Piramal Enterprises: DHFL acquisition fast-forwards retail aspiration

Integration may take about six months, though execution may be a tightrope walk

After months of negotiations and upping its bid price with every round to take over the beleaguered housing financier Dewan Housing Finance Corporation Limited (DHFL), the healthcare to realty to financial services firm, Piramal Enterprises, has finally emerged successful. The decision was public on Friday, after market hours, though its stock didn’t take the news very jubilantly on Monday – down about 2.5 per cent in BSE. On a one-year basis Piramal Enterprises stock hasn’t returned much gains to its investors (down about three per cent) and is way far away from its all-time high of over Rs 3,000 a share. Can DHFL acquisition change the wind?

Certainly with the integrating DHFL into its books, which Asutosh Misra of Ashika Stock Broking says could be a 3 – 6 months process from the conclusion of acquisition formalities, it would bump up the share of retail loans for Piramal Enterprises in one go. With about Rs 33,500 crore of retail assets out of DHFL’s total loan book of Rs 79,800 crore coming into Piramal’s fold, that increases the overall proportion of retail loans from a mere Rs 5,682 crore as of September 30, 2020 (Q2) to over 39,000 crore of the combined book. In other words, it significantly fast-forwards Piramal’s retail aspiration (see table). Analysts at Motilal Oswal Financial Services note that the company plans to have a 50:50 mix of retail and wholesale loans in the next five years.

With continuous deleveraging of balance sheet and stake sales in its healthcare business, Piramal’s net debt to equity (consolidated) stood at less than 1x as of Q2. Well-capitalised lending business also places the firm strongly to absorb DHFL’s assets.

But how fruitful the acquisition is for Piramal will be known from the financial performance of the combined book going forward. To start with, DHFL’s gross non-performing assets (NPA) stood at 21.32 per cent for retail loans and 92.61 per cent for its wholesale book – the highest in the industry. Piramal’s gross NPA was at 2.5 per cent in Q2.

Recoveries, collections and maintaining the current customer base of the housing financier post integration would be a challenge for Piramal. Also, while DHFL’s website indicates that it has over 500 branches across the country, reports suggest that at least 90 per cent of them have been shut since insolvency proceedings were initiated in November 2019. Reviving the branches, getting back the work force and reestablishing the lost business is another challenge. Further, DHFL’s Rs 30,000 crore worth of land parcels would require significant investments from Piramal to monetise the assets. Can Piramal do so, without taking its eyes off from its already existing wholesale book that needs to be seen.

Therefore, while Misra believes that DHFL may be a worthy purchase for Piramal, the next 2 – 3 years will reveal the true picture.