Piramal Enterprises — the legacy bonfire is nearly out, now prove the engine

The Pulse

Piramal Enterprises is the Ajay Piramal group’s lending arm, and for the past three years it has been one long act of surgery: amputating a toxic legacy real-estate loan book while growing a clean retail franchise underneath it. That surgery is nearly complete. The legacy book has shrunk from ₹43,000 crore to under ₹7,000 crore (heading to ~₹3,000 crore), the “growth” book (retail plus a new, disciplined wholesale book) now makes up 93% of assets, and — the key inflection — by the latest quarter the legacy drag had essentially burned off, so growth-business profit finally flowed straight to the bottom line. The catch is what that leaves: consolidated return on equity is still a paltry ~1.6%, the company is over-capitalised, and the stock trades below book value (~0.94x) because the market is waiting for proof that the engine underneath earns its keep. FY26 — with a guided profit of ₹1,300-1,500 crore (versus ₹485 crore) and the holding-company merger into Piramal Finance — is the year management has staked on closing that gap.

The Business

Strip away the history and Piramal is a diversified lender to “Bharat” — tier 2/3/4 India — built on three things the group acquired or assembled. The foundation was the 2021 IBC acquisition of DHFL, a distressed housing-finance company bought through bankruptcy court, which handed Piramal ~1 million customers and a retail platform overnight. On top sits a fast-growing multi-product retail book (housing and loan-against-property are ~68% of it, plus used-car, small-business, personal and microfinance loans), and a deliberately granular, new wholesale book (“Wholesale 2.0”) of real-estate and mid-market loans that — unlike its predecessor — has had zero delinquency in 2.5 years.

What does it claim as an edge? A “high-tech, high-touch” model — proprietary AI underwriting paired with 517 branches and feet on the ground — plus a “switch on, switch off” multi-product diversification that lets it accelerate whichever loan type is behaving and brake whichever isn’t. The clearest articulation of its positioning, from retail head Jairam Sridharan: “the big problem is small-ticket, big-town; our positioning is mid-ticket, mid-sized town.” It’s a sensible, demonstrated edge in execution and funding — but not yet a structural moat; the returns haven’t shown up. Ownership tells a story of conviction amid pain: the Piramal family has been adding (to ~46%), domestic institutions have stepped in, and foreign investors have roughly halved their stake.

How Management Thinks

This is, with Five-Star, the most candid management in the peer set — and the most explicitly long-term. Chairman Ajay Piramal frames the group as “perpetual owners… we don’t get into businesses to time markets; downcycles are an opportunity,” and seeds new lending lines (micro-LAP, gold, microfinance) into weak markets on a deliberate 5-6 year horizon. Jairam Sridharan, who dominates the calls, called the retail credit downturn ~1.5 years early and tightened underwriting before it hit (“when cycles start, it’s too late; the time was before”). He refuses to call cycle tops, names his troubled pockets openly (microfinance, then small-ticket loans-against-property, then MSME-unsecured and used-car refinance), and at one point thanked an analyst for catching a risk nuance he’d glossed.

The cardinal operating rule has been protect net worth. Every legacy loan was run down at a ~24-25% haircut, but those haircuts were deliberately offset against recoveries from an alternatives fund, insurance-stake sales, and other “pockets of embedded value” — so reported net worth held flat at ~₹27,000 crore throughout the bonfire. That’s disciplined, if financially-engineered, balance-sheet management.

The honest tension management itself acknowledges is over-capitalisation: the company has too much equity for its earnings, which is the direct cause of the dismal ROE. Returning capital is awkward (buybacks are barred above 2x leverage, so they pushed the dividend to a 50% payout), so instead they’re crystallising embedded value — exiting insurance JVs, collecting a ~$140 million deferred payment from an old pharma-imaging sale, and unlocking a ₹14,500 crore tax shield on merger. Capital allocation here is less about deploying cash well and more about un-trapping it.

Where It’s Going

The trajectory is “drag gone, now scale the engine.” FY26 guidance is concrete and bold: total assets above ₹1 lakh crore (~25% growth), legacy down to ₹3,000-3,500 crore, and an all-in consolidated profit of ₹1,300-1,500 crore — nearly triple FY25 — with the first quarter already “well on track.” The medium-term anchor is a return on assets climbing from ~1.5% toward ~3% by FY28, bridged by falling operating costs (a deliberate branch-opening pause is letting existing branches mature), normalising fees, and the disappearing legacy drag. The holding-company merger into Piramal Finance, completing around September 2025, simplifies a sprawling structure and switches on the tax shield (meaning reported profit ≈ pre-tax profit for years).

The live risks are squarely in the retail credit cycle: management flags MSME-unsecured loans (deteriorating, disbursements cut three quarters running) and used-car refinance as fresh hot spots, even as microfinance and small-ticket stress appear to have peaked. The whole thesis rests on the growth book sustaining ~30%+ expansion at controlled credit costs while the company digs itself out of over-capitalisation — execution risk, not existential risk.

The Four Checks

Quality & moat (gate). A decent, improving business with — honestly — a thin moat. The genuine assets are the Piramal brand’s funding access, a built-out tech-plus-branch retail platform, and demonstrated underwriting discipline. But it competes in crowded retail-lending segments and the “moat” is execution and data, not structural advantage. The wholesale-2.0 book’s clean record is encouraging but young. Verdict: a credible franchise still earning the right to be called high-quality.
Returns on incremental capital & runway. The crux, and currently the weakness. Consolidated ROE is ~1.6% — distorted down by both the legacy clean-up (now ending) and structural over-capitalisation. The growth book earns far better (~1.4-1.8% return on assets and rising), and the runway in under-served retail India is real. But “incremental capital earning well” is still a forward promise (the ~3% ROA target is for FY28); today the returns are simply poor. This check is unproven, trending up.
Capital allocation for the stage. Genuinely interesting and mostly rational. The portfolio surgery — buying DHFL cheap through bankruptcy, demerging pharma, killing the legacy book net-worth-neutral, recycling stake sales into the retail build — has been executed with skill and on schedule. The mark against is the result: a balance sheet now carrying more capital than it can profitably use, which management is right to try to un-trap (max dividend, stake monetisation) but which depresses returns until resolved. For its stage, the capital discipline is sound; the legacy of over-capitalisation is the unfinished part.
Price. The cheapest valuation in the peer set, and rationally so. At ~0.94x book — below stated net worth — the market is pricing in either residual legacy losses or scepticism that the engine lifts returns. The optically-high ~49x P/E is just a tiny earnings denominator. The bull case is precisely this gap: if FY26’s ₹1,300-1,500 crore profit lands and ROA marches toward 3%, a sub-book price on a recovering franchise re-rates meaningfully; if returns stay stuck, sub-book is fair. It’s a genuine “value with a catalyst” setup, with the catalyst being execution management has so far delivered on.

Sources

Concall transcripts read: Q2 FY25 (23 Oct 2024), Q3 FY25 (27 Jan 2025), Q4 FY25 / full-year (6 May 2025), Q1 FY26 (29 Jul 2025).
Annual reports read: FY23, FY24, FY25 (high-signal sections).
Financial snapshot: screener.in, fetched 2026-06-09 (FY25 PAT ₹485 Cr, ROE 1.63%, P/B ~0.94x, GNPA 2.83%, NNPA 2.01%, dividend yield 0.98%; resolved as “Piramal Enterprises Ltd (Merged)”).
Research dumps (not published): vault/Sources/Earnings/Piramal Enterprises Ltd(Merged)/.
Notes: an initial fetch for ticker “PEL” mis-resolved to a different company and was discarded; this digest uses the correctly re-fetched Piramal Enterprises data. Consolidated returns are depressed by the (now-ending) legacy wholesale run-down and over-capitalisation; the growth book’s economics are materially healthier. FY26 PAT guidance of ₹1,300-1,500 Cr is management’s, stated as all-inclusive of one-offs.