For the past 3-4 quarters PEL financial services business was doing good, investors believed the worse is over and management also said we are out of the woods then suddenly in Q4 FY22 they bombed it with the below press release -
And remember these are still past cockroaches they aren’t growing their Wholesale book from at least the past 2-3 years (in fact de-growing it) and this makes you wonder how many cockroaches are still there? because the wholesale book is still large enough (Rs 41000 cr) & of long duration.
it does raise a serious question of why management didn’t let the markets know before? and why it wasn’t provisioned earlier itself in a graded manner?
This uncertainly I think going to keep prices depressed for a while again until markets see good stable 5-6 quarterly results.
Asking management what these new provisions are all about? here is what they said :
The detailed answer is from 58.00 mins onwards in link below- (Transcript is not out yet)
https://www.piramal.com/wp-content/uploads/2022/05/PIR0620220526141086.mp3
Basically, they are saying most of the provisions came from 3 renewable assets & Mytran Energy was the biggest of the three, management initially thought these renewable assets are good & can be sold at a good value, so recovery going to be good but recovery came out to be lower than expectation that’s why they have to provide the additional provisions this Quarter.
It’s frustrating as an investor because they were saying the same asset almost a year ago was good, not an NPA and they were very optimistic saying “As of today, more than 15 top renewable companies have signed the NDAs for looking at this company”.
Mythran rating downgrade happened in 2019 itself, the earning call (28 Oct 2020) snippet below again shows they mislead the investors, or maybe they were just too optimistic (mislead themselves).
Long answer short - “it all boils down to how many cockroaches are still there” and As an Investor how would you price this risk? or should we just stay away?
I generally stay away from leveraged financial institutions that surprise investors with Provisions in off-cycle (None of the NBFC reported loss this Q4 except PCHFL ) out of nowhere. That’s the reason Bajaj finance trades at 5-10x Book and PCHFL trades <1x Book.
At today’s valuation early last year I was a buyer thinking it’s cheap, Wholesale lending cycle is over and now most of the stress is behind us, and DHFL acquisition if goes through that will just pull in the 5 years of growth (15% cagr) into 1 year.
Now today at the same valuation now rather than buying I have taken the decision to sell half of my holding as it just raises the question all over again? most of the past stress is behind us?
If you believe no more cockroaches left, it’s the cheapest stock to buy today, Given PPL (pharma) business (which is an A+ business) going to trade easily around Rs 25 - 30 K cr given the order pipelines and we are getting PCHL (finance) business (which is a very ordinary business) around Rs 14 - 9 K cr valuation, which is less than book value that is around 18k Cr.
They have provisioned 4% of AUM so far and everything depends on is it adequate, less, or more.
If you ask me is it trading cheap? I have no answer I don’t know, 2 days back before Q4 results I would have said it’s a good risk-reward trade.
In financial services, if a company has figured out how to bring Gini out of the bottle like Bajaj finance (or AU SFB which is an Enigma) it gets valued on a PE basis, and if the company is struggling to clean up its past & has not figured it out yet, it valued based on Price to Book (based on the sector they have lent to).
Piramal Finance I think as a standalone business is probably a very ordinary business and they haven’t yet figured it out, they hired more than 500 IT engineers in Bangalore, built an Analytics team, and going gung-ho on Retail finance now but will they be able to do Bajaj Finance? I don’t know given even HDB financials struggling to bring the Gini out of the bottle.
PCHFL may be trading cheap but it's now more like betting on startups as retail finance is their new focus, I think from their attitude they are done with doing wholesale finance and I don’t think they bring anything new to the table in order to compete with already established great many players in the retail finance space except DHFL does gives them good & large distribution network across their 2 & 3 cities.
DHFL acquisition has been a savior for their financial services business & it does give some stability as now out of 64K Cr of book, 24 K is retail.
As they mentioned in this conf call some recoveries were made from 63% of the DHFL book which was marked down to Rs 1 & DHFL NPAs taken on the book of a total of about Rs 700 Cr (recovered). Which does give some Cushion to value eroding wholesale book.
Will I be a buyer today given the 11% drop? No, I think now it’s a great risk-reward trade at Rs 1200 if it is at all going to trade there.
Let me know your views in the comment below-
BLOGS ARE NOT A RECOMMENDATION SERVICE – These are my personal views about the Business Quality, Management Quality, Business Execution & Performance.
Thanks,
Dhruva Pandey
Email : dhruva.pandey@outlook.com
Twitter : https://twitter.com/Dhruvapandey
Great perspective - loved reading it :)
I think that 1550 will be a good point to start allocation. PEL mannagement has done a pretty good deal with dhfl. How? just take a broad overview, when everyone is considering a lot of books of dhfl as grusome or = rs 1. it's actually way more than that.. just check sucheta dalal's moon something video related to pel, you'll get my point. And now for their financial arm they are trying to bid for a part of reliance capital as news suggest. So, they are actually trying to look for undervalued assets. And they are doing that at a lower interest rate..
for the pharma, just a normal 15% growth business which is sticky in nature. We should not forget they have more than 35+ molecules in their phase 3 pipeline.. and phase 3 ha 70% success ratio. even if we take 30% success ratio.. it's worth it..
also, in market uncertainty/bear phase all assets are falling and people also suffer. So, we should not panic and wait patiently.