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Price Analysis

Poonawalla Fincorp has delivered a strong 2QFY23 result, in line with the stated strategy (3x AUM by FY25E). The company has registered a ROA of 3.6%, with 22% YoY AUM growth and robust disbursement of ?37.2bn (44% YoY growth). The focused AUM grew by 10.6% sequentially against overall AUM growth of 5%. Moreover, the GS3 and NS3 improved significantly by 67bps and 12bps respectively and stood at 1.52%/0.83%. Recoveries from written-off accounts led to provision write-back of ?411mn. Aggressive write-offs and persistent recoveries are likely to keep the credit cost in check for coming few quarters. Factoring strong balance sheet growth, healthy operating performance and lower credit cost; we have a positive outlook on the company with BUY recommendation.

Gazing the core

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%. The company has delivered the guidance and reported 2QFY23 with ROA of 3.6%, disbursement up 44% YoY, AUM growth: 21.5% YoY, NNPA of 0.8% and credit cost of negative 90bps on the back of write-back. Organic disbursements accounted for 97% of total consolidated disbursement compared to 80% in 1QFY23. On a standalone basis, 100% disbursements were organic and up 31% QoQ at ?31bn. The company expects the growth momentum to continue in coming quarters supported by change in the product mix and the increased contribution from the distribution pillars of Direct, Digital and Partnerships (DDP). The share of DDP disbursements was ~47% in 2QFY23 v/s 34% in 1QFY23 and 17.5% in 4QFY22.

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. In 2QFY23, the focused business grew by 10.6% QoQ against the overall AUM growth of 5.1% sequentially.

GS3/NS3 further down: The previous quarter has demonstrated better collection efficiency (108%). Consequently, asset quality improved with gross stage - 3 declined 67bps sequentially to 1.5%. Moreover, gross stage – 2 also plunged 250bps for consolidated entity to 4.2%. Restructuring pool moderated to ?4.67bn (2.5% of AUM) and it carries provision of 20%. The restructuring book in DPD buckets at ?2.1bn (45% of restructured book). With improvement in delinquencies bucket, we believe the comfortable buffer will translate into lower credit cost for FY23E/24E.

NIMs improved further; 71% YoY jump in PAT: Funding cost in the rising interest rate environment inched up 20bps QoQ to 7.12%. This was offset by portfolio mix in favour of high-yielding retail assets and recoveries from the legacy book. NIMs thereby expanded 35bps QoQ to 9.9%. Company raised ?12.25bn via CPs and NCDs in 2QFY23 and has further room to improve the mix in favour of these instruments. Improved NIMs (up 35bps QoQ and 77bps YoY to 9.9%) and focused AUM growth of 11% QoQ & 56% YoY supported operating performance during the quarter. This was partially offset by 14.1% QoQ / 51.8% YoY rise in opex (5.9% of AUM). Earnings beat was primarily maintained by provisioning reversal of ?414mn.

Outlook and Valuation :  We value the stock at ?378 based on FY24E BVPS of ?97 with a multiple of 3.9x. 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 the company in a sweet spot. Our checks on the ground re-iterate our conviction and we recommend BUY with an enhanced price objective of ?378.

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