Ajay Piramal on IL&FS, NBFC crisis and what retail investors can look at

Piramal Group chairman Ajay Piramal, in an interview with Anil Singhvi of Zee Business, speaks about the current turmoil in the non-banking financial companies (NBFCs).

What triggered the crisis in the NBFC sector?
In my presentation during investors meet on August 30, 2018, I said that any blow up in NBFC has the power to affect the whole sector and this is happening. The problem at Infrastructure Leasing & Financial Services (IL&FS) triggered the issue and resulted in lowering down of every company in the sector. The default by IL&FS has also forced banks, mutual funds and other fund providers to tighten lending to NBFCs. But there is a relaxation in the market now and banks and mutual funds have started funding good NBFCs with quality governance, good promoter base and asset quality. It was a temporary shock.

Are lapses related to governance in NBFCs or absence of complete regulation reasons for this crisis in the system?
Actually, IL&FS is not only an NBFC. Looking at their books you will find that the same is limited to Rs 18,000-20,000 crore but their complete liability stands between Rs 90,000 crore and Rs 1 lakh crore. It has invested in different sectors like power and road as well as other infrastructure projects. That’s why it must not be counted only as an NBFC as they invest more in the infrastructure sector.

You were exploring the possibility of buying IL&FS in 2014. Do you have any interest in buying it now?
I don’t have any interest in buying the company and during my conversation with investors on August 30, I said that I am against buying the NBFCs as accessing their books is not a simple task.

What makes assessing the books of the NBFC a difficult task?
One must look after the promoters and governance of the NBFCs before looking at their books. The stakes held by promoters make a difference. For instance, promoters’ stakes are more than 50% in our case but there are NBFCs where you can find a decline in the stakes of management or promoters, which means they are not in the position to look after it.

Housing finance companies have come under pressure. Will you like to buy any of these firms or some of their assets?
No. We have a clear policy under which we have decided to not go for acquisitions at present as we feel that we have the abilities to grow our books without acquiring some other company or its assets. This is a time when one should have cash in their account so that they can withstand liquidity situations.

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What are the focus areas? How much capital is available and how will it be used?
In 2017, we raised about Rs 7,000 crore with a mix of qualified institutional placements (QIPs) and a rights issue. This has helped in increasing the equity of the Piramal group. Today, we have an equity of around Rs 20,000 crore in the financial services available with us. Our books size stands at around Rs 50,000 crore and we can also increase that through the equity that is available with us. In addition, we have liquid cash of around Rs 2,500 crore and there are several banks in line and their support can help in increasing the liquidity situation to about Rs 5,000-6,000 crore. Our book is getting diversified as we have entered into the real estate as well as other corporates. We are also offering housing finance to individuals and consumers.

What type of NBFCs can retail investors look at?
One should invest in companies whose maximum stakes are lying with their promoters and they are not diluting it. In addition, they must have good governance and liquidity situation.