Moody's assigns Ba3 rating to Piramal Capital and Housing Finance, outlook Stable

The rating agency said that Piramal Finance is driven by its high capitalization and an increasingly diversified portfolio mix, offset by its relatively low profitability, risks from its legacy exposures and wholesale funding.

Capitalization is a key credit strength, the rating agency said.

“While we expect the 's capitalization to decline due to balance-sheet growth and further clean-up of its real estate exposures, the strong capital level provides adequate cushion against unexpected risks,” it said.

Since 2021, after the acquisition of Dewan Housing Finance Limited, the company has diversified its loan book into retail and small-ticket corporate and real estate sectors, which represent 79% of its consolidated assets under management (AUM) as of end of March 2024, up from 34% as of the end of March 2022.

The retail loans are further diversified across mortgages, loans against property, used car financing and unsecured consumer and business loans. Although delinquencies in the retail loans are low, the portfolio is yet to season because it has grown rapidly over the past few years, Moody’s said.

Legacy real estate exposures represent about 21% of the AUM. While the company has significantly reduced this portfolio over the past few years, the reduction has entailed sizable credit costs.

“We expect the company's twin strategy of increasing retail and mid-market exposures while reducing the legacy lumpy real estate exposures will help improve the granularization of the loan book and reduce the risk of volatility in its asset quality, a credit positive,” Moody’s said.

According to the rating agency, the company's core profitability, excluding the legacy real estate exposures, is moderate due to the investments related to the ramping up of its branch network and human resources over the past two years.

Its credit costs have also been elevated due to the running down of legacy real estate exposures and the one-time loan loss provisioning on the alternate investment fund investments due to regulatory guidance.

“While its increased operating leverage will help improve operating profitability, its net profitability will remain moderate in the next 1-2 years because of credit costs associated with further reduction of the legacy real estate exposures,” Moody’s said.

Like industry peers, the company relies fully on wholesale sources for its funding needs. The company maintains access to the domestic bond and bank loan market.

While its on-balance sheet liquidity is modest like other Indian peers, the company matches the maturities of its assets and liabilities, which helps manage liquidity.

Moody’s said that the ratings of the finance company could move up if it manages to meaningfully reduce its legacy real estate exposures and maintains stable, through-the-cycle, asset quality of retail loans and improves overall profitability with a return on average assets above 2.5%.

Moody’s also cautioned that the rating could move down if the company's asset quality or capitalization deteriorates, or its access to funding worsens. In addition, a reduction in regulatory capital below 17% could lead to a rating downgrade.