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Overlay provision buffer boosted by proceeds from Magma HDI stake sale

Result highlights

* For Q1FY23, Poonawalla Fincorp reported earnings of Rs1.4bn, beating our and consensus estimates mainly on account of provision reversals. At the pre-provision level, the reported number was exactly in line with our estimates. Proceeds from the gain from sale of its stake in Magma HDI (Rs2.4bn) was used to build a management overlay provision of Rs2.2bn. This along with improved GS3 ratios resulted in Rs140mn of provision reversals. On a balance sheet basis, disbursements grew by 3% qoq, with organic disbursements increasing 24% qoq. AUM growth was 6.5% qoq/22% yoy, with the de-focused book constituting 13% of the portfolio (Q4FY22: 18%). Asset quality improved with GS3 at 2.2% (Q4FY22: 2.7%) and NS3 at 0.95% (Q4FY22: 1.1%). Restructured portfolio stands at 3.5% of AUM (Q4FY22: 4.7%)

* The firm is in the midst of a new promoter-driven turnaround with the aim of becoming one of the top three NBFCs for consumer and small business finance. Management expects the portfolio to triple in about three years from the AUM base of FY21, with RoA moving to 3.0% on the lower cost of borrowing, portfolio shift toward secured vs. unsecured of 65%:35%, and tighter asset-quality control.

* We roll over our forecasts to Sept’23E and retain a Hold rating with a Sept’23E TP of Rs270 (earlier Rs250), valuing the company at 2.8x Sept’24E BVPS using the excess return on equity (ERE) method. Downside risk: Higher-than-expected operating expenses could impact the RoA expansion trajectory. Upside risk: Higher-than-expected AUM growth.

* Q1FY23 result highlights: In Q1FY23, Poonawalla Fincorp's disbursements grew by 3% qoq/98% yoy, led by the highest-ever disbursements in pre-owned cars (+22% qoq), digital LAP (+33% qoq), and digital business loans, personal loans, and loans to professionals (+63% qoq). Of the ~Rs34bn disbursements in Q1, 80% of the total disbursements accounted were organic, increasing +24% qoq. Organic disbursement growth was also aided by introduction of new product lines of supply chain finance and machinery loans in Q1FY23. AUM growth stood at 6.5% qoq/22% yoy, with the discontinued book now at ~Rs23bn (Q4: ~Rs30bn). Calculated NIM declined by 12bps qoq to 8.05%, whereas opex-to-AUM ratio increased by 6bps qoq to ~5.5%. Management had earlier guided for cost-to-income ratio (CIR) to remain elevated in FY23, similar to FY22 levels. CIR in Q1FY23 was 59.4% (Q4FY22: 58.7%). GS3 improved to 2.2% (Q4FY22: 2.7%) and NS3 improved to 0.95% (Q4FY22: 1.1%). Restructured book as of Jun’22 stood at Rs6.1bn (3.5% of AUM) vs. Rs7.9bn (4.7% of AUM) as of Mar’22. Provision coverage on the discontinued legacy book increased from ~9% to greater than 20% in Q1FY23.

* For Poonawalla Housing Finance Limited (PHFL), disbursements declined by 33% qoq but grew by 116% yoy. AUM growth was 4% qoq/31% yoy, with AUM of ~Rs53bn as of Jun’22. Earnings grew 4% qoq/248% yoy. GS3 for the quarter was 0.87% (4Q: 0.96%), while NS3 was 0.54% (4Q: 0.60%). Coverage ratio remained flat at ~38%. In Q1FY23, PHFL utilized management overlay provision of Rs65mn. Balance overlay amount is Rs55mn as of Q1FY23.

 * Direct, digital, and partnership (DDP) model: The consistent increase in lending via the DDP model of origination has further strengthened and diversified distribution. Growth momentum is expected to continue in the quarters ahead, supported by change in product mix, increased product offering (newly launched in Q1FY23 – supply chain finance and machinery loan), and increased contribution from distribution pillars of DDP. Contribution from DDP increased to 34.1% in Q1FY23, up from 17.5% in Q4FY22.

* Changes in estimates: The reported pre-provision operating profit is exactly in line with our estimates. In our estimates, we had assumed that 75% of proceeds from the sale of stake in Magma HDI and Jaguar Advisory would be used to create counter cyclical overlay provision. We expect gains from Jaguar Advisory’s stake sale to be reflected in the coming quarters. As such, we broadly maintain our view currently. Hence, after factoring in Q1FY23 earnings, there is no change in estimates.

* Valuations: We roll over our forecasts to Sept’23E and retain a Hold rating with a Sept’23E TP of Rs270 (earlier Rs250), valuing the company at 2.8x Sept’24E BVPS using the excess return on equity (ERE) method. Downside risk: Higher-than-expected operating expenses could impact the RoA expansion trajectory. Upside risk: Higher-than-expected AUM growth

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