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Operating efficiencies beginning to play out

* Poonawalla Fincorp (PFL)’s 4QFY23 standalone PAT grew 102% YoY to ~INR1.8b. Its strong operational performance was driven by: a) ~60bp QoQ margin expansion and b) provision write-backs of ~INR347m. PFL’s PAT grew ~100% YoY to ~INR5.85b in FY23.

* Its 4QFY23 NII grew 52% YoY to INR3.8b, while PPOP jumped 75% YoY to INR2b. PFL is focused on improving productivity supported by digitization and is reasonably confident of scaling up its businesses without investing in additional manpower or branches.

* The company has strong moats on the liability front, supported by its strong parentage. At its current size (one-fifth to one-tenth of peers in similar segments), PFL has a huge opportunity in its target product segments. With a healthy capital position, we believe the company has a long runway ofstrong loan growth ahead.

* PFL has laid down a robust foundation for sustainable profitability through initiatives that will lead to lower operating costs (as a % of AUM), higher business volumes and robust asset quality. We model a standalone AUM/PAT CAGR of ~38%/50% over FY23-FY25E and expect PFL to deliver an RoA/RoE of 4.7%/12.0% in FY25. Reiterate BUY with a TP of INR360 (premised on 2.4x FY25E BVPS).

Business momentum strong; rise in DDP will lower acquisition cost

* PFL’s standalone AUM rose 37% YoY/16% QoQ to ~INR161b in 4QFY23. Focused AUM grew 73% YoY and contributed ~94% to the AUM mix (PY: 75%). Unsecured loans contributed ~51% to the AUM mix.

* Standalone disbursements grew 150% YoY to INR63.7b. FY23 disbursements jumped 109% YoY to ~INR158b.

* The company continued to focus on accelerated customer acquisitions with improving proportion of Direct, Digital and Partnerships (DDP) in the sourcing mix to ~81% (PQ: 66%). This has been driving down the customer acquisition costs (CAC)

Asset quality healthy in the newly originated loan book

* Asset quality remained pristine with GS3/NS3 at 1.44%/0.78% and the PCR on S3 loans declining ~160bp QoQ to ~46.2%. Restructured book declined to 0.8% of AUM in 4QFY23 (PQ: 1.2%) and ~50% of the restructured book was in the 0 dpd bucket.

* Legacy discontinued book (GS3:15.7%) contributed a large part of nonperforming loans while the newly originated book had a GS3 of 0.4%. This we believe can help sustain healthy asset quality and benign credit costs going forward as well.

* Recoveries from the written-off book should translate into continued write-backs over the next two quarters. We model credit costs of 0.5% and 1.2% in FY24 and FY25, respectively.

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