Outlook for Piramal Enterprises is not bright; stock falls over 3%

Further unwinding of positions in Shriram Group firms is key worry

Things weren't working out well between Piramal Enterprises (PEL) and the Shriram Group and it was not surprising that the former sold a 9.88 per cent stake in Shriram Transport on Monday. However, the stocks of Shriram Transport and PEL still fell over 6 per cent and 3 per cent, respectively, on Monday. PEL held a 20 per cent stake in the holding company (Shriram Capital) and 10 per cent each in Shriram Transport Finance and Shriram City Union before Monday's transaction.

Trouble started after Shriram Group's second attempt to convert into a banking franchise by acquiring IDFC Bank in 2017. But, it didn't fructify due to multiple reasons including regulatory hurdles. Ajay Piramal bought into the Shriram Group in 2013 just when the latter was working towards becoming a bank.

However, pressure for PEL intensified since September 2018 as the Street started shunning financiers with heavy developer loan exposure. The PEL stock, which draws nearly 60 per cent of its valuations from non-banking finance companies (NBFCs), has seen a 65 per cent fall in its price since its August 2018 peak of Rs 3,302. It has lost about 27 per cent of its market capitalisation in a year. 

The NBFC business hasn't seen a visible disturbance after the liquidity crisis, whether in terms of loan growth or asset quality. However, when compared to past performance, the March quarter (Q4) wasn't satisfying. Loan growth at 34 per cent lagged that of previous quarters at 45-85 per cent. Similarly, gross non-performing assets ratio at 0.9 per cent in Q4 has almost trebled in a year. 

Developer loans at Rs 40,160 crore account for over 70 per cent of PEL's loan book, while the share of relatively secure home loans is just 9 per cent. Also, Lodha Developers, a stressed firm, adding up to 7 per cent of exposure, and top 10 developers for 31 per cent of the total loan book is disconcerting for investors.  Analysts at Citi Research have downgraded FY20 earnings by 8 per cent as they expect growth to slow down. 

While PEL is attempting to alleviate the concentration risk by going for joint development and co-investing with private equity firms, the overall slump in the real estate market and liquidity crunch remain major headwinds. The impending stake sale in Shriram Group companies is another valuation risk. Therefore, unless the real estate sector revives, the outlook for PEL is not too bright.