Ajay Piramal is taking a leap of faith with the acquisition of DHFL. Can he get it right this time? – The Economic Times

Clipped from: https://economictimes.indiatimes.com/prime/fintech-and-bfsi/ajay-piramal-is-taking-a-leap-of-faith-with-the-acquisition-of-dhfl-can-he-get-it-right-this-time/primearticleshow/84184335.cms

SynopsisPiramal Group’s DHFL acquisition is a combination of Ajay Piramal’s aspiration to build a decent-scale financial-services business and the management’s perseverance through the bidding war. Analysts say there is adequate upside potential in the deal. But, like always, there are an equal number of challenges. The street will closely watch this two-time bank-licence aspirant get his act together.

It was in 2018 when the unthinkable hit India’s financial-services sector. The mighty Infrastructure Leasing and Financial Services (IL&FS) collapsed, and with it, the entire non-banking financial services space crumbled.

While the first to fall was Dewan Housing Finance Corporation Limited or DHFL, India’s poster-boy industrialist Ajay Piramal too was facing difficult times. His home-grown Piramal Capital and Housing Finance (PCHF) couldn’t access funds at any price below 11.5% and rates stood stiff for a long time. Around that time, rumours that all wasn’t well in his relationship with Shriram Group first surfaced.

A year later, he stepped down as chairman of the group.

Piramal's shopping spree @2x

Piramal’s experience with the Shriram Group taught him a very valuable lesson — do it yourself. Since then, he’s been on a mission to build his NBFC all by himself and the market was reasonably sure a deal was in the making to augment his dream.

Among others, three things were characteristic of Piramal — his eye for acquisitions, his willingness to experiment, and his long-term aspiration to own a financial conglomerate. With the DHFL deal, he has neatly ticked all these boxes. Those who know him well would say DHFL’s acquisition is definitive proof of his perseverance to play in the NBFC space.

Helping him in his efforts is former banker Jairam Sridharan who joined the Piramal Group to head PCHF in April last year. Sridharan joined with a clear mandate — to bring a balance between wholesale and retail assets and tap ‘Bharat’,or rural India, for a significant portion of its revenues.

Under his leadership, PCHF aims at building secured loans, which will form the major chunk of its core business. It also plans to foray into small-ticket unsecured personal loans. In fact, this is presently being piloted. In partnership with Zest Money and Cars24, two fintech companies, PCHF entered used-car financing and unsecured lending in the March quarter of FY21.

Sridharan believes there’s more room to partner with fintechs, especially in the housing-loan market, where many haven’t been able to crack the digital model. “We are passionate about serving Bharat and are laser focused on reaching unserved and underserved customers in tier II and III cities and towns,” he says, as he lays down his plan to expand to 1,000 branches across the country as against 40 now.

Wholesale - retail mix@2x

What Sridharan has been tasked with — to organically improve the wholesale-retail mix — has been a struggle for PCHF in the past. The inorganic route would help PCHF achieve the objective within a finite time and in a healthy way.

Will buying DHFL help achieve that? And personal aspirations aside, is the deal a good investment?

Why buy DHFL?
“DHFL was the original leader in the affordable-housing segment and that was the compelling factor for the acquisition,” says Sridharan, spelling out the logic behind pursuing the bidding process for the distressed mortgage company.

The icing on the cake is the price at which the business was acquired.

At INR37,250 crore, analysts at Citi Research say, Piramal is getting these assets for a steal, leaving ample room for upside.

How the Piramal-DHFL deal matrix looks like@2x

Clearly, the Piramal-DHFL deal is a smartly valued and structured transaction that gives PCHF access to DHFL’s balance sheet. It is also quite different from other high-profile resolutions such as Alok Industries and Essar Steel to the extent that PCHF assumes the liabilities of DHFL.

But by that virtue, INR17,700 crore of cash in DHFL’s books will help Piramal retire a significant portion of the debt to start with and with no immediate outflow of funds from PCHF’s end.

For the rest, non-convertible debentures (NCDs) will be issued.

The initial five years of NCD repayments can be easily met by DHFL’s high-yielding retail book, where the rate of lending is at least upwards of 10%. Not just that, it leaves a surplus that can be reinvested in the wholesale book.

At a steeply marked-down value of about INR9,860 crore, the wholesale or developer book of DHFL could be a googly for Piramal. After all, real estate or real-estate funding aren’t new ventures for Piramal, and for the price at which the wholesale assets have been acquired, there is every ingredient to make a decent upside. Though, to start with, it may need significant investments to revive interest.

The challenges
All this may not be as rosy as it seems, though. There are operational hurdles which would truly test Piramal’s capabilities to turn around stressed assets.

First, DHFL barely enjoys good brand recall. Hence the task of rebranding and reaching out to its customers may come at a price. Second, if the objective is to build on the existing customer base of DHFL and grow the book, with over half of DHFL’s branches shut, regaining presence in its erstwhile geographies and restaffing its branches may not be an easy task. It would consume time and money.

The more important aspect is how PCHF will guard the existing book against the high prepayment trend that NBFCs are now faced with (presently upwards of 5%). DHFL, in particular, even ahead of its bankruptcy had the highest prepayment rate of 7%-8% among mortgagers.

For PCHF, sweetening the interest rate to retain customers may be a tough ask. Therefore, the task ahead would be to compensate for the run-over book and also aspire for incremental growth.

The good part is that the mortgage space isn’t as densely populated as it was five years ago. Existing players are also on a cautious footing, thus, leaving space for Piramal.

But in the initial years there’s always a dilemma of growth versus asset quality and either of the options will have a bearing on Piramal’s cost of funds. In short, it will be like walking a tightrope.

Where it could get trickier is wholesale assets. The success rate of turning around land parcels and making them monetisation-worthy is very limited.

After IL&FS took over the assets of Maytas Infra Limited, the real-estate arm of beleaguered Satyam Computers, in 2009, it had to ultimately write-off the value of investments, as there wasn’t much to realise.

In PCHF’s case, while the takeover value is quite low, given its balance sheet construction and cost of funds (over 10% as on March 31, 2021), any write-off will weaken its balance-sheet position.

FY23 will be a true test of intent for Piramal.

The question is whether DHFL, like Piramal’s past deals, turns out to be another momentum acquisition that will give it an initial fillip in the NBFC space or lead to long-term potential in the assets.

Other uncertain pieces
On June 7, the National Company Law Tribunal (NCLT) allowed the company to takeover DHFL and asked it to set up a seven-member team to help implement the resolution plan in the next 90 days. While this does signify that the deal is almost done, there are issues that could spring up.

On Tuesday, the National Company Law Appellate Tribunal (NCLAT) agreed to hear the petition by 63 Moons Technologies (which holds INR200 crore of DHFL’s NCDs) challenging some of the provisions of the resolution plan laid down by Piramal. While the NCLAT hasn’t stayed the resolution, these legal battles may stretch PCHF’s earlier timeline to completely integrate the books of DHFL by mid-FY22.

“A group of FD holders also plans to challenge the creditors’ decision,” says a person aware of the development, which will add to the legal tussle.

Additionally, there are layers of ongoing investigations around DHFL’s former promoters Kapil Wadhawan and Dheeraj Wadhawan.

While Grant Thornton’s forensic report formed the base for Piramal’s bid price, and the company is ring-fenced from these investigations into financial fraud, experts say, it is difficult to compartmentalise and earmark assets.

This may not necessarily have a bearing on the loan book, but adverse observations from these investigations could weigh on Piramal Capital’s ratings at a subsequent time.

The bottom line
Piramal Enterprises’ stock has gained 63% year to date, far outperforming the benchmark indices. This is partly due to the DHFL acquisition and partly for mitigating some risks in its wholesale loans.

With Lodha Group’s exposure reducing in Q4 and the share of the top 10 borrowers easing a bit, analysts at broking company Motilal Oswal recommend a ‘buy’ for Piramal Enterprises and say that the company has done a good job of strengthening its balance sheet.

The broader consensus, however, is that the stock price has spiralled ahead of fundamentals.

Further, as an analyst from a domestic brokerage points out, while there is adequate interest around the stock and a lot of participation from varied segments in the investor meets hosted by the company, very little interest is trickling down to strong buying action. “The next meaningful trigger would be when the demerger of the pharmaceuticals and financial-services businesses happens,” he says.

In its Q4 investor call, PCHF laid out the demerger as its “medium-term” plan, although the idea had been in the works for a while.

Given the scale Ajay Piramal is aspiring for, now is the time to deliver the goods. The stakes are high, and this two-time banking-business aspirant has little choice but to get it right this time.

(Graphics by Mohammad Arshad)

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