Housing loans first step in growing retail lending book: Ajay Piramal

Resolution of stressed assets under the provision of the Insolvency and Bankruptcy Code (IBC) needs to follow the laid-down process that has been approved by the Central Vigilance Commission (CVC), and bid to maximize sale value of stressed assets beyond the stipulated process isn’t “correct”, says industrialist Ajay Piramal, chairman of Piramal Enterprises, the pharma-to-financial services conglomerate.

Piramal was speaking to reporters in Mumbai on Monday following the announcement of his company’s earnings for the quarter and fiscal ended March 31, 2018.

“The process as far as the CoC (Committee of creditors) is concerned has been laid out and approved by the CVC. This has to be followed. Maximisation (of value realised for these stressed assets) is happening later and beyond the process, and this isn’t correct,” Piramal said. “This way the process can be gamed. A bidder will come up with a lower value and if he doesn’t get the asset at that value, he will revise it at a later date after the deadline. I hope the NCLT (National Company Law Tribunal and the Supreme Court will decide on this logically. Otherwise, the process can be taken for a ride.”

A consortium of Dalmia Bharat and a fund formed by Piramal Enterprises and Bain Capital emerged as the highest bidder to acquire Binani Cement under the IBC, but Binani reached an agreement to sell its business to Aditya Birla-led UltraTech Cement after the deadline. The Supreme Court, however, disallowed the UltraTech transaction, outside the ambit of the IBC, from going through. UltraTech subsequently bid through the IBC process being played out in the NCLT, and Dalmia Bharat has moved the appellate tribunal challenging its rival’s late bid for Binani.

Piramal Enterprises, which has business interest ranging from housing and construction finance to making and selling pharmaceutical products in India and internationally, posted a 21% growth in normalised net profit for the quarter ended March 31 to Rs 375 crore, on the back of higher profitability from the pharma business and interest income from the financial services vertical.

The reported net profit for the quarter was Rs 3,851 crore, but this was on account of the creation of a deferred tax asset. The deferred tax asset was a one-time gain on account on an arrangement whereby Piramal Enterprises has consolidated its financial services business by merging Piramal Finance and Piramal Capital with Piramal Housing Finance. The company reported a turnover of Rs 2,991 crore for the quarter, up 21% year-on-year.

For the full financial year 2017-18, Piramal Enterprises reported revenues of Rs 10,369 crore—an increase of 24% from last year—and a normalised net profit (excluding the deferred tax asset) of Rs 1,551 crore—up 24% year-on-year.

Piramal Enterprises’ loan book increased significantly to Rs 42,168 crore as on March 31, 2018, an increase of 69% from a year ago. Around 45% of this loan book is on account of construction finance and housing finance (retail housing loan products launched in September 2017); with structure real estate finance (including mezzanine capital), corporate finance and SME finance making up the rest.

Piramal said that consolidation of all financial services entities under one company was expected to lead to significant long-term synergies including higher profitability, higher risk-adjusted returns, and return on equity improving by around 2% to 3% in the years ahead. Piramal Enterprises earned a return on equity of around 19% in FY2018. “Our borrowing costs (on money borrowed to lend onwards) will also go down due to the diversification into retail products, with housing loans also a part of the combined entity,” Piramal said. “We expect an upgrade in our ratings and hence the borrowing costs should come down by 25-50 basis points. Also, access to funds would further improve since we expect to attract higher allocation from mutual funds.”

Piramal stated that the entry into housing finance, whereby the company will extend credit to individual homebuyers, was a way for it to enter the retail finance space. “As we understand the market for retail lending, we will scale up this business and launch other products as well,” Piramal said. Peers like Bajaj Finance have built a stable business in this space and scaled it up rapidly by extending credit to retail borrowers through a plethora of products ranging from unsecured personal loans and gold loans to two-wheeler and three-wheeler loans, and loan against property.

Piramal Enterprises also saw a stellar 118% year-on-year growth in its corporate loan book, which stood at Rs 8,209 crore at the end of FY18. This, according to Piramal, was a reflection of the opportunity that existed for non-banking financial companies like his to tap into corporate borrowers, in the absence of adequate liquidity in the banking channel.

“Clearly there is an opportunity. We are all aware of the stress in the banking system. It is not only the public sector banks that are under pressure, but even some private sector banks, which means that decision making to some extent has been slowed down,” Piramal said. “Therefore there are opportunities for NBFCs like ours. There are many good corporate institutions who need funding.”

Piramal Enterprises’ financial services business yielded revenues of Rs 4,981 crore in FY18, up 49% from last year; while the pharmaceuticals business clocked a turnover of Rs 4,322 crore (up 11%). The relatively muted growth in the pharma vertical’s top line was on account of measure like demonetisation and implementation of Goods and Services Tax, which led to a certain degree of disruption in the sales of over-the-counter products in India.

Piramal also disclosed that the company’s non-compete clause with global pharmaceuticals major Abbott, to whom Piramal had sold its entire portfolio of domestic formulation products in 2010 for $3.7 billion, was coming to an end in September this year. This meant that Piramal Enterprises could explore re-entering the market for domestic formulations, Piramal said but added that no decision has been made yet.

Piramal Enterprises’ shares rose 2.61% on the BSE on Monday to close at Rs 2,468.35 apiece. The bourse’s benchmark S&P BSE Sensex gained 0.69% on the same day to end at 35,165.48 points.