Despite challenging times for the real estate sector, the asset quality of the company has improved, says Chairman of Piramal Group Ajay Piramal.
Since Real Estate Regulatory Authority (RERA) has come into play, there is distinction among developers. “Better developers will do better and the marginal ones will be under stress. So, we have consciously decided that we would only work with the better developers,” Piramal observed.
“We will bring in Rs 8,000-10,000 crore of equity in this financial year to further strengthen it,” Piramal stated, adding that no specific proposal has come to the board. In an interview with CNBC-TV18, Piramal shared his views on the company’s Q1 earnings as well as the road ahead.
Excerpts from the interview: Let me start with the quarter as compared to the previous quarter, which is the fourth quarter. Especially on the financial services side of things, loan book has been absolutely flat. Is that a conscious decision?
If you compare the Q1 of last year to this year, we have grown 21 percent, both the topline and the bottomline. In the Q4 of last year and the Q1 of this year, in the financial services, the loan book has remained flat and it is a conscious decision.
We have to understand that today in the financial sector, there is a fair amount of concern. We feel that this is a time to tread cautiously. Our focus has been to ensure that we have high quality assets. The liabilities that we have are long term. I think this is a temporary phase and in the next few months this should improve.
On the asset quality front, things have remained stable.
If you look at our numbers, the asset quality has improved. We have got gross non-performing assets (NPAs) of 0.9 percent and our provisioning is at 1.89 percent which is about 216 percent of the gross NPA.
Importantly, our Stage 2 assets have actually come down and our provisioning there, which was 83 percent till the last quarter, has now gone up to 135 percent. So, overall the asset quality has been good. We have taken steps to ensure that we are prudent in the way we are provisioning.
How is it happening, considering the challenging times we are seeing in the real estate space and you are one of the groups which has a major exposure to that part of the market, especially in markets like Delhi and Mumbai. How has the asset quality not deteriorated but improved?
We have been saying this since Real Estate Regulatory Authority (RERA) has come into play that there is going to be a distinction among developers. There will be consolidation and better developers will do better and the marginal ones will be under stress. So, we have decided that we would only work with the better developers.
Second thing is, it shows the way we do our security, the way we build our assets. There were Stage 2 assets which we could convert and actually find solutions. Two specific assets in the last quarter, we have provided more for them, we could reverse that. So, these are some of the reasons.
I think it is just the understanding of the market, the right developers and the right security structure which make the difference.
You see no reason for that change? Are things getting worse on the ground because sales are not happening?
There is challenge, to say that there is no challenge would be incorrect. However if you look at the better developers, their sales are much better than that of the average developer, that is what we have to see.
In fact we did a deep analysis of our whole portfolio and all the projects. And we found that in a vast majority of our projects, there is enough cash flow from the project itself that they can fund any construction activity.
We have found a few projects where, under extreme stress, if there are no sales and financing gets stuck, they would need around Rs 1500-2500 crore over the next 9 months. That is not a big amount. Therefore, I feel that at least for projects that we are in, they would be able to survive the stress and continue.
If these projects and builders would come back to you for additional top-up funding, would you be open to that?
Whenever somebody comes with a proposal, we look at the viability of the project, the security and the track-record of the developer and accordingly we would give.
I am asking that in the context of loan book being flat on a quarter-on-quarter basis.
It is not that we have not lent out because, remember, we get repayments. I think we have lent out Rs 3,600 crore more this quarter but we get that much repayment. So, my own view is that after a few months the economy has to revive, the real estate has to revive, it is just too important and there will be consolidation of the NBFC sector and opportunities for growth will be there. So, we are being cautious today just to make ourselves ready for the future.
Why do you say it has to revive? I understand the point that it is an important part of the economy but does it need a trigger, a push, is that coming?
If you look at what happened in the budget, the finance minister has announced specific things to improve the liquidity to the NBFCs. She did announce that Rs 1.3 lakh crore would be given to the banks to lend for pooled assets and there will be a 10 percent first loss guarantee. She has also said that they can even take another Rs 1 lakh crore to lend and public sector banks have been recapitalised to the extent of Rs 70,000 crore. We are awaiting the guidelines and every day I read a statement from all the people who are in positions of responsibility that they feel that the NBFC sector is important and the real estate is important. So, I just have that hope.
We had, in the last 48 hours or so, a private sector bank chief saying that it is a free market, so a couple of them actually may not survive. So even that kind of talk is there as well, right?
I am surprised at that statement. Even if you may be strong, I may be strong but it is not good for the system if one or two fail, because then the contagion effect sets up.
If you go back on history, why did this whole financial crisis start off? It was IL&FS which defaulted in the end of September. To say that if one or two fail, it is fine, I do not think it is very responsible.
What would be the asset quality guidance for the full year? Would you be around where you are now in the first quarter?
It really depends on what is the environment around. I can only say that as far as we are concerned we are also bringing in more equity. We will bring in Rs 8,000-10,000 crore of equity in this financial year to further strengthen it. So, there will be a growth in the book size and I am also optimistic. I cannot imagine that the economy will remain like this because there is a lot of gloom, you have to change it and I think the government is also conscious about it.
Do you think the government should do more?
At least let them actually give the guidelines out on whatever they have announced. I saw the Reserve Bank of India governor's statement also urging the banks to lend, so let us see how it happens.
This Rs 8,000-10,000 crore fresh equity this year, where is that coming from, could you provide us with some details?
I will leave it at that… that we will bring equity into this business to further strengthen it.
CNBC-TV18 had reported sometime back that you are talking to players like Softbank and GIC for an investment.
We had also said at the same time that the proposals have not been brought to the board.
Could you tell us if talks are underway?
I would like to just state two things, that we will bring in equity of Rs 8000-10000 crore and no specific proposal has come to the board.
So, I should assume that the talks are still underway and they have not reached a stage where they can be put before the board?
Please don't assume anything more than what I have said.
Is Softbank a contender? Are they interested?
I do not want to comment anything more than what I have already said.
Will this money that you are talking about come in for the existing business or will it come for a new business?
If you look at our portfolio, about 50 percent of our portfolio is in residential real estate. We have 11 percent of it in retail, balance is in corporate finance group as we call it. We have been saying this for a while that we are going to increase the proportion of our retail. So, when the equity comes in, it will just strengthen our equity. Today also our debt-equity ratio is amongst the lowest amongst financial services companies, it is under 4, it is about 3.8. I see that in the future there is going to be a lot of opportunity, I do believe that the India story is intact. We may have taken a step backward but it is going to come back and for that financial services is perhaps the most important engine. For financial services, what you need really is equity and money is the only raw material.
So, this will come into Piramal Enterprises or will it come into a specific business?
It will come into the lending business.
Wholesale or retail?
Wholesale and retail are part of the same entity, so Piramal Enterprises, Capital and Housing etc.
So, the equity will be used for both the wholesale and the retail?
By when will this close?
As I said, in this financial year we expect to bring in this equity.
The other thing is the stake you still have in Shriram City Union and Shriram Capital, where are you right now on that?
We have said this publically and we have said this now for more than a year, that we believe that this is not a strategic investment for us, it is a financial investment and at the right time we would exit from the Shriram Group.
Is it the right time?
Every day is a new day, there are so many changes happening every day, so I do not know which is the right time.
Will this also happen in this financial year?
We are looking at that.
There is a talk about you acquiring distressed assets. There is a big housing finance company which is in trouble and it has got a large size retail book, does something like that fit in the strategy of expanding the retail side of things?
We will look at assets and we will look at portfolios of assets and again depending on the quality of assets, on whether we want to take people along with it or it is just the asset, it also depends on at what valuations. So, if it makes sense we will do it.
People do come up today in this environment that there are assets, we will see but it is too early. So, yes we are talking to people.
Are you talking actively to people?