Piramal Enterprises Limited (PEL) share price rose nearly 5% in early trade on Friday after the company said it is confident of recovering the investments made by its group entities in Alternative Investment Funds (AIFs) that have lending exposure to PEL group debtors.
The PEL stock witnessed a recovery after a sharp fall in the previous session. Investor sentiments improved after PEL issued a statement clarifying its position on the investments in AIFs following the Reserve Bank of India’s (RBI) guidelines issued earlier this week.
As per the latest shareholding pattern, promoter Ajay Piramal holds a 35.63% stake in the company as of December 2022 quarter.
In a regulatory filing on Thursday, PEL said the total value of investments made by Piramal Enterprises and Piramal Capital & Housing Finance in AIF units stood at ₹3,817 crore as of November 30, 2022.
Out of this, ₹653 crore is invested in AIF schemes that do not have any exposure to PEL group debtors.
₹3,164 crore invested in AIFs having exposure to PEL debtors
Of the remaining ₹3,164 crore, downstream investments worth ₹1,737 crore have been made by AIFs into 3 entities that are or were debtor companies of Piramal Enterprises in the last 12 months.
“Taking a conservative view of the regulatory intent, Piramal Enterprises intends to adjust the entire ₹3,164 crore in our financial statements through capital funds or provisions,” the company statement said.
As per Emkay Global Financial Services, PEL will provide for the full ₹3,160 crore invested in AIFs having exposure to its debtors. This provisioning is expected to materially impact the company’s FY2024 profit and loss statement.
The brokerage has estimated FY2024 losses at around ₹2,200 crore due to this exceptional item.
RBI bars banks, NBFCs from investing in AIFs with exposure to their debtors
Earlier this week, RBI prohibited banks and NBFCs from investing in any AIF scheme that has exposure to companies which have taken loans from the lenders in the past 12 months.
This directive is aimed at curbing the evergreening of loans by financial entities.
Banks and NBFCs will have to liquidate such AIF investments within 30 days, as per the central bank’s order.
“We remain confident of full recovery of the underlying downstream investments in the impacted AIF units. Piramal Enterprises has received ₹905 crore so far as repayment of interest and principal on these units,” PEL stated.
The company said its recovery process for AIF investments remains unchanged despite the RBI rules.
Strong capital position; Economic value of AIF exposure unchanged
As per Emkay Global, despite the ₹3,160 crore hit, PEL’s capital adequacy ratio is estimated to be around 28% in H1FY24.
The brokerage believes PEL has adequate capital buffers to support future business growth through internal accruals and divestment of its non-core assets.
It noted that the economic value of PEL’s exposure to AIF investments remains intact and the company should receive recovery flows through sell-down of the underlying assets.
The brokerage said PEL 2.0 continues to evolve through scaling up of retail lending and building of wholesale lending business 2.0. Hence, negative as well as positive surprises owing to legacy issues may continue to happen.
However, it believes the current valuation of the PEL stock factors in such uncertainties to a large extent.
‘Buy’ rating retained on stock; target price cut to ₹1,080 per share
Emkay Global reiterated its ‘Buy’ rating on Piramal Enterprises shares while cutting its target price from ₹1,180 to ₹1,080 per share.
The new target factors in the exceptional provisioning cost and values PEL’s core lending business at 0.8x Price/Book value multiple based on September 2025 earnings estimate.
The global brokerage highlighted that PEL stock offers an attractive upside potential considering the high growth estimates for its financial services business.
At 10:25 am on Friday, PEL shares were trading 4.31% higher at ₹920.10 on the BSE as the stock recovered some of the sharp losses suffered in the previous session. Investors would closely watch the recovery process of AIF investments to gauge further upside potential.