Piramal Enterprises Ltd

(deeps2884) #1048

I think there are 2 important things which Ambit report clearly misses out:

  1. PEL has raised Rs.7,000 Cr. of equity out of which ~Rs.5,000 Cr. has been earmarked for Financial services (if I am not mistaken against a total loan book of Rs.50,000+ Cr. PEL has total equity of Rs.10,000 Cr. which is very low leverage levels - they can easily do a 1 Lakh crore loan book with this much equity)
  2. For calculating the ALM the Ambit report strictly goes by scheduled repayment of loans sanctioned and not the actual cash flows. Generally the loans sanctioned by PEL would have significant pre-payment. For example loans for construction of Residential Projects would have automatic pre-payment based on sales collection similarly if a developer has taken a land loan at 13 - 16% with repayment at the end of 3rd/4th years as soon as he gets approvals within 12-24 months he would refinance this loan with a construction loan facility from a bank. (you can refer to the PEL con call where Mr.Khushru Jijina talks about collections and the figures are quite strong and need to be factored in for ALM mismatch)

Further I would like to add one more thing here a general gyaan about real estate sales being slow is missing the real picture - the smaller developers are destroyed by demonetisation and RERA but the top 10 developers in each city (which is the focus of PEL) are gaining market share - you can just plot the unit sales & collection figures of the top listed developers and you would get a true picture, PEL is focusing on these developers and not on Real Estate market.

Yes, Real Estate lending has inherent Risks and we should monitor the book for defaults (my earlier answer about how having a sister concern with real estate development capability is a big advantage for PEL and allows them to take over projects in case they see default) but I feel PEL is moving towards lower risk book - they are diversifying the book and reducing the risk across the portfolio - from initial promoter funding which is the riskiest form of Real Estate lending they have now gone ahead and started home loans, LRD Loans, Hotel Funding etc


Following presentation clearly gives all the information related to ALM. Now the question is do we believe Ambit (how old is Ambit report?) or PEL(This report was on Aug 30th) …http://www.piramal.com/assets/pdf/fs-day/PEL-FS-Day2018-Treasury.pdf.

(Krishnaraj) #1050

Mr Piramal is very very smart and very practical, based on track record. So it is highly sensible to assume they have ALM fully under control (as the subsequent chart shows), if that’s the point under debate.

And PEL can raise funds from the market faster than a snap of fingers.

(deeps2884) #1051

Markets are like girl friends when you really need them they are not available :slight_smile:
Hence, when you need money you would not get it or you would get it a high cost. So when market is giving you money you should take it and then figure out the uses (I know its counter intuitive but that is the best strategy and endorsed by Mr.Deepak Parikh).
Mr.Piramal being a smart promoter knows this and has cleverly raised Equity earlier in the year when he could - now he can easily ride out the small storm.
The CP market was being used by NBFC as short term funding was cheaper (50 bps difference over long term funding) and Mutual Funds were rolling it over at maturity (typical AML mismatch). NBFC promoters now realise this is not a reliable source of funding and would make requisite arrangements (Undrawn bank lines, Medium Term NCDs, Tier 2 bonds etc.) This would increase the cost of funding for NBFC by 50 to 100 bps and this would impact profitability in the short run while in the medium term they should be able to pass on this increased cost to end customer but one thing is for sure the high 25 to 30% growth rate we used to assume in NBFC has to be tempered - the growth would now be more sensible 15 to 20% growth with same or slightly lower profitability in short term and higher profitability in long run.
Leverage levels also would get moderated (no more the model of 10x leverage levels) so you would have moderate growth funded by either more equity raise or Tier 2 bonds or growth only with profits being ploughed back.

P.S. in the long run for India to grow at 6 to 7% we would need quality NBFCs and they would grow at 15 to 20% growth rate which is still very good with ROEs of 15+% (This can still give you an 10x in 10 years - as shown by Coffee Can Portfolio of Ambit - good Financial Institutions growing revenue at 15 to 20% at ROE of 15+% should give excellent returns at any time you buy them and we are getting them at a discount).

(pradip) #1052

How credible is this source of information?

Did you also manage to read through reports positive on Piramal? Its helpful to read both sides of the story I believe.

While you made it clear that you stay away from businesses in financial industry, what still keeps you interested in them that you invest time to write posts (mostly negative) in multiple threads - Piramal, Edelweiss, Yes Bank, Dewan, Bajaj Finance and more?

(phreak) #1053

There has been talk of inventory buildup all the way from 2014. Here are some articles from all over the years. There are many more from Knight Frank and Liases Foras that you can look up.

I have read every post on this thread and I have come across quite a few. I am still quite skeptical about the NBFC business thats lending to real-estate.

I am in general a very skeptical person. Perhaps I am looking for disconfirming evidence that will change my opinion. Also, I am a newbie with an inclination to learning diverse things which may not be of immediate interest, so its only natural that I would want to know everything there is to know and what better way to do it than to read, write and express opinion? I have expressed in detail the reason for my avoiding Financials in this post here in response to a query from someone. You can look it up.

(Kumar Saurabh) #1054

Does forum rule says one cannot write posts on threads in which one is not invested or so far has not been interested. As an investor we should be happy if someone is trying to fimd fault in business provided he is more or less logical, it helps us to check and revalidate our own thesis and makes our conviction stronger. It is a very dangerous sign I am seeing on every second thread of VP with comments like this “when you are not invested, why are you coming to this thread”. This is not the spirit of separating wheat from chaff. I think as an investor, the sooner we learn to respect our critique the better it is for us. @adminph2 There has been a trend of posts like this where one group invested is asking not to post when other set of people are not invested. Kindly look into it as it does not leave a good taste when it happens repeatedly .
@phreakv6 I am invested in PEL and must admit that I am having a cautious optimism and I had gone through AMbit report when it came . To be frank , I am an admirer of ambit research but not their conclusions . I liked their research on many occassions which helped me to get deeper understanding of business but avoided their conclusions. Coming to PEL,

  1. Recently , they made a presentation on investor day where they highlight that they lend to 1% of real estate companies which are responsible for 8% of national sales which indirectly indicates , the size and scale of companies they lend to. Though it may not reflect quality of companies they lend to but still tells these must be the high scale builders. Also, the other caveat is they need to choose 1% of the lot and ensure these r good lending candidates. When we are talking about 1% of real estate market, to be frank , I don’t think we can generalize and I do not how we can be specific apart from tracking media (in terms of where they ve invested )
  2. AP has been known as man of acquisitions and he has categorically said he does not like the way lending has happened n can’t trust the books of many companies plus the culture and hence would like to grow organically . I think there is a hidden message and up to us to decode
  3. He understands the risks of concentration and slowly as he is identifying the opportunities, he is diversifying his lending book. Frankly, as I track hotel industry, I was surprised by his timing when he got into financing of few commercial hotel projects as he saw revival of industry and good times ahead , just when sector was in ignorance for last 8 years of underperformamce (that’s what AP has been )
  4. They have organisational experience as well as execution capability in real estate business and if some of accounts go bad, I think they will be able to take over execute those accounts
  5. After kind of cynical comments on certain posts regarding personal ground experience , I have stopped sharing this and hence , anyone wants to discard this info , you are happy to discard. Finance is one area where I feel it’s very difficult to dissect businesses and lots can be kept under the carpet and hence , in this specific area , I rely heavily on ground information. Now, based on whatever ground research I did , I got a positive feedback on Mr. Khushru Jijna ( the man who runs real restate lending was arloer CEO of suntek realty). The feedback which I got was he knows each and every land parcel of developers in India - which is clean and which is in litigation and does not take collaterals out of air . So, he knows his stuff.
  6. Last but not the least, What AP has done in last 30 years , I am giving some trust premium here

Now the negatives

  1. I was not very comfortable with very high exposure considering macro sector scenario and hence cut out my exposure a bit and I am allocated at 4% of portfolio and accumulating in current correction
  2. There has been lot of fudged lending in real estate consumer loans (I am aware being a customer ) and hence, I am very cautious on each and every company including PEL
  3. I am not comfortable with some of the builders they have lent to and will be asking them on these accounts in coming quarters
    Hope this helps

Note : knowingly m not highlting NPA nos etc as I think this is an industry where evergrening can go years by rotating money n managing the denominator . As AP himself says he finds difficult to do due diligence of many financial companies, then, I wonder how much we can do and hence I rely more on ground scuttlebutt .

(MD RH) #1055

These all points does not have any meanings still corporate governance issue persists in Piramal. What is your take on the flashnet scam by Piramal. Is not it a big redflag?Please help us to get answer below queries…

  1. Is it not true that as on 31-3-2014 the total assets of the company (including trade receivables and loans
    & advances) was only Rs 14.24 crore?
    2.Is it not true that as on 31-3-2014 the net worth of the company (assets minus liabilities) was only Rs 12.50 crore?
    3.Is it not true that Mr and Mrs Goyal, between them, held practically all the shares (50,020 shares) of the company?
    4.Is it, therefore, not true that the value of the 50,020 shares, at best, could be only Rs 12.50 crore as on 31-3-2014?
    5.Why did the Piramal company buy the shares of Flashnet for nearly Rs 50 crore — that is four times the value of the shares?
    6.The only “asset” of Flashnet appears to have been Mr Piyush Goyal, the consultant working for Flashnet. Without that “asset” what was the value of Flashnet when the Piramal company bought the shares and took over Flashnet?
    7.How was Flashnet with a net worth of Rs 12.50 crore as on 31-3-2014 valued at Rs 50 crore within a few months after 31-3-2014?
    8.Was Mr Piramal buying only the 50,020 shares of Flashnet or was he buying something more for which he paid Rs 50 crore?And what is that?

(narendra ) #1056

Ajay Piramal very insightful interview today , competition will reduce and NIMs going to improve .

(Kitam Ranka) #1057

Its always good to hear him talk real estate. He also states that the real-estate sector has bottomed out. We’d be silly not to consider and analyse this man’s words.

(Parag) #1058

We (I am taking the liberty to include many others) respect @phreakv6 opinion and the point of view you bring to the forum irrespective if you are invested or not invested.

On many forum threads, it is quite common to have people who are on the buying side of the transaction. It is not uncommon to have one’s opinion biased towards buying when one is on the verge of buying or already invested in the stock. We naturally look for confirming evidence if we get one, and sometimes we choose to ignore the unconfirming evidence. The worst thing in my humble opinion is not knowing the potential negative scenarios.

This forum enables one to understand a different point of view including a lot of negative scenarios which may happen. I think it is up to us as an investor to consider it or take it with a pinch of salt. We need counter view so please carry on having your point of view.

(Parag) #1059

A company expanding rapidly, mainly by acquiring more debt at a time when there is mayhem/distress in the market remind me of an old- story of Daweoo corporation. If you are old enough to remember, Daewoo corporation was a big South Korean Chalobol, having multibillion-dollar assets in the late 1990’s. The owner of the company was a Korean war survivor whose family rarely had enough to feed for others during his childhood days. He (Owner) not only survived but made Daewoo corporation as one of the biggest company not only in South Korea but globally.

I remember during one of the crises in the 1990’s, Daewoo started acquiring companies/assets by issuing more debt. He had a fantastic quote which caught my attention “If you shiver, you will feel cold”. This motivated him to acquire debt funded asset. And no so long after that, Daewoo faced financial difficulties, I suppose due to the Asian financial crisis. His biography-Every Street Is Paved With Gold: The Road to Real Success- is a wonderful read, for those who love biographies.

I see something similar happening with PEL (not in term of facing bankruptcy, to be clear). The overall debt market is under stress, and the real estate market, in particular, is undergoing sea changes. In that market, PEL is expanding at breakneck speed and that too as an NBFC with more debt. Of course, it may not end up like Daweoo, but there is an inherent risk in expanding in risk market.

On the other hand, this could be a game changer for the company. Real estate is a difficult market to operate it as it involves litigations, delay, fraud and many of the real estate developers are ‘Gundas’ having strong political connections. This means it is a relatively uncontested area, like banks, NBFC or shadow banking channel plays a part in it, but extreme cautions.

If PEL has build expertise in it, as they are clamming and demonstrating, it could be a niche they could exploit in years to come. Plus, they have guts, expertise, skills as well as the legal and financial power to take on builder or projects, which not many fancier would venture into. Rasesh Shah of Edelweiss has spoken some high-level number for real estate financing in one of his interviews. I think they are highly relevant here and will update once I find it out.

In my view PEL (Financial) demand is not a problem this is true for most of the NBFC. The differentiating factor is an execution, which PEL has a good track record, though even if not long or seasoned. If their execution is as they are claiming, I think PEL will be a force to reckon with in Financial services in the next few years.

(Value Seeker) #1060

Good points. The few years are passing by fast though for them to show up and execute. Will need to keep reviewing this story. What worries me though is the god like status people have given AP :slight_smile: as though he can do no wrong…at the end of the day he is human

Disc: No holdings, not interested at present

(Growth_without Debt) #1061

Real estate companies - example of Sunteck.

Getting hit by debt crisis -
Raising money at 9.25% interest rate (5th Oct 2018)



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Earlier was on 20th July, 2018 at 8.40%



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Within three month significant rise in interest rate.If real estate inventory does not improve sell velocity, rise in interest rate will definitely impact balance sheet of real estate companies in a big way.
Does Piramal’s investment in real estate could get impacted due to rising in NPA?

(gneop84) #1062

Based on what I read in this forum and interview bytes, it seems Pirmal has structured their bets that aid them in both scenarios. i.e

Scenario 1 : Interest rate increase, they earn more ;

Scenario 2 : risk of counter-party default due to burden of additional interest out-go. Incase of default, they would step in and complete the project.

I am not sure of other cities, but in Mumbai they have launched project in Thane which is supposed on Lodha’s land (not verified, speculation).

Again, I am not sure if there mutiple counterparty defaults would they be able to shore up so many resourse.

Disclosure : I am invested , but can’t make up my mind to invest more. Please feel free to counter my thoughts !

(deeps2884) #1063

Large amount of defaults are definitely a systematic risk. Having ability to take over projects would not help if there is large widespread defaults. Maybe up to a 5 to 10% of the book goes bad they would be able to step in but beyond that even for Piramal’s it would be difficult to take over and manage. It’s an important risk and we should be clearly monitoring it for widespread defaults.
Interest Rate increase is generally hedged as loans are linked to base rate which increases when rates increase in the market (Base Rate + Margin) but margins do come under pressure if competition increases.
With funds limited in markets (smaller NBFCs would have difficulty raising funds from the market and PSU banks are saddled with NPAs and have lost ability to fund) - what Mr.Ajay Pirmal was hinting at is Margins would increase due to lower competition.

(Parag) #1064

As per Kushru Jijina’s above interview shared by @kitamr - PEL has been disbursing Rs 5000 cr of a loan over the last few months. (19:40 time in the interview).

I am curious to understand how they are funding such a massive loan disbursal?.

Assume that PEL has raised 5000cr from equity raising last years( They raised 7000 cr, but assuming that they are allocating 5k towards financial services). Add 5-time debt of 25k cr. So, in essence, they can disburse around 30k cr of a loan (5k equity + 25k cr loan).

But they are disbursing much more than that if I go by Mr Jijina’s comments above?

Would appreciate if someone can shed some light on how PEL is souring such a massive disbursal?

(deeps2884) #1065

Hi Parag
Please go through the below link. I am not sure how you are getting a figure of Rs.5,000 Cr. equity in Lending. Though precise amount has not been shared in the reports as per ICRA the tangible networth is ~8,2000 Cr which can be taken as minimum equity in lending business. PEL presentation also talks about equity in range of 10,000 Cr. in financial services (lending + Alternative AUM) and another ~7,300 Cr. of equity in retail lending business ( if you subtract investment in Shriram Group) you be left with ~Rs.3,000 Cr. of equity in retail lending business


(manivannan.g) #1066

PEL’s Digwal plant expansion is facing public’s opposition. How does this gonna impact PEL ?

(Parag) #1067

Thank for your information, it is helpful.

My question was more on a generic level. In one of the presentations, I have seen PEL allocating Rs 5k to financial services and 2k cr to pharma business, hence my number above.

Even if we assume equity of Rs 10,000 cr in financial service and debt of equity of 5 (assume), PEL has access to Rs 60,000 cr of loans. In the above interview, Mr Jijina has said PEL is distributing Rs 5000 cr per month. At this rate, the equity will not last much. So I am wondering how PEL is sourcing so much funds to fuel huge loan growth ?