How DHFL fits into Ajay Piramal’s plans

Ajay G. Piramal, the billionaire owner of Piramal Enterprises Ltd (PEL), one of the three bidders for DHFL, has left no stone unturned in his efforts to win the ailing housing finance company that’s up for grabs.

His December 21 letter to the RBI-appointed administrator of DHFL has made many wonder why Piramal is so resolute in his desire to take over DHFL. He has made a strong case for the resolution plan submitted by his group for the troubled company, which is currently undergoing a prolonged resolution process under the Insolvency and Bankruptcy Code Act.

“We are not desperate in our attempt,” Piramal tells Fortune India, rebuffing every insinuation that he is attempting to curry favour with the lenders. “Of course, DHFL perfectly fits in… [our scheme of things]. Otherwise we wouldn’t have bid for it,” he adds.

Piramal, who is known for taking risks and seeking inorganic opportunities for faster growth, seems to have found value in the DHFL brand which enjoys great trust in the semi-urban and rural markets.

Recuperating from the terrible crisis following the collapse of Infrastructure Leasing & Financial Services (IL&FS) in 2018, the non-banking finance sector in the country was struck by a double blow in the following years—the economic recession and the pandemic-induced slump in business. Most NBFCs faced an extremely harsh liquidity crunch in 2019. Piramal’s financial services business, which has a high real estate exposure, was no exception. When it faced an unprecedented redemption pressure, giants such as Life Insurance Corporation (LIC), International Finance Corporation (IFC), and Canada Pension Plan Investment Board (CPPIB) had come to its rescue.

Several external factors may have tempered the pharma-to-financial services giant’s growth curve, but that never dissuaded Piramal from dreaming big. The man, who built a pharma business through multiple acquisitions and sold it to Abbott Laboratories for $3.7 billion in 2010, re-entered the domestic pharma market in 2018 after the company’s non-compete agreement expired. Following the sale in 2011, Piramal’s pharma portfolio had comprised of the global pharmaceutical business and over-the-counter brands which accounted for ₹1,605 crore in revenue in 2010-11. Since then, Piramal has scaled up its global pharma and over-the-counter businesses.

In 2019-20, his pharma business, under PEL subsidiary Piramal Pharma, clocked revenues of ₹3,154 crore, accounting for 41% of PEL’s revenues. In June, he sold 20% stake in Piramal Pharma to The Carlyle Group, a global private equity giant, at an enterprise valuation of $2.8 billion.

Piramal, who is also a member on the board of Tata Sons, the holding company of the Tata group, has charted a long journey for his financial services company Piramal Capital & Housing Finance Ltd (PCHFL), which is the entity bidding for DHFL. His dreams of making the financial services arm a behemoth will undeniably get a leg up if he can wrap up DHFL. He has already strengthened the team by bringing in Jairam Sridharan, former CFO of Axis Bank, as chief executive officer, in March. The other two who joined PEL last year are Jagdeep Mallareddy, former president-retail banking, Axis Bank, and Sunit Madan, former VP, Genpact.

Meanwhile, he has also promised that there won’t be any layoffs at DHFL, which has over 4,500 employees at present.

In his letter to the DHFL administrator, Piramal has elucidated why the bid by PCHFL, as a strategic buyer, remains the strongest one. The Piramal resolution plan, he believes, offers high certainty to the committee of creditors (CoC) that it would be implementable, irrespective of the outcome of the sale process currently underway for the insurance business.

“As an Indian entity, our backstop offer to DHFL lenders, in case the stand-alone sale process does not gain traction, is fully implementable and comfortably within the ambit of current ownership rules as per the guidelines of Insurance Regulatory and Development Authority of India (Irdai),” Piramal wrote in his letter.

Piramal was referring to the complications arising out of a foreign entity keeping the insurance arm of DHFL. At present, US-based Prudential International Insurance Holdings Ltd owns 49% in DHFL’s life insurance company. In a recent communication, Irdai had made it clear that foreign entities cannot have any stake or control more than the prescribed FDI cap of 49%. To circumvent the crisis, American asset manager Oaktree Capital, which is locked in a fierce bidding war with Piramal, had suggested that if it eventually acquires DHFL, the interest in the insurance company can be housed in an alternative investment fund (AIF) without breaching the FDI norms. This would entail Oaktree seeking a nod for floating an AIF and eventually setting it up.

Piramal, on its part, said that it would acquire the insurance arm for at least ₹300 crore if DHFL’s stake in the insurer fails to get sold within six months.

“As it currently stands, the competing foreign financial investor’s resolution plan is un-implementable till such time that a credible, regulatorily acceptable alternate buyer for the insurance business emerges,” Ajay Piramal wrote in his letter, adding that the foreign financial investor’s plan falls short and does not meet the test of ‘feasibility and viability’.

This has evoked a strong response from Oaktree: “We hope not to be discriminated against just because we are a foreign player.” The remaining bidder, Adani Group, a distant third, is keeping a rather low profile and awaiting the creditors’ votes which will decide the winner, probably in a week’s time.

If it wins the bid, Piramal has offered to infuse ₹10,000 crore of equity into DHFL through a reverse merger of PCHFL into DHFL. “PCHFL is a 100% owned subsidiary of PEL. So there is no need for any demerger,” says Piramal.

PCHFL is an AA-rated firm, with 33% capital adequacy and a low 2.2x debt-to-equity ratio. “The structure we have proposed envisages merging our existing HFC with DHFL, thus ensuring a highly rated bond that lenders would hold. The competing bid envisages a high-risk leveraged buy-out (LBO) structure. Debt instruments of such LBOs with very high leverage are likely to struggle to get an investment grade rating as per prudential credit norms. Needless to add, this would reflect in correspondingly lower bond valuations in the secondary market,” Piramal wrote in his letter.

In 2019-20, the financial services arm contributed 59% of PEL’s total revenues of ₹13,068 crore. This includes stakes in three Shriram Group financial services companies. After a stupendous initial growth, the loan book has shrunk to ₹51,522 crore as on September 30, 2020, from ₹53,055 crore reported a year ago, and ₹52,793 crore reported on September 30, 2018. The wholesale lending loan book (loans to residential and commercial real estate and corporates) stands at ₹45,840 crore while retail lending touched ₹5,682 core, taking the total loan book to ₹51,522 crore, as on September 30, 2020.

The income from financial services too dropped during the first half of 2020-21 (April-September) to ₹3,760 crore, from ₹3,968 crore reported a year ago. PCHFL has raised ₹ 11,500 crore of long-term borrowings during the first half of 2020-21.

Piramal said his group entities are regulated by RBI and National Housing Board (NHB) and have been deemed ‘fit and proper’ to manage systemically important financial institutions. “We have not included any sunset clauses, any rights to revoke the plan, etc. Our intention is to commit to the CoC and stand behind our offer,” he said in his letter.

PCHFL’s bid is designed to ensure the highest upfront cash payment, higher than the competing bid by ₹1,000 crore. “Additionally, the competing bid has asked for an escrow of ₹1,500 crore from lenders’ funds.”

Piramal said the large number of retail holders of DHFL fixed deposits have faced considerable hardship and difficulties, and are likely to see erosion of their hard-earned life savings. To partly alleviate their pain, PCHFL has specifically committed to pay retail FD holders an additional amount equal to 10% of the amount that would be allocated to them by the CoC.

Piramal believes the resolution process has gone on for much too long. “As we keep debating, there hang in balance the livelihoods of 4,500-plus employees, the fate of four lakh-plus customers, and the reputation of the first RBI-initiated financial services IBC process in the country.” He has requested the administrator and lenders to close the process as quickly as possible.

What is most attractive for the prospective bidders of DHFL is that the stressed company is “going for a song”, as suggested by its former promoter Kapil Wadhawan. For anyone looking for a jump-start in an otherwise slow-growing economy, DHFL presents a great opportunity.