Asserting that sales in A-class real estate sector have been about 75 percent of the average, Ajay Piramal, Chairman of Piramal Group, denied concerns of demonetisation having a big impact on realty.
“People have held back a little bit because of the talk of prices and interest rates coming down... but it is moving towards normalcy now,” he said.
Piramal said that more important than the demonetisation is the impact that is going to take place because of the Real Estate Regulation Act (RERA). “At every stage you took some more money from your customers, now those days are gone. One is because of the new Act does not allow you to do it. Also, people of the last 10 years, especially in the big cities have found that there have been a lot of approval delays that have taken place,” he said. The new Act will protect interests of consumers, he said.
Below is the verbatim transcript of Ajay Piramal’s interview to Prashant Nair on CNBC-TV18.
Q: You are into the entire spectrum of real estate financing. The total size of your investments is about Rs 30,000 crore or so -- this includes the investments in the Shriram Group of companies as well. Your thoughts prima facie on what demonetisation has done to the sector – I am talking about real estate?
A: When I look at the real estate sector, I think we have to go a little more into detail about it. We as a company have for instance been only lending to the A-class developers in five or six major cities. About 300 projects that we have lend to, when we look at details of those projects, we find that sales are about 75 percent of what they would have been in a normal case. Therefore, it is not as bad as it has been made out to be.
Also, in real estate, I think, it is a long-term, once in probably lifetime decision, so, people have held back a little bit because of the fact that everybody talks about that prices are coming down, interest rates are going to come down and hence I think 75 percent, but it is moving towards normalcy now.Q: On the issue of prices, are we really going to see price correction? You operated tier-I markets, but you have a sense overall.
A: Overall I don’t see prices coming down. More important than the demonetisation is the impact that is going to take place because of the Real Estate Regulation Act (RERA). The new act which is there for the real estate, I think that is a more significant change that is taking place in the environment.Q: Has lending slowed down?
A: Not really. When I see the numbers of the quarter end, our lending has not slowed down.Q: So, at the end of H1 of FY17 you did revenues of more than Rs 4,000 crore. One can extrapolate those numbers to full year?
A: Yes.Q: Out of the Rs 30,000 crore that I mentioned, the loan book on the real estate side is about Rs 19,000 crore plus at the end of second quarter, H1. How is that going to shape up from here?
A: I don't want to give too many forward looking statements but I think it is going to be a good growth from here. When I see the sort of numbers which come out for Q3 and then going on into Q4, I think we should have actually good numbers.Q: On the NPA side 0.4 percent, you were actually doing much better compared to a year back or two years back, do you think that trend will continue?
A: Yes, we are pretty confident. Our NPA as a percentage and also in absolute terms has come down. 0.4 percent is the gross NPA though we provide for much more. It is only because we have been able to recover some of the loans which had gone bad. So, that just shows that the quality of the legal documents that we have as well as the risk assessment that we do is quite robust and this just one evidence that we have been able to recover a couple of loans which had been provided as NPA back into the system.Q: Construction finance is about 50 percent of that Rs 19,000 crore book right?
A: Yes.Q: And that will grow?
A: That will continue to grow.Q: In that book that will be the fastest?
A: We made a strategic choice a year and a half ago to fund construction finance. Earlier on, we were in the early stage of financing. When we saw that the market, the way it was developing and the way we wanted to actually see the risk that we were doing and the size of the book, that is when we choose deliberately to go into construction finance.Q: On the housing finance side, what are the plans, how are you going to enter that space?
A: Housing finance, we have created a separate subsidiary for housing finance. So, it will be managed by an independent team of people. We have people who have got experience in housing finance, who have understood this space and these are all home grown talents. One of things that we distinguish ourselves from others is that we get home grown talent who have been with us for sometime, who know our values which are really important and the culture. So, we have created this team, we are in the basis of creating a team in housing finance and we will go into those.
So, the first of the things that we want to do is that we are today already in more than 91 plus micro markets which we are funding different projects. So, those are the ones which we know well, we know what is the demand in those areas and that is where we will start by funding first. We have put initial equity of Rs 1,000 crore and I think over time we will keep increasing it. So, Rs 1,000 crore equity in housing finance also allows you a fairly decent debt equity ratio. So, I think this should be significant growth engine for us in the future.Q: You have applied for an approval to the NHP?
A: We have applied for the NHP. As soon as we get the licence we will -- so, all the preparatory work is being done. Also, we are going to use a fair amount of technology in it, so, you are not going to have as many feet or as many branches as what traditionally it was there. One of the advantages of coming in late is that you can start with new technologies.Q: Coming to your investments in the Shriram Group of companies, you are clearly the single largest shareholder, directly or indirectly you own between 15 percent and 18 percent in various Shriram Group companies – Shriram Transport, Shriram City Union Finance, Shriram Capital, what really is the plan there? How should one look at this; you have in the past said this is like a portfolio investment for us.
A: As I look at it today, we talked about the Piramal business in financial services, we have also talked about Shriram Transport and the City Union, all these three businesses are on a growth trajectory today. All of them have enough runway to grow. In my view, with all this demonetisation and the environment, actually organised finance companies are going to do even better as more and more money comes in into the system. So, I feel that this is the time for us individually to focus on growth in each of the businesses.Q: So the answer is no, indirectly you are saying there is no plan to merge or anything??
A: No. At this moment we don’t want to do that.Q: Also the nature of the business, you are on the wholesale side, they are on the retail side. So, the game is different in that sense or is it about you gaining experience there?
A: I think it is really about not distracting ourselves. Any merger -- more than 50,000 people of the Shriram Group means the culture will be different. It takes a lot of time and one or two years in a merger of this size would mean that you can get distracted from your growth agenda. As and when we find that our growth agenda is coming to a steady level, that is the time we should look at it.Q: In terms of getting people on board because you are expanding on your own as well, is that project over or is that a continuing process?
A: It is a continuing process. As you know to get high quality people is a challenge and that makes a difference and especially I found in the financial services, the most important thing is the quality of people and more important than that is the culture and the values that you have. Therefore, in our system, we insist on getting people at lower levels and then bringing them up in the system because that is when they get our culture and our values and I think that is the most important. Otherwise financial services is not as complicated a business as sometimes is made out to be.
_PAGEBREAK_Q: I go back to the question about restructuring business. I must tell you that analysts are already putting down numbers in terms of what Shriram Group looks like, what Piramal looks like, what the combined business will look like -- so you are telling us that is not on the anvil, at least not right now, it is not something which you are looking at, you want to grow both those businesses individually and there is enough runway to grow. So a question I have asked you over the years is, is there plan to demerge the financial services business and list that separately?
A: We have been talking about this, whether to demerge or separate out the financial services business. As the business was growing, there has been a demand let me say from the investors to know that they wanted to have more transparency as to what we are doing in financial services and therefore we said that yes we will separate it out and I still continue to say that we will separate it out. We will do that in the medium term.
However, before that, what we are trying to do from this year onwards is to make the numbers more transparent. The financial services business is being moved out of the Piramal Enterprises to its subsidiary; it has already moved out in the last quarter. Q: So will we see something in FY18?
A: Whether it will be FY18 or not I can't say now but you will see a separate business.Q: Separate listing as well for the financial services business?
A: Listing will be in the medium term. You will see a separate subsidiary in the year ending FY17.Q: What stops you from listing it separately? Another large group - the Birla group for example is doing that.
A: Each one has their own reasons why they are doing it. We will do it at the right time. It is a matter of time really. Our other businesses - our pharma businesses are also doing quite well, we are investing in that. We have invested both organically and inorganic means in pharma. If you see the last 18 months we have made significant investments in pharma.Q: Over the last two years you have invested about Rs 1800 crore in healthcare acquisitions. It doesn't get that much attention, it is the financial services which does.
A: Right it is because everybody talks about financial services.Q: So, you are saying that business is doing very well?
A: That is doing well and we are investing in it. So, you will see some more investments going on into that space. So, this number of Rs 1800 is actually going to go up.Q: The other business is the information and data business in the US and that did revenues of about Rs 1,150 crore last year. I was looking at growth rate and that has also grown very fast.
A: If I look at the information business, data is what everybody talks about today. We are in the space of data information. We say that we convert our information into wisdom and it is in the healthcare space. So, much data is being generated in healthcare, especially if you look at the US where 16-18 percent of GDP is growing on health, there if you can make efficient use of this data, it is going to be huge value. So, that is what we are working on whether it is in terms of data analytics, whether it is in terms of making better interpretation of what is happening. So, that is an area that we are in.
When we acquired this business it was mainly out of US and Europe. We have moved a fair amount or the growth has come from adding people in India as well.Q: There are plans to list that in the US?
A: We will list that in the US again in the medium term. So, in the medium term I see Piramal Enterprises as actually having three listed entities. One would be pharma space, the other will be the financial services and third will be the data.Q: Medium term you would define as two years?
A: Let us see.Q: What is your view about what is happening from the governments side to push growth? Many people say that the economy was just about starting to takeoff, at least earning expectations were rising from the corporate side and then you had this demonetisation event which happened and that kind of disrupted things. This year for example in FY17 we will mostly see 0-2 percent kind of corporate earnings growth. What is your view? How long do you think we will have to wait for animal spirits to comeback, growth to pickup etc?
A: Overall I think that demonetisation was a step in the right direction. I think we needed it. This will only help growth rate in the future. At least for organised businesses like ours it is going to be a plus. We have suffered maybe for a couple of months but it doesn't matter so much in the, not in the long term, in the immediate short term it will benefit because interest rates will also come down and that I have seen always grows the economy.
Growth rates to come up, I think government spending has definitely gone up. It is now for the private sector to increase the spending and that remains a challenge.
A lot of balance sheets of the corporate sector were stretched and many companies had NPAs or large loans and I don't think they have been able to sort out that problem still. So, that continues to remain.
The second thing is that the banks though they have a lot of funds available with them have now become naturally cautious in lending because of the large NPAs that they have and the risk that they have had undertaken in the past. So, banks will have to sort that one out.Q: But these has worked to your advantage in that sense?
A: Yes they have worked to our advantage both ways, one is there are many more loans we can give, also the banks want to lend to you, so there is enough competition and so the cost funds is also attractive.Q: Do you expect cost of funds to come down meaningfully?
A: I hope so. I think with all the things happening I expect at least between 150-200 basis points coming down.Q: In this year, in 2017?
A: By March 2018.Q: You have spoken about the concept of trusteeship in terms of running your business, the culture that you just referred to etc. You were on the board of Tata Sons. What is your impression in terms of what we have all seen over the last many months now?
A: What we have seen is pretty unfortunate. Tata Sons, we must recognise is a private company. If somebody who has two thirds majority wishes to change the chairman and CEO, it should be a normal process. It could have been done but it has been highlighted too much. People have not appreciated that it is a company where performance was not what was expected to be.
We had one chairman for 4.5 years and if we are to blame the past after even 4.5 years there is a problem. Prime Minister of India is elected for a 5 year term, President of the US is elected for a 4 year term, you can't during the end of your term say the previous one had done a mess. So, if the performance is not upto the mark then it is upto the person who is running it for 4.5 years to account.Q: It was not at the end of Cyrus Mistry's term.
A: It is still 4.5 years.Q: Do you think it could have been handled better? The starting point which was his removal, from that point on.
A: What I understand and I was not privy to that but there had been conversations before and this is what has come out all in the press. So, it was obviously not a sudden decision. I think it was also expected from what I see the reaction of the other side.Q: It has you would agree sullied the reputation of one of the top corporate houses in the country?
A: I think it has sullied the reputation of all business and it is not a very good thing to do. I know lot of facts have been twisted and given out in the public domain which is unfortunate.Q: How do you see this progressing?
A: If you looked at shareholder democracy it is very clear that the shareholders have voted on their feet. Whether it is the public institutions, whether it is the individual shareholders, they have shown overwhelming support for Ratan Tata and I hope things will sort out in the near future. It is good for India because Tata is not just any other company, it represents India. You talk about concept of trusteeship, I think we have learnt it from people like Ratan Tata or the Tata Group right from the beginning. Now we hear of cases of how people have donated all their wealth in the US to public charitable causes but Tata's did it 150 years ago.Q: Cyrus Mistry in his lat communication said I want to take it to a higher platform. A bigger platform is what he called it. So, although investors have voted with their feet, shareholders etc but he is still carrying the battle on, calling for reform in the group as a whole.
A: Let us see what happens. I hope better sense prevails.Q: As of now it is the legal route, essentially courts have to weigh in and decide this matter?
A: Yes to the extent courts can play a role in everything, yes they will decide.