Markets
Piramal's strategic bets turned out to be subpar. A recent course correction has rekindled hopes
Summary
- Piramal Enterprises's acquisition of Dewan Housing Finance has not delivered positive results so far, and its investments in Shriram Group have only matched the Nifty 50 index on IRR.
- The stock has delivered negative returns over the past six years, during which time the Nifty 50 has doubled.
Investors in Piramal Enterprises Ltd must be ruing their decision to buy the stock rather than a plain Nifty 50 index fund, considering that several of the financial services company’s strategic bets have not paid off.
But over the past month the stock has jumped nearly 13%, indicating a revival in investor confidence in the Piramal Group's flagship company.
Piramal Enterprises’s acquisition of Dewan Housing Finance Ltd has not delivered positive results so far, and its investments in Shriram Group have only matched the Nifty 50 index on internal rate of returns (IRR); its strategic importance hasn’t yet materialised.
Owing to the mediocre performance of these bets, the Piramal Enterprises stock has been a large-cap laggard, having delivered negative returns over the past six years.
The stock hit a lifetime high of ₹1,769 per share on 31 August 2018, and remains nearly 10% below that level even after adding the value of the shares of the demerged Piramal Pharma to its stock price.
In comparison, the Nifty 50 has doubled over the same period.
Also read: Piramal to focus on brownfield expansion, cut debt before acquisitions
The Piramal Enterprises stock had hit its all-time high just before the IL&FS crisis in September 2018, which was sparked by Infrastructure Leasing and Financial Services Ltd’s inability to repay bank loans, commercial papers, and deposits.
The crisis soured investor sentiment for all non-banking financial company (NBFC) stocks, including that of Piramal Enterprises.
After recovering from its covid-19 low in March 2020, the stock approached its all-time high in October 2021 amid the excitement around the Dewan Housing acquisition and the demerger of Piramal Pharma.
Big bets, small returns
Piramal Enterprises had made a bold bet by acquiring Dewan Housing for ₹34,250 crore in 2021, which included a cash payment of ₹14,700 crore and non-convertible debentures.
The acquisition was touted as a game-changer, with the customer base shooting up from 23,286 to 1 million, and the number of branches increasing from 14 to 301, giving Piramal Enterprises a footprint in a majority of Indian states.
Piramal Enterprises’s results since the acquisition shows it has hardly been able to improve its financial performance. The size of its balance sheet peaked at ₹1 trillion in 2021-22 and has been sliding gradually ever since, with little hope of touching the mark again in this financial year. The company went from an aftertax profit of ₹1,815 crore in FY22 to a loss of ₹1,536 crore in FY24.
Legacy provisions related to bad loans, or non-performing assets, were blamed in part for the loss. But even its pre-provisioning operating profit had fallen from ₹2,457 crore in FY22 to ₹1,196 crore in FY24, as Piramal Enterprises’s operating expenses had ballooned during this period.
Also read: After Aditya Birla, Piramal to merge with private arm
Meanwhile, the company’s earlier acquisition of a stake in Shriram Group and its subsequent disposal generated average returns at best. Piramal Enterprises had invested a total of ₹4,440 crore in various Shriram Group entities from 2013 to 2018. It has sold most of these investments, and now only has stakes in Shriram Life insurance and Shriram General insurance.
Assuming the holding in the insurance entities is liquidated at the total valuation of ₹3,000 crore, an IRR of 12% from the overall investment in Shriram barely matches Nifty 50 index fund returns.
Course correction in progress
Piramal Enterprises’s management has been trying to correct course by exiting its legacy asset book and improving growth. These efforts, however, are likely to bear fruit only gradually over the next few years.
The company is aiming for ₹1.5 trillion in assets under management by FY28, with a focus on retail lending—which accounts for 75% of the total lending—and the rest from wholesale. It’s aiming for a return on assets of 3-3.3% in FY28.
Also read: Ajay Piramal may look to buy a state-run bank
Meanwhile, interest in the Piramal Enterprises stock has been rekindled of late. The shares ended Friday at ₹925 apiece, up from ₹815 per share on 9 May when details of the company’s restructuring scheme were announced.
The corporate restructuring involves a sweetener of preference shares amounting to nearly 7% of the current market price. Piramal Enterprises will reverse merge with Piramal Capital and Housing Finance Ltd, its wholly owned subsidiary, and the entity will be renamed as Piramal Finance Ltd.
Piramal Enterprises shareholders will get one share of Piramal Finance along with non-convertible, non-cumulative redeemable preference shares of ₹67 for each equity share.
