Can Ajay Piramal Build His Financial Conglomerate One Distressed Asset At A Time?

After acquiring DHFL, the Piramal Group may be looking to bid for Reliance Capital. Is this part of a bigger plan?

<div class="paragraphs"><p>Piramal Group Chairman Ajay Piramal. (Photo: Company)</p></div>
Piramal Group Chairman Ajay Piramal. (Photo: Company)

It added home loans to its balance sheet through an acquisition of distressed mortgage lender Dewan Housing Finance Corp. Ltd. Now, the Piramal Group is looking to add a general insurance business to the mix through the acquisition of Reliance Capital Ltd., which is currently under insolvency.

PEL Finhold Pvt. is leading a "Piramal Consortium", interested in buying all of Reliance Capital's businesses, as per a list of prospective bidders available on Reliance Capital's website.

An official bid is yet to be submitted. The key attraction in the Reliance Capital portfolio is the general insurance business, said a person familiar with the matter, who spoke on condition of anonymity. This, as Reliance Capital's lending operations are too small to be material and the Piramal Group already has an expanded presence in life insurance via DHFL's 50% stake in Pramerica Life Insurance Ltd.

Besides, Reliance General Insurance Co. is the most profitable business under the Reliance Capital umbrella.

The Anil Ambani-owned general insurance company's premiums in the first two months of this fiscal stood at Rs 1,603 crore, up 20% year-on-year, according to data from the General Insurance Council. Reliance General Insurance reported a market share of 4.4% as of May, the fourth highest among private general insurers.

The insolvency process is a great opportunity for someone like the Piramal Group to acquire a good business at distressed valuations, the person quoted above said.

While declining to answer queries specific to the bid for Reliance Capital, Jairam Sridharan, managing director of Piramal Finance, told BQ Prime that the group will look to tap organic and inorganic options.

"In terms of acquisitions, tapping organic and inorganic growth opportunities to create long-term value for stakeholders is a part of the Piramal Group’s DNA," Sridharan said, in response to queries emailed to the company.

The Distressed Asset Play

The bid, according to the person quoted above, is also part of a broader plan to create a full-fledged financial services platform, with a variety of businesses under it.

To achieve its ambitions, the Piramal Group sees merit in using the inorganic route, since building out a financial business organically takes years. That's not to say that it will seize every opportunity which shows up in the market, because it is also mindful of the risk involved, the person quoted above said.

Picking up distressed firms is also a better use of Piramal Group's capital, this person said.

Piramal Enterprises' financial services business under Piramal Capital and Housing Finance Ltd. reported a capital adequacy ratio of 22% as of March, down from 36% a year ago, owing to the DHFL acquisition.

Eventually, Piramal Enterprises will act as a holding company for the financial services businesses since the group has already decided to demerge its pharma business under Piramal Pharma Ltd.

It is unclear how quickly or how well Piramal's strategy will play out.

An analyst at a ratings agency, who spoke on the condition of anonymity, said that the DHFL acquisition is still too young to yield any tangible results. Presently, the integration of DHFL's established housing finance model is not fully concluded at the ground level. While the purchase increased Piramal's retail lending portfolio by five times, to over Rs 21,000 crore, the wholesale book will continue to bog Piramal Group down for some more time.

In the March quarter, Piramal Enterprises told analysts that it had transferred DHFL wholesale loans worth around Rs 9,500 crore into a separate book called "purchased or originated credit impaired". After the transfer, this pool of loans has been valued at Rs 3,500 crore, a 63% discount on the book value. This resulted in additional provisioning of Rs 822 crore and interest reversal of Rs 215 crore.

Any recoveries from this book, which exceeds the 63% discount, will be directly added to the profit and loss account.

Nirmal Gangwal, founder and managing partner, Brescon Advisors, believes that Piramal's strategy is more about picking up value buys rather than just building a financial services platform.

"Reliance's general insurance business is strong and it offers Piramal an entry into segments it is not present in. It is also being offered under an insolvency proceeding, so this can work out to be a great value buy for Piramal," Gangwal said. "For bidders like Piramal, businesses like these offer excellent future growth opportunities."

The Five-Year Plan

The need to pursue distressed inorganic opportunities may also be spurred by Piramal Group's aggressive growth plans. On May 26, Ajay Piramal, chairman of Piramal Enterprises, detailed the group's longer term plans at an analyst meet.

"With the DHFL acquisition and integration now complete, we are now embarking on Phase-III of our transformation journey. And we’ve put in place the appropriate levers for superior performance in the future," Piramal said.

By FY27, the group is looking at:

  • Growing its retail lending business to two-thirds of the loan book.

  • Achieving 40-50% compounded annual growth rate in retail disbursements.

  • Doubling assets under management from the current level of Rs 65,185 crore.

  • Optimising capital utilisation while raising the net debt-to-equity ratio to 3.5-4.5%.

In its bid to grow the lending business, Piramal Group is converting its 300 branches into multi-product outlets offering home loans, micro, small and medium enterprise loans, loan against property, used car and education loans, among others, Sridharan told BQ Prime.

"We have built a technology-led retail lending platform and are getting into partnerships and equity investments in leading fintech businesses. These are strong players in the fintech space who know how to acquire customers, but don’t have the balance sheet to fund the customers," Sridharan said.

Will all of this eventually lead to a bank license bid from the Piramal Group? Sridharan does not answer this question directly.

"For our economy to grow, we need more banks in the system that can lend to mid-market companies or companies below the threshold credit rating... While NBFCs are meeting the demand from MSMEs, we are seeing that many non-bank institutions are reaching a saturation point because of their size," he said.