Piramal stock lags Nifty 50 as acquisitions fail to deliver

Owing to the mediocre performance of these acquisitions, the stock has been a large-cap laggard, having delivered negative returns over the past six years. It hit a lifetime high ₹1,769 on 31 August 2018 and remains nearly 10% below that level even after adding the value of four shares of the demerged entity Piramal Pharma to its stock price. In comparison, the Nifty 50 has doubled over the same period.

Interestingly, the stock hit its all-time high just before the IL&FS crisis, which was sparked by the company’s inability to repay bank loans, commercial papers and deposits in September 2018. The crisis soured investor sentiment for all non-banking financial company (NBFC ) stocks, including PEL. Notably, after recovering from its covid-19 low in March 2020, PEL’s stock approached its all-time high in October 2021 amid the excitement around the DHFL acquisition and the demerger of Piramal Pharma.

Big bets, small returns

PEL made a bold bet by acquiring DHFL for ₹34,250 crore in 2021, which included a cash payment of ₹14,700 crore and rest in non-convertible debts. 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 it a footprint in a majority of Indian states.

The company’s performance since the acquisition shows it improved its financial performance. The size of the balance sheet peaked at ₹1 trillion in FY22 and has been sliding gradually ever since, with little hope of touching the mark again in FY25. Profit after tax in FY22 before exceptional items of ₹1,815 crore turned into a loss of ₹1,536 crore in FY24. While the legacy NPA-related provisions have been blamed in part for the swing to losses, even the pre-provisioning operating profit (PPOP) fell from ₹2,457 crore in FY22 is ₹1,196 crore in FY24 as operating expenses ballooned during this period.

Meanwhile, the company’s earlier acquisition of a stake in Shriram Group and its subsequent disposal generated average returns at best. Having invested a total of ₹4,440 crore in various Shriram Group entities from 2013 to 2018, it has exited most of these, and now only has stakes in Shriram Life insurance and Shriram General insurance. Assuming the holding in 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

PEL’s management has been trying to correct course by exiting the legacy asset book and improving growth. However, these efforts are likely to bear fruit 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 (75% of the total) and the rest from wholesale. It’s aiming for a return on assets of 3% to 3.3% in FY28.

Meanwhile, interest in PEL stock has been rekindled of late and it’s now around ₹915, up from ₹815 on 9 May when details of the restructuring scheme were announced. The corporate restructuring involves a sweetener of preferential shares amounting to nearly 7% of the current market price. PEL will reverse merge with Piramal Capital and Housing Finance Ltd (PCHFL), its wholly owned subsidiary, and the entity will be renamed as Piramal Finance Ltd (PFL). PEL shareholders will get one share of PFL along with non-convertible non-cumulative redeemable preference shares (NNRPS) of ₹67 for each equity share.