Piramal Enterprises Ltd., a leading diversified non-banking financial company (NBFC), witnessed a sharp 8.10% decline in its stock price today, trading at ₹905.40 apiece during intraday sessions. This steep drop follows the company’s announcement of its Q1 FY25 financial results, which were released after market hours on Tuesday.

Q1 FY25 Performance Overview

The company's net profit for the June quarter dropped by a significant 64% year-on-year, settling at ₹181 crore. This decline is largely attributed to a high base effect from a one-time gain recorded in the previous year. Despite this, Piramal Enterprises managed to increase its core net interest income by 18%, reaching ₹807 crore, driven by a 10% growth in total assets under management (AUM) to ₹70,576 crore. However, the company faced challenges with its net interest margin, which narrowed to 6.7%, down from 7.3% in the same period last year.

Retail AUM exceeded ₹50,000 crore, now accounting for 72% of the total AUM. Although disbursements were impacted by regulatory changes concerning fair practices during the June quarter, Piramal remains optimistic about achieving its FY25 target of 15% AUM growth, aiming to reach ₹80,000 crore.

Financial Highlights

• Net Profit: Dropped by 64% YoY to ₹181 crore.
• Net Interest Income (NII): Increased by 18% YoY to ₹807 crore.
• Total AUM: Grew by 10% YoY to ₹70,576 crore.
• Retail AUM: Surpassed ₹50,000 crore, making up 72% of total AUM.
• Net Interest Margin (NIM): Narrowed to 6.7% from 7.3% YoY.
• Fee Income: Remained steady at ₹97 crore YoY.
• Operating Expenses: Decreased by 104 basis points YoY to 4.6% of AUM.
• Pre-Provision Operating Profit (PPOP): Rose by 48% YoY to ₹375 crore.
• Other Income: Declined by 21% YoY to ₹167 crore.

Analyst Reactions

In response to the company’s Q1 performance, global brokerage firm CLSA downgraded its rating on Piramal Enterprises to 'Underperform' and lowered its target price to ₹860 per share. CLSA highlighted that the company’s credit costs were negatively impacted due to lower provisions on Stage 1 and Stage 3 assets. Additionally, the company’s operating profit was largely supported by one-off gains, masking what would have otherwise been a weaker performance.

Despite the growth in AUM, which was driven by a 43% YoY increase in the retail segment, CLSA expressed concerns about the deteriorating trend in certain parts of the retail book, particularly the 90+ days past due (DPD) segments. This trend could exert pressure on both growth and credit costs, especially as management has indicated near-term challenges related to the cost of funds.

Jefferies also maintained an 'Underperform' rating on Piramal Enterprises, with a target price of ₹805. The brokerage noted that the company’s Q1 net profit fell short of expectations. Jefferies pointed out that the utilization of ₹2.6 billion in overlay provisions during the quarter helped boost profit figures. While the growth in retail loans is promising, the legacy wholesale AUM is expected to continue shrinking, leading to a slower recovery in earnings.

Key Takeaways for Investors

• Net Profit Decline: A sharp 64% YoY drop in Q1 net profit due to a high base effect.
• Retail AUM Growth: Significant 43% YoY growth in retail AUM, now making up 72% of total AUM.
• Margin Pressure: Net interest margin contracted to 6.7% from 7.3% YoY.
• Analyst Downgrades: CLSA and Jefferies downgraded their ratings, citing concerns over growth, credit costs, and reliance on one-off gains.

Conclusion

The steep decline in Piramal Enterprises' stock price reflects investor concerns over the company’s shrinking net profit and narrowing margins. While the growth in retail AUM is a positive sign, challenges in the wholesale segment and rising credit costs pose significant risks. With analysts downgrading their ratings and expressing caution, investors may need to reassess their positions in the stock.