Piramal Enterprises Ltd
NSE:PEL
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Piramal Enterprises Ltd
Earnings Call Analysis
Q2-2025 Analysis
Piramal Enterprises Ltd
In the second quarter of FY '25, Piramal Enterprises Limited showcased a notable transition towards a growth-oriented structure. Consolidated net profit reached INR 163 crores, with its growth business contributing INR 130 crores. This shift was driven by a 45% year-on-year increase in the growth AUM (Assets Under Management), which now constitutes a staggering 84% of the total AUM—an increase from just 34% in March 2022. The total AUM improved 12% year-on-year to INR 74,692 crores, emphasizing a successful strategic pivot.
Piramal continues its focus on diminishing its legacy assets, aiming to reduce this segment significantly. As of this quarter, legacy AUM stands at INR 12,000 crores, down from 72% since March 2022. The company is on track to deplete this legacy book to below 10% of total AUM by March 2025. They plan to reduce it by another INR 4,500 to INR 5,000 crores in the latter half of the fiscal year through various recovery mechanisms.
The company's net interest income experienced a robust growth of 29% year-on-year, reaching INR 940 crores. Operating profit also saw a commendable uptick of 23% year-on-year, culminating in INR 397 crores. The overall Net Interest Margin (NIM) also improved to 5.1%, up from 4.9%. This profitability enhancement reflects a strategic shift towards higher-margin businesses amid challenges in the legacy portfolio.
In terms of credit performance, the Gross Non-Performing Assets (GNPA) and Net Non-Performing Assets (NNPA) ratios were stable at 3.1% and 1.5%, respectively. Credit costs for the growth business were reported at 1.6%, up from 0.9% in the previous year, indicating a need for cautious monitoring. However, the company is optimistic about offsetting these credit challenges through recoveries and increased profitability from its growth-focused initiatives.
The management remains committed to a long-term Return on Assets (ROA) target of above 3% by FY '28. This guiding metric reflects confidence in the ability to navigate current market challenges. The recent advancements in technology, such as the launch of a WhatsApp service bot and upgrades to their mobile app, have further positioned Piramal to enhance customer engagement and operational efficiency.
Overall, Piramal's transition towards a growth-oriented portfolio while strategically handling legacy assets showcases resilience amid a challenging economic backdrop. Investors can look forward to solid growth metrics and a commitment towards financial health as the company approaches its year-end targets.
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Ladies and gentlemen, good day, and welcome to Piramal Enterprises Limited Q2 FY '25 Earnings Conference Call.
[Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ravi Singh, Head of Investor Relations, Strategy and Sustainability from Piramal Enterprises Limited. Thank you, and over to you, sir.
Thanks, Michelle, and hello, everyone. Welcome to our earnings conference call for Q2 FY '25. Our results material has been uploaded on our website, and you may like to refer to them during our discussion. The discussion today may include some forward-looking statements based on management's expectations that are subject to uncertainty and changes and must be viewed in conjunction with the risks that our businesses face.
On the call today, we have with us our Chairman, Mr. Ajay Piramal; Mr. Anand Piramal, Director, Piramal Enterprises; Mr. Rupen Jhaveri, Group President, Piramal Enterprises; Mr. Jairam Sridharan, CEO of Retail Lending and MD of PCHFL; Mr. Yesh Nadkarni, CEO of Wholesale Lending; and Mr. Upma Goel, CFO, Piramal Enterprises.
With that, I would like to hand over the call to Mr. Piramal for his remarks on the Q2 performance. Thank you, and over to you, sir.
Good evening, and thank you all for joining us today. First of all, I would like to take this opportunity to wish everyone a very happy Diwali and a prosperous New Year.
Our financial performance in the second quarter of FY '25 tracked the objectives we have been speaking about as part of our transformation in the last few years. In the second quarter, our growth business continued to scale up steadily. Risk was well controlled and operating leverage further improved. At the same time, we continue with the focus rundown of our discontinued legacy business.
Let me summarize the key trends in this quarter. Driven by the rising share of the faster-growing growth business, our total AUM growth has been recovering well. In this quarter, the total AUM was up 12% year-on-year to INR 74,692 crores. The growth AUM was up 45% year-on-year and now accounts for 84% of our total AUM. This is up from 34% of the total AUM is in March 2022. Within the growth business, retail AUM grew 8% quarter-on-quarter and 42% year-on-year and now formed 73% of the total AUM. Wholesale 2.0 AUM rose by 12% quarter-on-quarter and 75% year-on-year to INR 7,889 crores. Our legacy discontinued AUM now stands at INR 12,000 crores, which is 16% of the total AUM. We reiterate bringing this book down to less than 10% of the total AUM by March 2025.
We have a fair line of sight on the expected reduction in the second half of FY '25 from loan, SRs and AIF assets through a combination of organic cash flows, refinancing, asset sales and accelerated repayment. In this quarter, we have reported a consolidated net profit of INR 163 crores. Within this, the growth business accounted for a net profit of INR 130 crores. Increasing share of the growth business, which has a higher NIM has driven the overall NIM improving to 5.1% versus 4.9% in the first quarter of FY '25. In the second quarter of FY '25, our operating profit to AUM for the growth business was stable at 2.8%. OpEx to AUM was down 10 basis points quarter-on-quarter and 80 basis points year-on-year to 4.5%. The further reduction in this ratio would drive future expansion of operating profit in the growth business.
Our gross credit cost was at 1.8% versus 1.6% in Q1 of this year. With normalizing recoveries from the DHFL book, the reported net credit cost was 1.6% versus 1.3% in the first quarter of FY '25. Thus, the PBT to AUM for the growth business stands at 1.2% in this quarter. On the merger between PEL and PCHFL, we have filed the scheme with the stock exchanges. The next steps include approvals from the exchanges, SEBI and RBI followed by the NCLT process. We continue to diversify our borrowing base with securitization now at 14% of total borrowings, up from 4% in the same quarter of FY '24.
We currently have 27 DA and 2 co-lending live programs with Axis Bank and the Central Bank of India, who now are our co-lending partner. Following our $100 million social impact loan and our debut $300 million sustainability bond in July 2024, we successfully completed a tap issuance in October 2024, raising an additional 150 million from international capital markets. The tap issuance was oversubscribed 3.5x, reflecting strong investor confidence.
I'll now hand over to Jairam, Yesh and Upma to discuss our business and financial performance.
Thank you so much, Chairman, sir. I'm going to start with a discussion on the retail lending business, and it will be followed by Yesh speaking about the wholesale side of our business.
In the second quarter FY '25, our retail AUM grew by 42% year-on-year and is now at an AUM of INR 54,737 crores. Our disbursement stood at a little over INR 8,000 crores, reflecting 29% year-on-year increase. Disbursement yields remained stable at 14.1%. In our flagship mortgage business, which comprises housing loans in affordable housing and loan against property, the business grew by 37% year-on-year to an AUM of INR 37,005 crores, and now it accounts for 68% of the retail AUM. Our mortgage book has exhibited robust asset quality in the last 2 years. Currently, the 90-day past due delinquency ratio is 0.5% in our housing business and 0.3% in loan against properties.
Our retail products also demonstrated robust AUM growth, with used car loan up 145% year-on-year, salaried personal loans up 148% year-on-year and business loans up 55% year-on-year. However, our disbursements to the digital loans business remains constrained, and we were at INR 562 crores of disbursements in the quarter versus INR 836 crores in the first quarter and an average of about INR 1,300 crore run rate that we had through FY '24. From peak, this business has reduced by more than 2/3 on a quarterly disbursement run rate basis.
While we have been controlling digital loan origination, the use of digital channels in our overall business has been quite a transformative change over the last year. We've shared a new slide in this presentation, Slide #10, where we have highlighted some metrics on the adoption of our mobile app and of our use of WhatsApp in customer engagement, customer service and collections. Our mobile app received a significant upgrade, introducing features such as last-mile PL disbursal, advanced EMI payments and third-party products, like health insurance. Monthly active users, or MAU on our Piramal Finance apps, have more than doubled in the last 1 year.
Today, 53% of all the service requests that we get in the company are fulfilled digitally. We also launched a WhatsApp service bot in April that supports 8 languages and user conversational AI, enhancing the user experience beyond traditional menu-driven interaction. This service has seen a sharp uptake in MAU and have concluded service request and is playing a big part in overdue collection.
During the quarter, we also received formal approval from RBI to launch our prepaid payment instrument, Piramal Pay. This happened in October 2024. We aim to provide seamless secure platforms of prepaid transactions, enhancing accessibility of payments for individuals and businesses in our customer segment.
Moving on to asset quality. The overall retail asset quality remains healthy. Slippage ratio and 30-plus and 90-plus days past due delinquencies are all running flat compared to the second quarter of FY '24, though slightly up from the first quarter of FY '25. We believe our diversified multiproduct portfolio provides the stability even as various products undergo their own cycle. Slide #15 and 16 in our presentation outlined the 90-day past due delinquency chart and the vintage risk trend across various product segments. You will see here that digital loans have remained elevated from a risk standpoint. These represent 6% of retail AUM.
Within all the unsecured areas, the area where you see the most steady increase in risk is business loans, which in our classification also includes the small microfinance population. The 90-day delinquency trend here, as you will see, have been trending up. The portfolio is also seasoning. So that has got something to do with this apart from what's going on in the macro environment as well. Within those unsecured business loans and all loans in general, the sub INR 50,000 category is where we are seeing the steepest risk deterioration. In our retail business, our total exposure to less than INR 50,000 loan is less than INR 750 crores. The rest of the products continue to witness benign delinquency trends, but we remain vigilant.
Moving on to customer franchise and cross-sell. If you look at Slide #11, our franchise grew by 27% year-on-year to $4.2 million. We've been able to capture a significant portion of our customer originations for future cross-sell opportunities. In our unsecured business, we have slowly increased cross-sell penetration to a point where 17% of our unsecured disbursement today happens through cross-sell. We expect to see continued improvement on those metrics in the quarters to come.
On our network side, we have a network today of 508 full-service branches, apart from 236 microfinance branches. Through these, we serve 608 districts in 26 states. As we have mentioned in the past, our aim is to expand our reach to about 600 full-service branches in the medium term. However, the pace of our branch opening has moderated to about 10 to 15 branches a quarter, down from 20 to 30 branches a quarter, which was our pace in prior years. Our focus now has shifted to raising the productivity of our existing network, even as we slowly move towards the 600 mark that we have guided before.
Slide #12 talks about these very productivity metrics and how they have been improving. As you can see here, we have seen steady gains in productivity amongst our branches and all our employee base as our broad vintage mix continues to improve. So on a disbursement per branch basis, AUM per branch basis or disbursement per employee basis, you will see productivity metrics steadily improving.
In addition to scaling our operations and managing risk, we are equally focused on enhancing profitability. If you look at Slide #17, over the last multiple quarters, we have consistently reduced our OpEx to AUM ratio in the retail business. This now stands at 4.7% in the second quarter of FY '25, down from 4.9% in the previous quarter and 6.5% in the last year -- in fourth quarter of FY '23. We aim to continue the strength of steady reduction in this metric in line with our medium-term guidance of 3.5% to 4% per annum. With retail AUM now at almost INR 55,000 crores overall, we expect to continue to scale our multiproduct franchise and for this to continue to grow at a healthy pace, even as we keep portfolio quality and some of the emerging asset quality issues at key areas of focus. As we do that, we will continue to improve operating leverage to will drive profitability expansion.
With that, I hand over the call to Yesh to walk us through the wholesale lending business and our progress there.
Thanks, Jairam, and good afternoon to everyone. On the wholesale side, during this quarter, we disbursed INR 1,857 crores in our new wholesale business, that is Wholesale 2.0. This was a Q-o-Q increase of 17%. We also saw faster-than-expected repayments in this portfolio, due to which AUM grew 12% Q-o-Q to INR 7,889 crores. Prepayments occurred across both CMML and real estate lending businesses, however, were more pronounced in the CMML segment. This only indicates better-than-expected performance of the book, which continues to benefit from economic tailwinds across corporate and real estate sectors.
Since our inception of the new wholesale lending business, a 2.0 version of wholesale, we have not experienced any delinquency in the portfolio. The portfolio has an average ticket size of INR 75 crores and an effective interest rate of 14.3%, featuring a well-balanced asset duration and diversification. Encouraged by this performance and the market tailwinds, we will continue to build in a calibrated manner, a granular, high-quality and profitable Wholesale 2.0 business. Our legacy discontinued wholesale AUM reduced by 49% year-on-year to INR 12,066 crores. This portfolio is now down 72% since March 2022 and stands at about 16% of total AUM on the firm.
In the first half of FY '25, we have achieved a reduction of INR 2,506 crore in this book. We continue to work on betting down the portfolio through a combination of organic cash flows, the refinancings, asset sales and accelerated repayments. Given the amount of work in progress towards this, we feel confident to meet our target of bringing the legacy AUM to less than 10% of total AUM by March 2025.
With this, I will hand over to Upma for her to cover finance part of her.
Thank you, Yesh. Moving to our financial performance. In Q2 FY '25, we reported a consolidated net profit of INR 153 crores, led by growth business reporting a profit after tax of INR 130 crores. The growth business reported net interest income growth of 29% year-on-year to INR 940 crores led by AUM expansion. OpEx to AUM for the group business declined by 80 basis points year-on-year to 45%, supporting a 23% year-on-year increase in operating profit to INR 397 crores. Net credit cost after POCI and other recoveries was at 1.6% in quarter 2 of FY '25 versus 0.9% in quarter 2 of last year. The growth business thus reported a profit before tax of INR 173 crores. This represents a PBT ROE of 1.2% in quarter 2 of FY '25. The tax rate at PCHFL was linked due to assessed carryforward losses, while at the Piramal Enterprises Limited, we continue to accrue the applicable tax rate.
Our GNPA and NNPA ratios were 3.1% and 1.5%, respectively. Our net worth stood at INR 26,930 crores with a capital adequacy at 23.3% on consolidated balance sheet basis. Our cost of borrowing stood at 9.1%. We're actively diversifying our borrowing mix, including securitization and international costs. Our fixed to floating rate debt mix has improved to 54% fixed and 46% floating and is expected to enhance further in the coming quarters.
With these remarks, I would now like to open the floor for questions. Thank you.
[Operator Instructions] The first question is from the line of Abhijit Tibrewal from Motilal Oswal.
So the first thing is on the legacy AUM. You plan to bring it down by another INR 4,500 crores to INR 5,000 crores in the second half of this fiscal year. Just trying to understand, this quarter, we have reported that we brought down the legacy AUM without any P&L impact. So how are we thinking about the additional INR 5,000 crores in the second half? Will it kind of coincide with the recoveries that you've talked about in the past, whether from [ AIF ] or some of the other monetization tools that you have spoken about?
Yes. I think that's a fair description of what it is likely to be. We don't think on an incremental basis. We will see any further hits beyond on a net basis, the recoveries that we look at.
You might see, Abhijit, credit cost line items come up, but correspondingly, some of the AIF recoveries and some of the other items that we have pointed to in the past will also come in. So we are reiterating both the points that we have made in the past. One, that the reduction through the course of the year will be INR 7,000 crores or a little bit more than that, the reduction in the legacy book; and two, that reduction would be on an net worth neutral manner. And both of those, we continue to believe to be true.
Okay. The other thing is, I mean, we've reported total credit cost of INR 317 crores in this quarter. Just trying to understand what is the split between our growth in legacy business in this INR 317 crores.
Yes. So 1 second. We will just show it to you. So growth credit cost is INR 223 crores. You will see it on Page 26 in the presentation. The growth is INR 223 crores on a gross basis and on the legacy, which is on a net basis, you will see the balance.
But it does obviously include the INR 77 crores of AIF gain. If we add back, then....
Yes, AIF gain sort of shows in extraordinary line, not on the credit cost line.
So that is separate. That you have shown separately, the AIF gains. So gross credit costs were INR 317 crores. And when we include the AIF gains, that INR 317 crores will come down...
Yes...
Got it. And then, I mean, the last question that I had was for Jairam. Jairam, I mean, in the past, you have articulated that this seemingly looks like a difficult year in terms of asset quality, whether you want to call it normalization, whether we talk about the broad-based stress that we are seeing in the environment. Yesterday, also NBFC talked about basically broad-based stress across retail and SME segments. So 2 things I want to understand while you already explained, I mean, business loan also includes MFI for us, and that is where maybe it is also inching up and also basically portfolio seasoning is what you spoke about.
But I mean, how are you thinking about this environment in terms of asset quality? And the related question is, we've been growing upwards of 40% in retail. Now you would have seen RBI on multiple occasions, right, I mean, highlighting its discomfort, right, without meaning anyone with NBFCs who are growing at a very high rate, right? So I mean, will we at some point in time after this legacy AUM has run down, right, think about moderating our retail loan growth?
Yes. No, a really good question. So there are two or three aspects to your question. Let me start with the last one first, which is a growth outlook. See, on an overall basis, our AUM as a company has grown 12%. So fairly modest as growth rates go. As you're rightly saying, this has been driven by kind of a tale of 2 cities, one part which is growing fast, one part of degrowing fast. And that is -- that what has resulted in a modest overall growth. As the de-growth runs its course and as we finish the recalibration of our portfolio, we do expect to see more modest growth rates across the pool. If you look at our 3-year growth rate that we have guided, we have guided around 25%, 26% CAGR from FY '24 levels that implies that by the time the wholesale rundown happened, we would have moderated the retail growth rate as well.
Needless to say, when we are a INR 55,000 crores, INR 60,000 crores book, you can't -- you can no longer grow at 40-plus percent, like it's just physically, it just gets harder and harder. So it's not something that we intend to do too much. So we will see as the year go, but that's our -- our medium-term guidance hasn't really changed in that regard.
Now on your question on risk and how we are reading the risk environment. See, the risk environment is not exactly as we had expected it to the first 2 years of -- first 2 quarters of this year have been challenging. And our numbers have been modestly impacted by this delta in the environment. But it is something that we are very much prepared for. And we have been making underwriting cuts in our business for more than kind of a year, almost 1.5 years.
And we have shown a specific slide this time, Slide 16 in our presentation, which shows the impact of all the underwriting cuts that we have been making over the last 1.5 years, 2 years. And what that shows is that with continued tightening of our underwriting criteria, our new origination quality has quite drastically improved in this period. As we have mentioned in the past, when cycles start on the credit risk side, it is too late to start doing underwriting changes. So at that point, your investments should focus on collections. The time for underwriting interventions was before, not now. And that's exactly our belief, that people who haven't made underwriting changes in the last year, 1.5 years, probably a bit late for them to start doing it now.
Now the other element of your question is kind of where do we see the credit risk cycle going from here. We have no strong guidance to offer in this matter. We do think that the retail business has had an extraordinarily benign risk environment for almost 10 years. and it's a small blip in the microfinance business during COVID, really, nothing really bad has happened in the sector for a long, long time. And if that cycle is starting now, and it is now 2 quarters old, our guess would be that it will probably continue for a little bit more. So it's -- we would hesitate to call a top here of the credit risk cycle. It still seems early days.
So this is useful, Jairam. Just a follow-up on that. Given how environment is shaping up, and I'm glad you acknowledge that if it started in the last 2 quarters, it might continue for some more time rather than topping out in this quarter. So I mean, then will it also, I mean, over the course of the next few quarters mean that retail credit costs could inch up?
Yes, it could. I think we have seen that in this quarter, and if you look at growth business and they've got a page on the -- page number, what is that 8, where are we on that, 6, 7? Okay. So look at Page 6. Page 6, that shows what has happened in our growth business in terms of credit cost. And let's just look at the growth -- the chart on the bottom middle, let's just look at the growth numbers, the net numbers are a bit misleading.
But at the gross level, we were at credit cost of 1.6% last quarter. We are up at 1.8% this quarter, roughly the same as what we were at the same time last year. Now so we've seen a 20 bps delta from Q1 going to Q2. My estimation would be that you would see a little bit more of an increase in this metric for the growth business in Q2 and Q3 as well. We're not guiding any specific numbers here. We don't know, honestly. But it's hard to imagine that this is the peak.
We'll take the next question from the line of Avinash Singh from Emkay Global.
Yes. So 2 questions. First one is on that AIF recovery. So if I recall, I mean, when this kind of a onetime big provision hit was taken due to the regulatory changes, it was kind of indicated that the typical run rate will be kind of a closer to INR 200 crores of ballpark number a quarter, leading to kind of INR 800 crore a year. But I mean, the last quarter, it has come lower. This quarter, it is further lower. And again, in a broader context, if I understand, the real estate sector continues to do well. I mean, of course, might have moderated, but if you look for a longer time, it is still doing perfectly fine. So what's the sort of a thing is going on there? And what kind of further recovery expectation we can have with this? That's one.
And second, for Jairam. I mean, again, continue on the same thing. So about a year back or so, of course, you had your kind of -- you had your eyes set on to just find targets in the area of like the microfinance, gold and all. Today, I mean, microfinance unsecured PL, even gold has its own set of challenges. So I mean, that kind of an inorganic opportunity seems to be off the table. And on top of that, I mean, your growth also because, as you also said that, okay, you do not believe that this is going to sort of -- the credit thing is going to top, so it will -- the pain will last for some more quarters.
In that context, your growth will also get affected on the retail side due to all this for a few more quarters. Do you still stand by kind of your -- the long-term guidance like FY '27, '28 guidance that you have given? Because I mean, this is going to affect it for the next few quarters. So your organic growth is going to get impacted. Inorganic currently -- I mean is likely off the table. So how do you see sort of a growth panning out, which segment will drive growth? Because, I mean, over the last few days or so, the numbers coming out from your NPS, one or the other, almost every segment seems to have some kind of trouble. There is no right now, I would say that segment does not see some kind of inch up in credit cost. These are my 2 questions.
See, I will address the AIF question first. The AIF constitutes, let's say, 4 assets mainly, right, which is the focus of our recovery. We have been working on a resolution of these assets for the last 2 quarters. A lot of work has gone into it, and this is which we continue to believe that we will be able to see the results of all the efforts that have gone into this in terms of the actual recoveries happening in the next 2 quarters.
To that effect, we stick to our guidance that we had given in the March quarter of making about INR 1,200 crores or so of gain on P&L. And we do feel that the progress has been -- significant progress has been made towards this objective. And if it changes along the way next quarter, then clearly we'll report back. But we do think that we are on track to achieving this performance.
The only thing I will highlight here is that -- the market obviously has been quite supportive. The physical market performance has been quite supportive of our recoveries. And so is the interest that we are seeing from different capital pools, particularly in the funds market, where we have seen historically, a lot of takeoffs in our portfolio have happened through the funds taking us out and that continues. It's not changed at all. But at the same time, we appreciate the fact that these are complex recoveries. They have many moving parts, and it can't just be a straight line in terms of quarter-on-quarter performance. So that kind of explains the delay in terms of where we are at on the quarterly run rate. But we do feel positive and confident about being on track with our targets.
So you are still suggesting, I mean, again with the uncertainty, of course, implied uncertainty, but you are still kind of hopeful of H2 contributing nearly INR 800 crores to INR 1,000 crores of recovery in this area.
Yes, absolutely we do. And our hope comes from the fact that there's a lot of work that's gone on these assets.
See many of these deals are large deals and a lot of background work has been completed in the first half of the year tends to be a bit slow from a deal-making perspective. But all the groundwork has been laid out by Yesh and the team, and we feel good about reiterating what we had said in the beginning of the year. So nothing much has changed there. Yes, on a full year -- when the year is done, you will see a full year average, not different from what you mentioned. But every single quarter, it's -- you might not see the same number, but we feel pretty good about where we are.
The second part of your question on kind of the opportunities in retail. There, again, same answer is what we have said. We reiterate all the guidance that we have offered in the past. The growth final number, the trajectory, nothing much has changed there. See, we are a multiproduct business. At every point in time, we expect some part of the -- some portfolio or the other, some business or the other to be going through some challenges, either on the risk front or on the growth front, et cetera. But that's that the benefit of having a multiproduct platform. As we have seen in these last 2 quarters, while we have slowed down, let us say, digital lending growth, our overall growth has not come down because we've been able to accelerate on affordable housing this quarter, LAP in the previous quarter, et cetera.
So there's always something. There is some part of the business where there is an opportunity. So we don't feel like anything needs to change on that front. We will continue to find these opportunities that is more than enough in the product market to keep stuff going. And as far as -- no, that's it. As you increase in scale, the absolute number, the percentage growth will fall, of course, that we're not going to continue to have 40% to 45% year-on-year growth that we have had over the last 2 to 3 years, that's unreasonable to expect, and that will certainly moderate out. As I mentioned to a previous caller, our medium-term guidance is more of a 25%, 26% growth over a 4-year, 5-year period, of which the first year also has been a little over 40%. So we feel pretty confident on the growth side.
You spoke also a little bit about inorganic opportunities kind of drying up and certain businesses, gold and microfinance, et cetra, being out of flavor, et cetera, that is absolutely true. The market are going to be bearish on some of these businesses for a little while. But we are perpetual owners of businesses. We don't get into businesses because we want to time markets or we want to make -- we are looking for an investment opportunity. If we get into any of these businesses, it will be for perpetual ownership, which essentially means that down cycles are an opportunity, not a threat for us. So we will -- if we like a certain business, the fact that, that business becomes cheaper in the market is a good thing for us, and we wouldn't turn away from it if we like the underlying long-term economics.
Very clear. If I maybe allowed one more. Any progress on some of the investment that is there for exit, particularly the stake in insurance venture of [ Shriram ] group? Because I guess there was an indicated time line kind of targeted time line for the same. So is there any progress on kind of a...
Not much has changed. There is some development internally on that. We are not talking publicly about it. Let me just say that there is development. Operationally, the deal is a lot more feasible now than it was, let's say, a couple of quarters ago. When we want to do the deal, who we want to do the deal, whether we are already in conversations or not, it would not be in our economic interest to be very open about that at this point. Let me just say that our sort of what we have guided in the past still stays.
The next question is from the line of Shreya Shivani from CLSA.
Apologies if my question on the legacy book is a little preliminary, but I wanted to understand that if there is a movement...
I'm sorry, sir, the participant has left the queue. We'll take the next question, which is from the line of Parag Thakkar from Fort Capital.
Yes. Can you hear me?
Yes.
Jairam, just wanted to -- that our growth business has reported an ROA of 130 bps, 1.3% on a PBT basis, right?
Correct.
Okay. So growth business, we include retail of INR 55,000 crores and around INR 7,500 crores of Wholesale 2.0. And there is no tax, right, because -- there is no tax here, right?
Our effective tax rate of the company at a consol level is about 14%. There is no tax for the PCHFL level, but there is taxation of the PEL level. So you will see our effective tax rate at 14-odd percent.
Okay. So basically, what is our target for the ROA in next, say, 18 to 24 months from now, when you are saying that credit costs might increase and OpEx might decrease by 1%, right?
So if you see our long-term goals that we have stated, we've talked about an ROA of a little over 3% by FY '28. That is our -- that has been our medium term target that we have articulated a little over 1.5 years or maybe a little over a year ago. Nothing much has changed there. So 3% ROA continues to be our goal.
So while calculating, we can calculate that current growth book, which is INR 64,000 crores, can grow at 25% and can achieve ROA of 3% by FY '28.
Yes.
That is a fair assumption in spite of your view on credit cost?
So credit cost is a cyclical view. Like you cannot think about cycles when you're doing medium-term target alignment. I mean you have to think about through the cycle averages, like [Foreign Language]
Correct, correct, correct. No, no. What I'm trying to say is that your OpEx lever -- still, you are at 4.6%, right, and you are saying that you can go to 3.5%. So you have OpEx lever a target of around 1% in the ROA, right?
Right. We have OpEx level. We need to increase fees from where we are right now. So you should expect to see 60, 70 basis points coming from the fee side. Hopefully, even if we keep our yields the same in the medium term, hopefully, we'll be able to get a ratings upgrade. So there's a little bit of margin expansion that you should expect to see as well. And all of these will net off against any credit cost increase that happens. [ Legacy ] book, which is a good high-margin business, will continue to expand as well and will replace a negative margin Wholesale 2 business, and that will [ change ].
By the way, I hope you noticed, and we have put up a slide specifically to talk about this, this time, that -- I think it's on Page #5, that because of this mix shift between growth and legacy, even in this quarter, at a consol level, we saw NIM expansion. Contrary to what you're seeing in most NBFCs, we saw NIM expansion in this quarter because of the shift from the Wholesale 1, the negative margin business has been reducing and has been replaced by wholesale 2 and retail. Just that mix shift is driving margin expansion.
Correct. I really appreciate your answer. And just one thing. If I heard correctly, what you have always said is that this INR 12,000 crores legacy book when you're running down -- running it down because of the recoveries in AIF and all those things, it will be offset, not on a quarterly basis, but at least on an annual basis. So on an annual basis, this INR 12,000 crore rundown will not cause any losses, right?
Yes. It will be net worth neutral or better.
We'll take the next question from Ms. Shreya Shivani from CLSA.
So I wanted to understand when you say that your rundown in your legacy book, like just now you're saying will be net worth neutral or no impact on P&L, et cetera. If I simply look at your -- the legacy book movement of the different stages, et cetera, or through the lands and receivables, the Stage 1 has declined Q-o-Q this quarter, some INR 863 crores or so, your Stage 3 has increased. So how do I read this? Do I read this as some loans in the Stage 1 were refinanced or some cash flow came through, et cetera, and that is why there's a reduction there. But there was some slippage into Stage 3 and possibly that could get written off at some point. Is that way of reading it correct? And then how does it...
Shreya, mechanically, what you're saying is absolutely correct. All that stuff will happen. But that has been happening every quarter and will continue to happen every quarter. So business is usual collection, stage movements, et cetera, will keep happening in the legacy book, even as we do onetime transactions to actually keep reducing the book size in the times to come. This quarter, we've seen the book come down by a little over INR 900 crores. Some of it is through repayments and regular action of the customer and some of it is through special activity that the team has taken on. Both of those we should expect to see in every quarter.
Correct. Correct. And the Stage 3 movements that -- I mean it's actually the Stage 3 for quite some time was at around the INR 740 to INR 800 crores level in the legacy book. This one has inched up. So that bit can possibly at some point pass through in the form of write-offs or something like that later. That option is still there, right?
That point is absolutely correct. But do remember that we have 66% provision made in Stage 3 against that book. So it's not naked exposure.
Absolutely correct. And last quarter, you had mentioned that your lands and receivables have written-off something. Is there -- has more actions been taken on that side because that's also come off in this quarter?
See, we continue to actually work on those assets. We have strategic MoUs, which are being explored with some development partners. There is no real progress to report that we can talk of here in terms of monetization potential of this site. As we progress from here, we very much do expect to see some development, and we'll keep you updated as we go.
Shreya, our guidance in general and before legacy book has been there are a handful of assets here. It's not productive to have an asset-to-asset conversation on exactly what the resolution path on each of these is. We believe that at an overall level, we've been able to bring that book down from INR 43,000 crores to INR 12,000 crores over the course of the last 2.5 years.
We've guided that this INR 12,000 will become INR 7,000 crores in the next 2 quarters. Exactly where that reduction will come from, et cetera, we also don't know with that precision. It depends on 10 different deals that are in the pipeline and which one gets resolved first versus not. So it's not super productive to do a deal-by-deal conversation on that one. However, on a macro level the overall book will come down, and it will come down in a way that is network neutral or better. That's our continued guidance on the matter.
Got it. And my last question is on the yield for the overall book, right? So that sequentially, at least the calculated yield product looks higher. Now the share of the noninterest-paying bit in your legacy book is as a percentage of mix is higher this time. So clearly, there is some yield expansion that has come through from the retail side. Is it purely because of the -- some change in mix over there? Or have you -- have we raised any lending base in any segment or any action that has been taken on that side?
Shreya, we have answered that specific question of why yields have expanded. And we have shown the last 5, 6 quarter trend, and it should be self-evident...
The next question is from Sameer Bhise Visa from JM Financial.
Just wanted to ask on write-offs, what was the write-off amount for the quarter?
Once again, Sameer.
What was the write-off amount for the quarter?
[Foreign Language] 110.
Okay. And I presume it is entirely from the legacy book?
Yes, yes, of course.
Okay. Yes. And secondly, just on this fee bit, there's an element called as others, which is -- looks kind of lumpy. So how does one read it on a run rate basis ongoing?
[Foreign Language]
If I'm looking at Slide 26...
Slide 26...
Slide 25 of [ PPT ].
25. One second. Okay, okay. Got it. So which part do you think is lumpy?
Fee and commission of INR 102 crores, dividend of INR 32 crores and others is INR 123 crores.
That INR 123 crores is mostly DA income, man.
No, no, no. Sorry, sorry. There is one property sale that happened during the course of the quarter, which forms a small -- how much is coming from there? INR 40-odd crores is coming from a onetime sale of a property.
We'll take the next question from Nischint Chawathe From Kotak Institutional Equities.
I was just looking at the growth assets and Stage 3 loans out here. I was just curious, there was a sequential rise this quarter, but more importantly, what is the coverage that we are comfortable on Stage 3 loans? I know on the legacy assets, we've gone to like 65%, but...
Yes. So see, in the growth business, our -- we use ECL models to come up with Stage 3 cover and that depends on a product-to-product basis. So for example, if it's a housing business -- if it's a housing business case, then your LGD expectation might be 25%. But if it's a personal loan case, your LGD expectation might be 70%, right? So depending on that, depending on the mix of what comes in, you will see this ratio change. It's different for each product. At one extreme is a very safe product like housing, where the cover will be somewhere in the 20%, 25% kind of range. And the other extreme will be unsecured products, where it will be in the 70%, 75% kind of range. So this is equal to LGD basically of the product, which is the way ECL models work.
Yes. But the fact is that you've not really seen a business cycle, right, for a very effective kind of data-driven ECL model to be...
No, no. But we have all the industry's data. We don't need to see a business cycle ourselves. We can use all the industry's data and it's all available quite readily, which is what we have done is that we have done a thorough analysis of the last 25 years of credit experience of the industry on the bureau. And that's what we have used to come up with PD, LGD model, which for any player that's starting business, you're always going to -- and has IND AS, you have to have models that's the IND AS requirement. You cannot do subjectively. You have to have ECL model, which means you need to have PD estimates and you need to have LGD and EAD, which we have chosen to do using a bunch of industry data. Of course, as our business is maturing, now we are 4 years old, we have 4 years' worth of data. So we keep wading our internal data a little bit more in the sample every year as the years go on. And over time, hopefully, at some point of time, we'll become all internal data. But right now, we are heavily waded by industry data.
Got it. And sorry, I joined the call late, but I mean, have you called out specific reasons for the sequential increase in Stage 3 loans?
So if you look at our risk trajectory, and we have shown on Page 15, 1-5, you will see the risk performance of all the different products in retail. And you can see here how businesses like business loans, et cetera, and a little bit in used cars, you can see that trajectory increase. And so that's the kind of higher risk environment that we are seeing. And that's what flowing through to Stage 3 in a growth business right now.
And these probably will need a higher coverage sooner than later, right? I mean you probably have a 180 or 360-day fully write-off policy or something of that sort.
No, no. Actually, in unsecured lending businesses, like business loans, we -- when the account reaches 90 days, we make a 70% provision. When the account reaches 120 days, we make 100% provision.
The next question is from the line of Vivek Ramakrishnan from DSP Mutual Fund.
Jairam, you had called out deterioration about a year ago in the meet and so a good call that. If I go back to Slide 16, we see a dramatic improvement in 30 DPD for the later originated loans. So is that part of the -- and we're not seeing concomitant decrease in yield on your loans. So is it part of the learning curve and this is a new normal for Piramal, where your credit standards will be tighter. It is just early stages of modeling, which is reflected in that. And linked to that, in terms of write-offs and so on, if I leave out LAP and housing loans, I think most of your loans will be 2 to 3 years' tenure. So if you've already seen a couple of quarters and if you take it back a couple of years, then like you said, the pain will be there for maybe another 2, 3 quarters before the new book kind of -- even the macro environment is deteriorating, the new book dominates the mix, right?
That is a fantastic question, and I'm glad you noticed that. I think this is -- those are really, really good points. Your point is absolutely right. Our new origination quality has been dramatically different than where we were before. And we have been able to do that without yield reduction by just getting a little bit tighter. Of course, our approval rates have suffered. Our approval rates are fairly low now. In unsecured renting, our approval rate in the 15% to 17% range, which is meaningfully lower than where there are some players in the market are. So obviously, it's not been free, so it comes because of OpEx. But at least, we have been able to protect the yield, and we've been able to protect risk.
Now the newer origination, today, if I look at all my unsecured lending businesses, these new -- those older originations, when I had those challenging times, they are about 12% of the AUM today, right? And as that 12% keeps reducing and that goes to single digits, et cetera, all the benefits of the chart that you saw on Page 16, all that will start showing.
The next question is from the line of [ Preet Nagar Seth ] Wealth Finvisor.
I think most of my questions have already been answered. The only thing I would add is that if it's possible, could we limit the kind of time it takes for the team to share all the updates. It's kind of taken 30-odd minutes to kind of mostly say what's already there in the slide. So it's just a request. I mean the earnings season is busy. So if you can save some time, it would allow more questions to come in.
We hear you.
Ladies and gentlemen, we will take that as the last question for today. I would now like to hand the conference over to Mr. Ravi Singh for closing comments. Over to you, sir.
If there are no further questions, have a good day. Thank you.
Thank you very much, sir. Ladies and gentlemen, on behalf of Piramal Enterprises Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.