Piramal Finance on track to 3% RoA, MD Jairam Sridharan says, as stock begins trading

For me personally and for the firm, it’s been very transformational five years. This was my first time of working in an NBFC and working in a family owned enterprise. The joy of building something ground up is very different. I wouldn't trade this experience for anything. We have transitioned from being essentially a wholesale lender to a retailer and such a transition is very uncommon in Indian financial services, especially at this scale and over a period of five years. The market has been conducive, and the promoter family has been very supportive of the strategy and lots of things have to fall in place for this to happen. In September 2021, after Dewan Housing acquisition got done, we were about Rs 20,000 crore book of retail. Today, that book is more than Rs 75,000 crore. The retail plus new wholesale business has grown 4x in four years. The break-even of business happened in July 2023, about two years after Dewan acquisition.

What part of the DHFL baggage in terms of bad loans is still in your books?

Very little. DHFL had a large book of Rs 40,000 crore, of which about Rs 20,000 crore was wholesale, and we practically wrote the whole thing off when we purchased it. we actually brought it on our books at about Rs 2,000 crore; at about 90 percent haircut. We took over the retail book for Rs 17,000-18,000 crore and identified about Rs 8,000-9000 crore as impaired loans. We have made reasonable recovery from the old NPA book.

How many customers of DHFL were retained by you?

Practically all. It's a long tail book and continues to be with us. Most of them have gone through the entire loan cycle with us. About 10 percent of all our retail disbursements are coming through cross sell within unsecured lending and 25 percent of our unsecured lending is coming through cross sell. A significant portion is to erstwhile DHFL customers and they are very much open to cross sell offers. We have a lot more confidence in cross selling to them and it comes at half the risk of regular unsecured lending risk.

The DHFL acquisition has given Piramal the retail momentum….

DHFL has been the most transformational acquisition in Indian financial services. The entire liability base got protected, though people took a haircut. All the loan customers got served and every employee retained. All branches have remained open, and we added more branches. Instead of just stripping it down and selling it for parts, which is what a distress fund might have done, we organically grew around it.

As you step into the phase of Piramal 2.0 how do you want investors and customers to perceive the company in the newer version?

We are an upper layer NBFC, and among the fastest growing within that segment. We've been growing at upwards of 35 percent when the market is growing 11 percent. Thirdly, we are a diversified retail lender, very different from what we were in our previous avatar. The fourth point is that we are very Bharat oriented, and think of ourselves as the lender to the Middle India. We are not big in urban centres or metros, and we are also not big in the rural centres. We are big in the semi-urban India and we've been lucky as that part of India has actually grown while urban and rural India faced challenges. The profitability has gone from negative to half a percent to one percent over the last four years. Now, the RoA is at 1.5 percent and it is expected to trend towards 3 percent. At this size, you don't usually see companies talk about doubling their profitability, and that’s a very big leap for us. Finally, because we are a young company which grew up in this new tech and AI led era, this is part of core business, as compared to traditional lenders that are now attempting to insert AI and technology into their businesses. The new Piramal Finance stock taking birth on the stock exchange on November 7 will start will these positives, unlike in its earlier avatar. It will have a clean slate start with relatively attractive valuation multiple.

With the investment phase done, would the cost to asset ratio trend downwards lending to further improvement in profitability?

Yes. In the quarter after DHFL acquisition concluded, our cost to assets or cost to AUM was 6.5 percent, now that number is 3.9 percent. Operating leverage is going to be the biggest driver of RoA growth for us. We are looking at another 60 bps reduction approximately in cost to AUM ratio in the next few quarters. We should see at least a 25 bps reduction in this AI-driven metric.

You seem very optimistic on growth. But when you speak in boarder forums you repeatedly emphasize on caution. Is there a dichotomy?

Each person has a natural pace at which they will operate. For example, if my son and I are to lift 25 kilos of weights in a gym, for him, 25 kilos might be easy or doing a relaxed workout. For me, it might be stretching the limits. For Piramal Finance, as a young company, our natural growth rates are higher even factoring in for caution may be higher than another lender. Every quarter we show our risk trajectory, product by product, and as an external person, you can just see it and predict what we are going to do. Our digital lending risk come down a lot, and correspondingly, our digital lending growth has picked up. Risk in used car kind went up and hence growth slowed down. That's the way we operate. In digital lending, customer behaviour has improved, but lender economics has improved even further because of FLDG guidelines.

You are also building a new real estate book is about 9% of total book now. What was the rational for getting into this segment?

We used to do very large ticket structure real estate lending, which we have stopped doing. Now we are doing much smaller tickets of Rs 150-200 crore. It's a very different business and more secure. Real estate remains a large opportunity in the market and it's a very capital hungry sector. It's a growth sector, and there are not that many capital providers to that sector. We would want to be one of them. We would like to have this book at 10-15 percent of our portfolio and another 6-7 percent from corporate lending, basically focusing on BBB plus rated entities.

Does it pay to be a diversified NBFC from a valuation standpoint?

100 percent, and there is no other way to go. It has become impossible to be a large but mono-line NBFC. Look at the upper layer NBFCs. Where are the mono-lines? Large players have to be diversified, and small players can be mono-line.