With all the bearishness around the NBFC and the liquidity situation surrounding the industry, we are closely monitoring the status of several NBFC’s. Amongst them is Piramal. Depending on which source you read at or talk to, you have Piramal, either an overexposed real estate NBFC lender in a liquidity crunch, selling investments to fund liquidity issues OR a savvy predator hungry for more deals in the market when there is blood on the streets. Either way, when the results come out tomorrow, it will be a good indicator of what the reality looks like.
With so many stories swirling around, it is really tough to separate out the truth from the rumor. All we can say is, given the sheer number of permutations and combinations of the stories out there, it is evident that Piramal is talking to investors. But for what and as what? A distressed seller or as a bloodhound on a trail. We will have to wait and see how this plays out.
Some of the links to articles around Piramal:
Piramal capital eyes $600M of buyouts in NBFC space (here)
Can Piramal enterprises weather the NBFC storm (here)
Softbank set to infuse capital into Piramal capital (here)
LIC, IFC come to the aid of Piramal’s financial services business (here)
Piramal’s INR 2500 Crore debt up for redemption in next 18 months (here)
Piramal sharply cuts short term debt as NBFC crisis lingers (here)
Piramal raises 1500 Crores from Stanchart through NCD’s (here)
Reliance Jio and Piramal might setup a joint venture for financial services lending (here)
Consumer finance focus can bring softbank to Piramal (here)
The pathetic performance of the IndiaReit V fund (here)
Piramal sells entire stake in Shriram Transport (here)
Piramal is in talks to sell stake in Shriram group of companies (here)
Update: Added a few more links to the Lodha issue
Piramal capital offloads 2,000 crore linked to Lodha (here)
Piramal to pare 1,000 crore of Lodha developers debt (here)
STFC announced their results last night. It has been a very tough quarter for the NBFC’s working through the liquidity crisis that has ravaged the sector. Considering the circumstances, I had braced myself for a blood bath from Shriram Transport this quarter. While the provisions and the NPA’s are sequentially up, they are only marginally so and could have been a lot more worse considering the circumstances.
Key metrics of ROA, ROE and provisioning continue to hold up pretty okay given the tough environment. Given the nature of the clientele that Shriram Transport caters go, which is the single owner trucking industry, it is not surprising to continue to see a large stage 3 asset book but very little seem to convert into actual write-offs.
What will be interesting to hear from the management will be the liability mismatches, liquidity and repayments during the conf call. Other than that, as an investor, I just have to sit and brace for another quarter of bad headlines and watch paint dry as the fundamentals continue to hold for STFC.
When STFC had released their annual results and the Q4 numbers, I had written the following post after looking at the provisions for the Shriram Equipment Finance division. Now, their annual report was released and as with most longs I have, I did read through the report over the weekend.
In 2015 compared to 2014, NIM on AUM remained very strong at 6.61% versus 6.68% prior year. Despite the additional INR 325 crores of provisions in 2015 in the Shriram’s equipment subsidiary, and the total provisions increasing by 28% to 1,612 crores from 1,213 Crores in 2014, the company reported net profits north of INR 1,000 crores. On the balance sheet, there is still INR ~1,800 Crores already provisioned waiting for assets to go bad and paid out.
Interesting was how little the subject of write off in the equipment business got a mention in the main annual report of STFC.
The total AUM is up to 62K Crores from 52K Crores. Diluted EPS is down to INR 45 from 59 in 2014. The company earned 1,022 Crores in 2015 compared to 1,357 in 2014. Rest of the things were boilerplate with the expected recovery in the economy and the commercial vehicle market expected to drive higher earnings but it does look like the long term story does look intact.
The one thing that caught my eye was note 22 in the annual report.
For the company to start losing money or book value to start going backwards close to 2,600 crores or close 4.5% of its book must go bad at the same time every year. Even after that, the company has sufficient reserves and a high CAR to take pain for a while before it would start bleeding bad. Assuming that the company has taken the bloodbath in the equipment finance arm, one can expect to see some improvement in the consolidated EPS but looks like recovery in the economy might be a while away and the company might continue to struggle on the NPA’s on the main transport finance business.
As we have iterated in the past, a good economic moat surrounds the business, with a management that is conservative and has demonstrated integrity in the past, though in a cyclical business. The long term story does seem to remain intact.
Shriram Transport Finance reported abysmal numbers in Q4 2015 with EPS down 74% compared to same quarter last year largely driven by the write off it had to take in one of its subsidiaries, Shriram Equipment Finance. Shriram Equipment Finance, established in 2009, lends to the construction industry for machinery equipments like cranes, forklifts, loaders etc. required to do the construction work. Over the years, the company had been reporting steady profits, book value growth and asset quality. Backed by the conservativeness of the accounting the management had followed in the past, the management pedigree and the high CAR ratios, there was little reason to worry before this quarter.
The company provisioned around INR 2300 Million up above 900% from last quarter. It basically provisioned 95% of all the net worth that it had garnered still its establishment in 2009. With this provisioning, the coverage ratio is still at 60%. While the company is hopeful that the construction business will pick up and they will recover the debts, it also means some more pain might be in order if the construction activity does not pick up.
This is a good lesson on how leverage can affect the results drastically both ways. While we have always emphasized that the finance business is only as good as the conservativeness of accounting and the pedigree of the management, it is an eye-opener on how quickly the game can change in the face of a bad quarter. While it is tough to absolve the management on why they did not see it coming, investors can breathe a little easy as Shriram Equipment Finance makes up a small portion of the total Shriram Transport Finance group. However, given the leverage, it managed to write off three quarters of the profit of the parent company. It is a hard reminder on how easy it is to lull oneself into believing that good returns are in order in the lending business.