Piramal Enterprises stock continues to be weighed down by wholesale loans

Average cost of funds remained at 11 per cent even in December quarter, indicating tight liquidity

Piramal Enterprises’ stock shed nearly 30 per cent in CY19 and trades have been almost flat on a year-to-date basis. At Rs 1,531, it is valued at 1.1x FY21 estimated book, which is attractive. But, the question is whether this is a fair representation of the quality of the book. 

For instance, as of December 31, 2019, nearly 70 per cent of its book was concentrated by wholesale loans — 47 per cent was towards wholesale residential real estate projects, and 23 per cent was towards wholesale commercial real estate loans. Compared to its listed peers, which operate well-below the 25 per cent-mark on wholesale loans, Piramal’s proportion is far from comforting, given the current operating conditions. 

This, even after considering the financial services business now accounts for about a half of its revenues, and that Piramal Enterprises had recently raised around Rs 3,650 crore through issue of fresh shares.

What’s more is the impact of these loans on the asset quality which was felt especially in the December quarter (Q3). Gross non-performing assets (NPA) almost doubled to 1.8 per cent in Q3 sequentially, while the ratio of weak assets (stage-2 assets with 30-day past due outstanding and stage-3 assets or NPAs) was at 2.1 per cent from 1.8 per cent in Q2FY20.

While Piramal Enterprises is taking numerous measures -- such as reducing the concentration risk and single-borrower exposure, increasing the share of securitising contracts (up from 6 per cent in Q2 to 8 per cent in Q3), and enhancing its retail presence -- these steps are going to take a while to reflect in the composition of its loan book. For instance, the company has expanded the share of retail loans from 7 per cent in December 2018 to 12 per cent in Q3FY20.

Besides home loans, the lender is fortifying its consumer finance business. However, when placed against peers, such as HDFC and LIC Housing, retail mortgage presence of which is 70 per cent and 80 per cent, respectively, the company has more ground to cover to turn into a retail franchise.

Analysts say this also explains the risk aversion seen in stocks, such as Piramal Enterprises and Edelweiss Financial Services, whose book are more wholesale loan-focused. Lately, Piramal Enterprises' stock hasn’t found much appeal among analysts and among the prominent brokerages. Motilal Oswal Financial Services recommends "buy" for the stock. 

However, according to Rajiv Mehta of YES Securities, who does not have active coverage on the stock, the systemic risks, especially for those lending to developers, aren't fully captured in the stock price. “There’s still reasonable risk-aversion towards NBFCs operating in this space because of the twin challenges -- weak demand velocity and unpredictable nature of asset quality,” he explains. This is why, he feels, even if banks benefit from the regulatory dispensation given to real estate players, which get another year to restructure their loans, this doesn’t take away the underlying weakness in the system. “After the moratorium period, real estate developers have the burden of repaying principal and interest. At the current juncture, their ability to do so remains stretched,” Mehta adds.

Risk aversion has, in fact, kept Piramal Enterprises’ cost of funds elevated at 11 per cent in Q3, which is near about its September-quarter levels. The lender, for now, is able to pass the burden onto its wholesale borrowers, helping it keep the average yield stable at 14.9 per cent in Q3. But, whether the company could do so for longer needs to be seen given weak real estate demand.

For investors, this means that while valuations could be relatively attractive, risks are high. It may be prudent to see how the company’s wholesale loans take shape in the coming quarter before turning positive on the stock.