Shares of Piramal Enterprises, a leading diversified non-banking financial company, took a sharp hit in today’s trading session, dropping by 8.10% to close at ₹905.40 apiece.
The steep decline in share price came on the heels of the company’s Q1 FY25 results, released post-market hours on Tuesday, which revealed a significant 64% drop in net profit for the June quarter. The net profit for the quarter fell to ₹181 crore, a stark contrast to the same period last year, primarily due to a high base effect from a one-off item that had boosted the previous year’s results.
Investors reacted swiftly to the news, with the sharp decline in share price reflecting concerns over the company’s profitability. The results highlighted that while Piramal Enterprises has been able to grow its core operations, challenges remain that have weighed heavily on its overall financial performance.
The company’s core net interest income saw an 18% increase, rising to ₹807 crore, supported by a 10% growth in total assets under management (AUM), which now stands at ₹70,576 crore. This growth in AUM was largely driven by the retail segment, which has now surpassed ₹50,000 crore, accounting for 72% of the total AUM.
Despite these positive figures, the company’s net interest margin (NIM) contracted to 6.7% from 7.3% in the same period last year, signaling some pressure on the profitability front. The June quarter also saw disbursements being impacted by regulatory changes related to fair practices, which the company acknowledged as a challenge.
However, Piramal Enterprises remains confident in its ability to achieve its FY25 target of 15% AUM growth, setting its sights on reaching ₹80,000 crore by the end of the fiscal year.
Operating expenses as a percentage of AUM showed improvement, decreasing by 104 basis points year-on-year to 4.6%. This reduction in operating expenses is a positive sign of the company’s efforts to manage costs more effectively.
Pre-provision operating profit (PPOP) increased by 48% year-on-year to ₹375 crore, indicating strong operational efficiency despite the challenges. However, other income saw a decline of 21%, falling to ₹167 crore compared to the same period last year, which may have added to the concerns over the overall profitability of the company.
The market reaction to these results was further exacerbated by downgrades from major brokerage firms. Global brokerage CLSA downgraded Piramal Enterprises to ‘Underperform’ and reduced its target price to ₹860 per share. CLSA cited concerns over the company’s negative credit costs, driven by lower provisions on Stage 1 and Stage 3 assets.
The brokerage firm also pointed out that the company’s operating profit was supported by one-off gains, masking underlying weaknesses in the business. Furthermore, CLSA expressed caution regarding certain segments of the retail book, where a deteriorating trend in the 90+ days past due (DPD) segment was noted. This trend, according to CLSA, could put additional pressure on both growth and credit costs, with the management indicating near-term pressure on the cost of funds.
Jefferies also maintained an ‘Underperform‘ rating on Piramal Enterprises, setting a lower target price of ₹805 per share. Jefferies highlighted that the company’s net profit for the June quarter did not meet their expectations, and raised concerns about the sustainability of the company’s profitability.
The brokerage noted that while retail loans are growing at a healthy pace, the legacy wholesale AUM is expected to shrink further, which could slow down the recovery in earnings. The firm also pointed out that Piramal Enterprises had utilized ₹2.6 billion of overlay provisions in Q1, which helped to boost profits temporarily, but this may not be a sustainable strategy in the long term.
The mixed results from Piramal Enterprises have left investors and analysts with concerns about the company’s future performance. While the growth in AUM and core net interest income are positive signs, the significant drop in net profit and the challenges highlighted by brokerage firms suggest that the company may face headwinds in the coming quarters.
How Piramal Enterprises navigates these challenges, particularly in managing its cost of funds and addressing issues within its retail book, will be key to its performance moving forward. Investors will be closely watching the company’s progress as it works towards achieving its growth targets and improving its profitability.
