Ajay Piramal, chairman, Piramal Group, keeps saying that only fittest non-banking finance companies (NBFCs) will survive in the current challenging environment. The 64-year old is spot-on as the IL&FS debacle has already started the process of separating the wheat from the chaff. A large housing finance company Dewan Housing Finance Corporation is now on the verge of bankruptcy. In fact, in Pirmal's own words, the current mood of gloom will continue as liquidity is hard to come by for some (players). Fortunately, it has been a good going for Piramal Group.
The latest institution to support Piramal is the country's largest bank State Bank of India (SBI). In fact, Mumbai-headquartered bank joins the list of marquee names such as behemoth Life Insurance Corporation (LIC) and the Canadian pension fund CDPQ to lend money to Piramal's $2 billion Group.
According to sources, the SBI has already sanctioned a rupee term loan of Rs 2,000 crore to Piramal Capital and Housing Finance Ltd, which is the Group's financial services arm. This wholly-owned subsidiary of the Piramal Enterprises has a large balance sheet of over Rs 52,000 crore. It also has a subsidiary that has the wholesale real business, a pain-point for most real estate finance companies.
The entry of institutions such as SBI with long-term money brings comfort to the Group. In the post IL&FS scenario, short-term liquidity window, especially through commercial paper (CP), has become tight. There are no rollovers of CPs. Mutual funds and insurance companies are cautious in lending to NBFCs. The largest bank already has an exposure of Rs 5,000 crore to Piramal Capital. The total loan exposure of the financial services arm is close to Rs 30,000 crore including debentures. Apart from SBI, other lending banks are Union Bank of India, IndusInd Bank and Bank of Baroda.
A few months ago, Piramal had managed to bring in LIC on board with a credit line of Rs 1,500 crore. LIC money came at an interest rate of 9.5 per cent, which is almost equal to what one pays to banks. In addition, the International Finance Corporation (IFC) has also provided funds to the subsidiary.
The Piramal's financial services arm reported a total income of Rs 5,571 crore with profits of Rs 1,442 crore in 2018-19. The group is also quick to reduce its exposure to wholesale real estate business from a high of 80 per cent to around 60 per cent. The retail finance is about 13 per cent while the balance comprises renewable and others. Going forward, the company has a plan to scale up the retail loan by covering self-employed and targeting small towns and cities. The wholesale group will continue to be a focus area, but bigger focus will be on selective projects with better risk and reward opportunities. The company is also looking to originate loans with banks.
Large funding institutions are comfortable backing Piramal. As an entrepreneur, Piramal has demonstrated his entrepreneurial abilities by turning around a small textile business into a pharma giant through a series of merger and acquisitions. In fact, Piramal was also quite successful in selling off the business to the US-based Abbott Labs for a whopping $3.8 billion. Piramal is also well networked. He sits on the board of Tata Sons, the holding company for Tatas. He had joined the board just before the ouster of Cyrus Mistry from the holding company. His son Anand Piramal recently got married to industrialist Mukesh Ambani's daughter Isha Ambani.
The current phase for Piramal is certainly challenging as this is probably the first cycle of highs and lows for his new businesses. The signs of stress can be seen from his decision to exit investments in Shriram Group. He has already exited from Shriram Transport, while plans are underway to sell stakes in Shriram Capital, the holding company and Shriram City Union, an NBFC in the consumer finance area. Piramal has also announced that he will be stepping down from the chairmanship of Shriram Capital.
The holding company Piramal Enterprises is facing rough weather in the market. The company's share price has almost halved over the past one year. The company with consolidated revenues of Rs 13,528 crore and profits of Rs 1,470 crore, commands a valuation of Rs 35,762 crore. Last month, a Canadian pension fund CDPQ decided to invest Rs 1,750 crore through a preferential offer. "This fresh equity infusion from CDPQ, especially in the current market scenario is a validation of company's robust business model and long-term growth trajectory," said Piramal while announcing the deal.