Digital Disruption And RBI Regulations Will Dampen Prospects

Key Takeaways

• Intensifying digital competition and stricter regulations threaten sustainable growth, increase operational costs, and pressure Piramal Enterprises' profitability and market position.
  
• Asset quality deterioration and capital pressures risk higher credit costs, diluted earnings, and weaker long-term growth opportunities despite ongoing business expansion.
  
• Strategic focus on retail lending, improved asset quality, and tech-driven efficiency are positioning the company for sustained growth, higher profitability, and market share gains.

Catalysts

Operates as a non-banking financial company in India.

• Rapid digital disruption in India's lending landscape, including the rise of nimble fintech competitors and increasing customer preference for digital-first platforms, threatens Piramal Enterprises' ability to sustainably grow its customer base, leading to slower revenue growth and possible market share loss in core segments.
  
• Growing regulatory scrutiny and costlier compliance burdens-highlighted by RBI's new rules on prepayment charges for floating rate loans and tightened guidelines for retail and MSME lending-are likely to drive up operational expenses and compress net interest margins over time.
  
• Legacy asset quality concerns, especially in open market MSME unsecured and used car finance portfolios where fresh origination credit risk has deteriorated and delinquencies have shown unseasonal upticks, may necessitate higher provisioning and result in elevated credit costs, dragging down future earnings.
  
• The company's high capital adequacy ratio is under pressure, falling from 23.6% to 19.3% in just one quarter due to business growth and changes in subsidiary status, and despite the expected reversal from the merger, prolonged rapid expansion could force equity raises that dilute earnings per share and reduce return on equity in the medium term.
  
• Structural industry challenges such as intensifying competition from small finance banks and tech-native NBFCs, combined with shifting demographics-like changes in credit demand due to urban migration and aging-risk reducing long-term growth opportunities and keeping core ROA well below management's 3% medium-term target, undermining net profit and scale.

Piramal Enterprises Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Piramal Enterprises compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Piramal Enterprises's revenue will grow by 8.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 9.0% today to 24.8% in 3 years time.
• The bearish analysts expect earnings to reach ₹20.3 billion (and earnings per share of ₹89.83) by about September 2028, up from ₹5.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 16.1x on those 2028 earnings, down from 41.8x today. This future PE is lower than the current PE for the IN Diversified Financial industry at 24.1x.
• Analysts expect the number of shares outstanding to grow by 0.54% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.33%, as per the Simply Wall St company report.

Piramal Enterprises Future Earnings Per Share Growth

Risks

• Robust long-term growth in retail AUM, with retail now forming 80% of total AUM and growing at 37% year-on-year, indicates continued strong demand and execution in core lending segments, which supports solid revenue and earnings growth over time.
  
• The company's strategic reorientation toward a focused financial services model, reduction of legacy drag, completion of the Piramal Enterprises–Piramal Finance merger, and improved capital structure are expected to drive sustained expansion in net interest margins and return on equity.
  
• Investments in technology, AI, branch productivity, and process digitization have led to improved operating leverage and declining OpEx-to-AUM ratios, setting a foundation for future profitability improvements and margin expansion.
  
• Risk metrics across most segments have steadily improved, with credit costs declining to 1.4%, NPA ratios holding steady, and no delinquencies in the restructured wholesale lending business, suggesting enhanced asset quality and lower future credit cost pressures that benefit net margins.
  
• Strong balance sheet liquidity, diversified funding mix, and moderated borrowing costs-combined with favorable secular trends such as housing demand, financial digitization, and financial inclusion in India-provide a structural tailwind to long-term revenue growth, profit expansion, and market share gains.

Valuation

• The assumed bearish price target for Piramal Enterprises is ₹950.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Piramal Enterprises's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1350.0, and the most bearish reporting a price target of just ₹950.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹82.0 billion, earnings will come to ₹20.3 billion, and it would be trading on a PE ratio of 16.1x, assuming you use a discount rate of 14.3%.
  
• Given the current share price of ₹1071.3, the bearish analyst price target of ₹950.0 is 12.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.