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Piramal Rights + Dividend: Where the master of capital allocation faltered


Piramal group started in 1984 and is now a $10 billion company. As the org chart will tell you that like every diversified company, things become very complicated and confusing as we delve deeper. In this post, we are only going to focus on the right side of the picture i.e. Piramal Enterprises. But before taking the plunge, let’s get familiar with a few financial terms.

Rights: Company wants to raise cash. Debt is too costly, and they don’t want to make current stockholders angry. So they give options of buying shares at a cheaper price. Read up more via our ZappChai Explainer on Rights.

Cash Dividends: Company give cash to the stockholders, usually done if the company feels it can’t find good enough projects.

The decision

Now that we have the basics in place, let us look at the recent story. Late last year Piramal raised Rs 3,600 crores through a rights issue. This was at a ratio of 11:83(You can buy 11 shares at discount for every 83 shares you own) & these were slightly over-subscribed.

This is fine, jut a company looking to raise some capital. Until you look at their next decision, announcing a dividend!

The decision doesn't make sense on many levels. For one a company that had 450 crores net profit Q4-last year, posting a ₹1,700 crore loss this Q4 should be enough reason to move into capital conservation mode. On a more basic level returning money back to shareholders that you have raised with some effort and a fee to the investment banker doesn't do anybody any good. Anybody except the bankers of course! The urge to maintain dividends is an understandable one, but most investors are likely to see through this veil pretty easily.

So what lies ahead

The pharma part seems to be okay for the foreseeable future, but they did manage to sell off a part of their healthcare insights and analytics business part for $900 million. If this deal were to happen now, it would probably be at very different valuations but let’s attribute this to sheer bad luck.

The financial services revenue fell 11%. This NBFC part of the business had them lending heavily in Mumbai real estate, which is the most saturated & is seeing prices drop with no demand in sight. Piramal did attempt to come out safely from this with ₹ 4,200 crores reduction in the large-loans and over this, they’ve put in ₹8,900 crore capital coverage for bad loans. They were supposed to ramp up retail finance in non-housing sectors, which did not see any traction putting this segment deep in the red.

The path ahead seems bumpy, but the firm is still led by extremely competent people. It would be interesting to watch how the firm works to gain back investor trust as it marches ahead.

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About the Author: The post is written by our EZPP partner Jayaditya Sirasani with relevant edits and changes by our editorial team. Jayaditya is a graduate from IIM Calcutta, currently working with Accenture Strategy.

Disclaimer - This is an attempt to understand the business decisions of a firm. This is not an investment recommendation.


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