DHFL is a significant acquisition and it is changing our financial services business: Ajay Piramal
After a long battle, Piramal Enterprise Ltd finalized its acquisition of Dewan Housing Finance Corporation Ltd (DHFL) by paying 34,250 crore to lenders. The acquisition will help Piramal to diversify its loan portfolio and more importantly to increase its portfolio of personal loans. In an interview with Activity areaAjay Piramal, Chairman of Piramal Group, said that this is a very significant acquisition and will change Piramal’s financial services business. Extracts:
Where does acquiring DHFL fit into your overall plan for your financial services business?
The overall plan is first to diversify our book. We were primarily a wholesale real estate book. We felt that we needed to diversify and move into a consumer oriented retail business. The first initiative we took was when we invested in the Shriram group. But we realized that Shriram and Piramal had different cultures and it would have been very difficult to merge them. Both were doing equally well. When the DHFL opportunity arose, we were looking at how we could grow organically, as well as through an acquisition. With this acquisition, in the short term, our ratio of wholesale to retail books will be 50:50. In fact, housing finance and wholesale will be 50:50. Gradually, we want to take two-thirds in terms of retail and one-third in terms of wholesale.
Is the acquisition of DHFL one of your most crucial acquisitions?
Yes, this is a very significant acquisition that changes Piramal’s financial services business. We had been preparing for such an event for two years, during which time we increased the equity of Piramal Enterprises Ltd (PEL) by 18,000 crore and made it a low debt ratio. In a financial services firm, if you have such a low ratio, you may not get the ROE that shareholders want, but we did it on purpose to be prepared to grab an opportunity. We have always said that in this environment, only the strongest companies will get stronger, and the marginal ones will get weaker. This is an opportunity to strengthen our strengths so that we can take advantage of the opportunities.
How did you experience this process of more than a year?
It was a long and very difficult process. This was the fifth time we had to bid. We had intense competition from international companies and national companies. Our history of successful mergers and acquisitions has also helped us a lot. It was the first of its kind in the IBC, thanks to the RBI change pushing to change the IBC laws. It took up more space and mental space than the other acquisitions we made.
Did you, at any point, feel like things were going out of control?
There are always times when you may feel like it is difficult, but in my own experience I have found that you just keep moving forward, doing your task, and eventually the result will come. But we always thought we had a good chance. It is also good for the country.
Also Read: Piramal Pays Lenders For DHFL Acquisition
DHFL has granted loans to cities of level 2 and 3, for people who are more self-employed than salaried. We have approximately 4,500 people working in 301 branches. Our average loan even for a home loan is only 17 lakh and you can imagine what the average person’s income is. It was very important that we continue, especially with the government’s push towards affordable housing, towards Bharat – the tier 2 and 3 cities.
Was there a plan B if this deal hadn’t happened?
We must continue to look at the environment. In addition to getting the equity, we also had a team that was ready for retail financing and we were also building our own financial portfolio. But we realized we had to make an acquisition to grow faster. It would take eight to ten years to build a housing finance company’s book and we just wanted to catch up. If it wasn’t that, we would have looked at something else. The past two years have been tough for everyone, especially in the NBFC space. There are many good businesses out there that might be in need of financing.
What is your roadmap for the future?
First, Piramal Capital and Housing Finance Ltd (PCHFL) will merge with DHFL, then the name of DHFL will be changed to PCHFL. We believe that our brand will have greater value and greater loyalty from our customers. Our retail book is growing almost five times what it is today. DHFL’s infrastructure will be used by us. There are 301 branches today. Piramal has 14 branches. We will add these two and it will be a synergistic effect.
How was the operation financed by Piramal?
The new debentures were issued by us today and the repayment made to the banks. The oldest have been reimbursed. Banks got about 46 percent of the total value of their loans. We get 19,550 long-term debentures and the balance will be in cash, which will go to the banks. We had been planning such an acquisition for some time, so we had raised sufficient equity. In PEL, we now have sufficient equity capital to do so. Our debt to equity to PEL ratio with PCHFL as a whole is only 0.9 times debt to equity. So there is enough fairness. The merger will now take place in the coming weeks.
Would you consider becoming a full-fledged bank?
It’s a bit in the future. Let’s see how the RBI sees it. They handed in the working paper, but I haven’t seen any conversions yet. We will continue to improve our systems and processes to make sure that we are within the purview of the regulator, and then let’s see what happens.
In the financial space, fintech is the most disruptive technology. Are you looking at this?
Yes, we use fintech. Our goal is to be phygital with DHFL. We need some physical presence, but we also need to be digital at heart. We are investing in this technology. We also have fintech partnerships in areas such as used car loans. We have a team of people in Bangalore who study the latest cutting edge technology. We believe that we can combine very high quality talents in FinTech and also add the financial strength to them that we bring.
With this phygital strategy, would you need to expand branches?
Yes, we will still need the branches and over time we will increase the number of branches. It’s just that assessing credit risk, the ease of doing business for the customer, and customer service are some of the areas for digital and fintech services.
What is the plan for the insurance branch of DHFL?
We have acquired it. Today it’s a good name, it’s established. So, let’s take a look at it. I think it will take us some time to come to a firm conclusion on what we want to do with it.
Will the ongoing DHFL resolution litigation impact your plans?
There are a few remedies, which are more the responsibility of the creditors committee. In our opinion, the law is quite clear on this matter. It’s between the COC and the people who actually filed the appeals. We’ll see what happens. The case is now closed and the payments have been made.
When does the split between your financial services and your pharmaceutical business begin?
It will be very soon in the near future.
On a macroeconomic level, do you think the worst is behind us? Is there a revival in direct debit?
Yes, the worst is behind us. From what I can see in terms of credit drawdown, for the first time, capital spending is increasing. People are making plans to see how they can increase the capacity. More than demand, supply becomes a constraint in the economy. This means that there is an ongoing financing need. I’m very optimistic that even in the retail segment the drawdown will be there in terms of loans. It’s a bit slow but you can see the changes happening in housing finance. The affordable housing sector, for example, is developing well. I am optimistic about India’s economic growth. It is one of the fastest growing economies.
There has been a lot of talk about the IBC so far. So how did the process go for you?
The IBC has seen a lot of progress over the past five years and is one of the government’s most important milestones in the liberalization process. Overall, we did well. Since the IBC was voted, we see that the balance has tipped in favor of the lender, otherwise, it was always the borrower. They also knew that the legal process was so long and torturous that if they never paid, everything would be fine. It takes time for such laws to evolve and we could do better.
We need to increase the number of people on the NCLT and NCLAT lots. Since this is a new law, we need to ensure that members are better trained and informed. The government has been very responsive in changing it and making changes to the law. So, for example, before DHFL, there was nothing for financial services companies. That’s when RBI moved in and the IBC was changed. Stray promoters could also bid earlier, but they have now been excluded.