Piramal Enterprises sees 5-fold rise in AUM

With the DHFL acquisition, Piramal Enterprises Limited's (PEL) retail AUM is expected to grow by five times, it is expects to become one of the top-5 HFCs (housing finance companies) in India. After acquiring DHFL, PEL plans to go for its transition from a wholesale NBFC to a well-diversified financial services business.

The company will focus on the integration of DHFL and leveraging its vast network to grow the multi-product retail lending business in the future. With the DHFL acquisition, PEL would have access to a vast network of over 300 branches, with majority of them being in tier-2/3 cities with 4,900 employees, and a sizeable customer base of 10 lakh.

PEL's resolution plan has received the approval of NCLT in June. Post the NCLT approval, a monitoring committee has been formed which includes members from the COC, the PEL, Administrator and members from the management team.

"As per the IBC law, the monitoring committee has duration of 90 days from the NCLT approval to complete the acquisition. And we feel confident that we will achieve this. With the DHFL acquisition, our retail AUM is expected to grow by 5 times and we expect to become one of the top-5 HFCs in India," said Ajay Piramal, Chairman, Piramal Group in an analysts' call.

Commenting on his company's plan for transition from a wholesale NBFC to a well-diversified financial services business, he said that the second part of our transition is the reduction in the wholesale book. "As part of our strategy of transitioning our book from a largely wholesale to a well-diversified financial services business, we are consciously bringing down our wholesale book. Our wholesale book has come down by 27 per cent from Rs 51,400 crore in March-2019 to Rs 38,000 crore in June," he said.

PEL's new lending strategy of pivoting towards affordable and mass affluent categories in tier-2 and tier-3 cities has made its retail book more granular. The average sanction ticket size in retail for secured lending products has declined from Rs 75 lakh to Rs 20 lakh. The end-to-end digital unsecured lending now contributes 6 per cent of new origination by value and 75 per cent of new customers originated into the Piramal Retail franchise. All these initiatives, he said, will result in significant change in our loan book, with the share of retail lending, moving closer to 50 per cent in the near term.

"Our teams will be working towards integrating our existing multi-product retail lending platform with DHFL's network during the year. We aim to leverage DHFL's platform to cross-sell multiple retail products offered as part of our digital platform, thereby, ensuring the continued future growth in the business. This would help us gradually increase scale in retail lending, while addressing the diverse financing needs of the growing 'Bharat' market, he said.

On sustainable profitability, he said that the key factors that are expected to boost profitability in the near term, post the DHFL transaction, include an immediate decline in the cost of borrowing post the completion of the DHFL transaction, as this transaction will be partly funded by NCDs worth Rs 19,550 crore at 6.75 per cent.

Post the completion of the DHFL transaction, the leverage of PEL's financial services business will increase from 1.6 times as of June this year to 2.5 fold. Further, with the growth in the retail loan book, the leverage could increase to 3.5 times in the near-to-medium term. Increased loan book diversification (with about 50 per cent retail in the near term) and growth will potentially be leading to lower borrowing costs in the coming year.

"Our change in product mix, with the expansion of the product portfolio and through differentiated higher-yielding products, we expect profitability of the retail lending business to improve in the medium term," Piramal said.

The collection efficiency at DHFL, which saw some impact in April and May, has also seen a healthy pickup in the month of June. In fact, the DHFL retail portfolio is performing broadly in line with PEL's expectations.

Replying to a query on Rajesh Laddha, Executive Director and Group CEO, PEL, said: "net debt-to-equity, we will be adding about Rs 19,500 crore of debt for the DHFL transaction. So, that debt will get added to the overall debt and therefore, our leverage will increase from roughly about 1.6 times to close to about 2.5 times. As far as, the retail and the wholesale mix, etc. and the DHFL book is concerned, we will be doing the purchase price allocation now, based on our total consideration of Rs 33,500-odd crore. At that point in time we'll be able to share the exact numbers, in terms of how we are going to allocate to the retail book and wholesale book o DHFL."

Piramal Capital and Housing Finance Limited (PCHFL) will be issuing Rs 19,500-odd crore of NCDs to the existing lenders of DHFL. "And of course, we'll change the name of DHFL. We will try and get Piramal Capital name back," he added.

Currently whatever is the book value of DHFL, PEL will be restating those values in our books, on the books of PCHFL, based on the fair valuation of all the assets of DHFL. That will include the retail, wholesale and everything else. We are not going to record it at Rs 60,000 or 70,000 crore, whatever is the carrying value of those assets in DHFL's book. We will be doing purchase price allocation to these assets, based on the fair valuation or realisable value of these assets into its books.

Net accretion to the overall loan book will be to the extent of about, close to about Rs 30,000 crore. But the allocation is yet pending, which PEL had to do for different set of assets, which DHFL has, including the insurance stake. So, the allocation part is still pending, it will be Rs 30,000-32,000 crore, net accretion of total assets.