Whenever there is wild spread ambiguity, i remember Pabrai’s distinction between risk and uncertainty loud and clear. In this specific case, the loan book concerns were about mortgage worthiness (risk) and cash flow/interest payments (uncertainty ). Piramal seems to have put off taking calls from investors all these years as the entire group structure itself was fluid and evolving. Now, the direction as well as the structure has taken form. More importantly, these market fears have already been considered in the business plan. Though this might be a black-swan event for the market in general, Khushru Jijina only feels a normal business up and down.

I was a little disappointed when i learnt that Ajay Piramal was not going to be on the call, but left the call very satisfied with the comments and the clarity of Khushru. Simple and blunt – what was necessary.

My notes from yesterdays call –

INDUSTRY VIEW
  • The sentiment is subdued.
  • There is Rapid Consolidation happening. Demonitization brought out the true impact of RERA.
  • Customers are beginning to chose
    • Safety over discount
    • Brand over contact
  • Tier 1 may be affected broadly by 25%, but not more than 15% in good micro Markets.
  • Tier 2 will experience Mayhem.
  • LUXURY will get affected – Blanket view.
  • Prices will correct. However at every 10-15% drop in prices, demand will rise.
  • RERA + Demonitisation is an ORGANISED PLAYERS WET DREAM.
  • New Approvals will be delayed due to confusion in greasing.
  • Govt is however shifting approvals to an online process anyway. Great for people following the law, bad for those who aren’t.
  • Long term 12 months + this is a great trigger for real estate. LOWER INTEREST RATES/ TAX SOPS ON AFFORDABLE/ PRICE CUTS.
  • Shitty builders were destined to die, now they will just die faster.
FUND VIEW and INSIGHTS
  • Before 2015 – Mezzanine funding is only for 1-2 years and it is at 18-20%. Difficult to sustain as you have to keep getting new deals so often for such a short period of time.
  • After 2015 – Moved into construction financing as the risk is a lot more palatable and the duration is 3-4 years at 14-16%.
  • Jan 2016 – Started commercial construction financing. Current sanctions stand at 5,000 cr.
  • Fe 2016 – Started the Piramal Preferred Partner – Opened up lines of credit to builders for any project that made sense to Piramal. 15,000 cr sanctioned here.
  • Nov 2016 – LRD- Lease Rental Discounting – will cross 1500 cr in December. Commercial construction funding is becoming LRD. Customer paying interest for 15 – 16 years.
  • FY 18 Mix will be great
    • Residential
      • Construction Finance
      • Senior Debt
    • Commercial
      • Construction Finance
      • LRD
  • Mezzanine funding – We donot do funding for optimistic projects. We fund only boring, has-been-done-will-sell projects only. Biryani only no Pasta. We loose a tremendous no of deals like this, but this is our policy.
  • Secret Sauce – Focus on CASH COVER not on MORTGAGE.
    • NBFC’s generally focus on mortgage value. Piramal looks at cash generating ability, delays the cash cycle from 1-2 years, fixes a MSP below the market rates, looks at the affordability segment in that Micro Market and then lends.
    • No issues even if projects get devalued 1 year. It is built into the system.
    • All projects have MSP – builder is not allowed to sell under that.
    • Since construction finance is LINKED to SALES, we are pretty much DISCOUNTING SALES only.
    • EXITS – Differentiates MEN from BOYS.
    • Any moron can lend.
    • 90% of projects are in Mid – Affordable segments in those micro markets, based on the income profile of those people.
      • Eastern Suburb – 1.5 – 2.0 cr
      • Thane – 1-1.5 cr
      • Western Suburb – 2- 2.5 cr
      • Cental – 4-6 cr.
  • FUTURE
    • Non infra and RE book currently at 2,200 cr should double in a few months.
    • RE and Infra too will double soon.
    • 15% drop in prices will take the sales velocity up like M.A.D.
    • RERA product to be introduced for developers. No one has one ready.
    • Strong developers will eat weak developers.
    • Stong NBFC will begin to RE-WRITE shitty loans by dumb NBFC. We might do that too.
    • I DONT NEED TO DO ANYTHING STUPID TO MEET MY TARGET.
    • There will be mayhem in tier 2.
    • Banks use a Cookie Cutter approach. They can’t compete with us on NPA levels at all.
    • MONITORING IS RELIGION FOR US. Of the 150 people team 60 are just for monitoring.
    • Margins used to be 45% in real estate, this has already come down to 25%. If it comes down further to 10-15%, sales velocity will zoom and unorganised players will move out as these margins will not allow them to function.
    • We have DEDICATED LINES OF CREDIT FROM MUTUAL FUNDS.
    • Fixed Returns – interest rates are falling.
    • Human Capital – Competing CEO’s are willing to join the platform everyday.

2 replies on “Demonetization triggers Piramal Enterprise’s first ConCall in years !”

  1. The notes are like a candle in th dark for all of us who are lost in this
    All the points are so we summarised gives us insights on the future trends
    It states clearly the vision of Pirmal for the coming years 👍

    Reply

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