay Piramal, PEL is engaged in the financial services business through its subsidiaries. The company also holds a substantial stake in the Shriram group companies.

 

In the financial services business, the company has four 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 finance group, which lends to corporate clients across sectors (infrastructure, cement, renewables, automotive, logistics, services and entertainment); (iii) emerging corporate group that provides finance to mid-tier companies; and (iv) 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	Sep-23	Mar-23	Mar-22
Total assets	Rs crore	77,966	79,882	79,050
Total income	Rs crore	3,899	9,087	7911
Profit after tax	Rs crore	557	9,969	1,999
GNPA/GS 3	%	2.7	3.8	3.4
Gearing (gross)	Times	1.7	1.6	1.6
Return on assets	%	0.2*	12.6	1.3

*annualised

Any other information: Not applicable