Buy Poonawalla Fincorp Ltd For Target Rs.195 - Emkay Global
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Portfolio diversification on the cards
* Poonawalla Fincorp reported profits of Rs645mn, missing our estimate of Rs754mn due to lower NII and NIMs amid a gradual shift toward a secured portfolio. Disbursements remained healthy at Rs17.3bn (+7x yoy, +21.5% qoq), mainly tilted toward secured products like housing. AUM, however, remained flat sequentially at Rs144.2bn.
* Gross Stage 3 witnessed a surge to ~5.4% from ~3.7% last quarter as lockdowns affected collection efficiency. However, trends are improving. The overall restructured book stands at Rs8.5bn (~5.9% of AUM) against which the company holds a provision of Rs1.5bn, with an additional overlay of Rs2.8bn (~2% of AUM).
* We continue to believe that Poonawalla Fincorp is well placed in terms of adequacy and liquidity. New management plans to diversify the current portfolio by making an effective mix of secured/unsecured products, i.e. affordable housing, pre-owned cars and business loans from current offerings, and new offerings like LAP, PL, loans to professionals, etc.
* With the change in guard, we believe that the company will see superior profitable growth, resulting in a significant improvement in return ratios. We roll forward to Sep’22E and revise the TP to Rs195 (Rs175 earlier), corresponding to 2.2x P/Adj Sep’23E Book (earlier 2.1xP/ABV FY23E) with RoEs of 12.1% and RoA of 3.3%. Maintain Buy with OW in EAP.
Surge in disbursements aided by sufficient adequacy and product diversity:
Management aims to triple the AUM by FY25E, aided by sufficient liquidity and diversity in product offerings. The company plans to discontinue the relatively riskier businesses of used CV/CE and tractor financing. Instead, management intends to create a significant presence in loans to professionals, PLs, non-affordable housing loans and SME LAP. The company also plans to introduce consumer durable financing, co-branded credit cards and digital lending products by the end of FY22. With professional management taking the charge, we remain optimistic about growth numbers.
Cost of fund advantage to support margins and improve asset quality:
The change in promoters should significantly improve the company’s borrowing profile (shift toward capital markets), which should, in turn, support rejig of the asset mix with the right blend of securedunsecured loans – de-risking the loan book from black swan events. With the ease in the cost of funds, the company has a dual advantage. With a good scope of margin expansion, the company can focus on the quality of customers (which is feasible at lower yields).
Outlook and valuations:
After the fund infusion, the company is well placed in terms of adequacy, promoter backup and liquidity. Probable rating upgrades, lower cost of funds and ability to inject equity by the promoter (without fear of forced dilution) are the key positives. We roll forward to Sep’22E and revise the TP to Rs195 (Rs175 earlier), corresponding to 2.2x P/Adj Sep’23E Book (earlier 2.1xP/ABV FY23E) with RoEs of 12.1% and RoA of 3.3%.
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