IGI Logo

...Targets AUM of 3x by FY25E

Company Overview

Poonawalla Fincorp Limited (earlier known as Magma Fincorp) is a tech driven NBFC focused on consumer and MSME lending. It is a subsidiary of Rising Sun Holding Pvt Ltd (RSHPL), which is owned and controlled by Mr. Adar Poonawalla. RSHPL invested ?32.1bn for a 61.5% stake in the erstwhile Magma Fincorp Ltd in Feb’21. Magma Fincorp went into business in 1988. The company has active customer base of nearly 7600 (as on FY22). It has an active presence in Business loans, Housing loans, Pre-owned car loans and General Insurance. Since the capital infusion, we have witnessed 1) change in senior management, 2) re-position of product portfolio, 3) improvement in credit rating, and 4) scale up in digital initiatives. The company aims to achieve 3x of Mar-21 AUM by FY25. We believe that the company is well poised for growth given the low base (AUM of ?165bn as on FY22), recent capital infusion and improvement in liability profile. PFL has a strong balance sheet with CAR of 54%, additional provisions at 0.9% of AUM and Stage 3 PCR of 59%.

Investment Rationale

Target FY25 is in line: The management has laid out the Vision for FY25. The management goal is 1) to achieve ~3x current AUM by FY25, 2) be amongst top – 3 NBFCs for consumer and MSMEs, 3) ~200bps reduction in borrowing cost, 4) NNPA guidance of less than 1% (current level: 1.1%) and ROA target of ~3.5%. PFL has delivered the guidance and exited FY22 with ROA of 2.5%, disbursement of 1.6x, AUM growth 17% YoY, NNPA of 1.1% and credit cost of 60bps. The company’s focus markets would be Tamil Nadu, Maharashtra and Gujarat, furthermore the customer segment targeted is mid - income group in semi urban and urban markets. Factoring the execution during transition phase, we believe the stipulated goals can be accomplished. We incorporate 30% AUM growth for FY23-24E and stable NIMs of 7.9%; hence estimating a ROA of2.9% for FY24E.

Re-alignment of loan book likely to be fruitful:

The Company discontinued used CV/CE, tractors and auto lease financial businesses, which has higher delinquencies. The new strategy and product lines are more focused towards consumers and MSMEs, with higher CIBILs and creditworthiness. The management guidance of 3x AUM of ~?400bn by FY25 (implied CAGR of 30%) would be more towards the new product lines.

Collection Efficiency at 108.4%, Gross Stage – 3 at 2.7%:

The previous quarter has demonstrated better collection efficiency (108.4% v/s 99.1% in Dec-21). Consequently, Asset Quality improved with Gross Stage - 3 declining 80bps sequentially to 2.7%. Stage – 3 for Housing Finance decreased to 1% from 1.9%. Moreover, Gross Stage – 2 also plunged 320bps for consolidated entity to 9.6%. Restructuring pool moderated to ?7.9bn (4.7% of AUM) and it carries provision of 19.6%. With improvement in delinquencies bucket, we believe the comfortable buffer will translate into lower credit cost for FY23E/24E.

Stake divestment in Magma HDI to strengthen core capital:

The Company entered into Joint Venture with HDI Gerling in 2012. In order to meet the regulatory requirement of RBI and IRDA, the company plans to divest its stake in Magma HDI General Insurance, which will free up capital of ?4.6bn. The divestment will enable PFL to focus on its core competency of lending business.

Outlook and Valuation

We value PFL at ?310 based on FY24E BVPS of ?97 with a multiple of 3.2x. In a business where the principal resource is deployable corpus, the induction of Poonawalla Group is an immense advantage. The new promoters, their vision and strategic growth is likely to unlock value for the company. Target segment of high yield loans and better credit underwriting may lead to NIMs expansion and slower credit cost. Therefore the target ROA of ~3.5% is achievable by FY25E. A high growth capital (Tier – 1 of 19.4%) places PFL in a sweet spot.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at www.lkpsec.com/#foo

SEBI Registration number is INM000002483

Above views are of the author and not of the website kindly read disclaimer