Ajay Piramal, chairman of Piramal Group, pauses during an interview in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Demerger Of Financial Services Business Some Time Away, Piramal Says

Piramal Enterprises Ltd.’s planned demerger of the financial services business is some time away as the group continues to focus on improving its return ratios.

Carving out financial services into a separate entity is expected to help unlock value. But the company, Chairman Ajay Piramal told analysts in a meet, is not looking at it in the near-term.

Piramal Enterprises, which started as a pharmaceuticals company, forayed into the real estate and construction financing after selling part of its domestic formulations business to Abbott in 2010. It offers everything from private equity funding to buy land, mezzanine lending for pre-construction phase, construction finance, lease rental discounting (for commercial projects) and housing loans. The business now contributes about half of the company’s total revenue. That’s why the company plans to demerge it.

Here are some takeaways from the analyst meet:

Demerger At Opportune Time

Piramal Enterprises reiterated its intent to separate the diverse businesses but only at an opportune time, likely in the medium term. It highlighted certain benefits (capital movement, tax related) of the conglomerate structure. “We continue to believe that timing is largely a function of when all businesses achieve critical scale and reasonable return ratios,” according to a Citi Research note.

Mumbai contributes 37 percent of the total loan book, followed by Delhi-National Capital Region (19 percent) and Bengaluru (17 percent).

Corporate Lending: Big Opportunity

The company’s corporate finance business, which was started two years back, has already grown to a loan book size of over Rs 10,000 crore (more than 20 percent of total loans) and is expected to further gain share.

The management believes there is a huge scope in corporate lending , given that most public sector banks and some private sector banks are not very active in this space. So, while bulk of its loan book (nearly 75 percent) is wholesale real estate lending, the management expects the share of non-real estate corporate lending to expand meaningfully over the next three years. In this segment, while Piramal first started off with infrastructure deals, it now deals in renewables, logistics and other sectors too.

Construction Finance: Key Growth Driver

The management, however, expects the construction finance business (nearly 45 percent of the loan book) to remain the key growth driver of the financing business while the share of mezzanine financing would continue to reduce. The share of housing finance is expected to grow significantly from the current 3 percent by FY20, led by plans of branch expansion and entry into Tier II/III cities.

Piramal Enterprises expects to become a top-10 player in housing loans by September 2019. The company targets 24 branches by 2020. This should aid in bringing down the risk profile of the company.

Capital Allocation

Despite a good track record in mergers and acquisitions in the healthcare business, Piramal intends to grow its financial services business organically, given the difficulty in assessing quality of book of a potential target company and issues around people, culture and process integration.

Focus On RoE, Not Growth

Overall, management’s intention is to generate a return on equity of at least 20 percent in all its businesses over the long term. Profitability and asset quality, not growth, are their key objectives. It does not have any growth targets for its executives. The lender expects a dividend payout ratio of 30-35 percent over the medium-to-long term as the businesses grow. Currently, nearly Rs 20,000 crore is invested in the Financial Services business, including investment in the Shriram Group.

These takeaways have been compiled from reports from Citi Research, Motilal Oswal and Nirmal Bang Retail Research.