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On a strong pedestal: Ready to fire on all cylinders

Poonawalla Fincorp - metamorphosis complete: The erstwhile Magma Fincorp, after ~62% stake acquisition by Poonawalla Group, has undergone a significant transformation w.r.t its business model as its parentage changed to a longstanding, non-levered, cash-rich promoter group with PFL being the maiden listed business. The change of ownership has driven significant reduction in cost of borrowings (down 260bps over 15 months), enabled the company to refocus its customer and product segment (to credit-tested customers with select offerings) and invest significantly in technology and talent. Past stressed pool has been amply provided for with a further cushion of ~170bps on the balance sheet to shield from future unforeseen credit shocks

Digital-first, granular lender with a focus on risk-adjusted returns: PFL is now a digital-first lender focusing on consumer and small business lending with customer journeys being fully digital in nature from onboarding to collections. PFL will focus on segments such as LAP, personal loans, business loans, pre-owned cars and other consumer lending products (e.g., credit cards, consumer product loans) to achieve a mix of ~60:40 between secured and unsecured products over the medium term. Its low cost liabilities and technology focus give it the wherewithal to compete with large consumer NBFCs and banks on these products w.r.t pricing and TATs. This also should result in lower credit costs over the medium term as the quality of customers is quite strong at origination itself (90% of new customers have >700 credit score for unsecured products). We expect PFL to deliver 36% CAGR in AUM over FY22-25E.

Strong growth runway; valuations to expand as delivery follows: We see PFL inching closer to its steady state RoA profile of 3.5-4% by FY25E as growth sustains and operating leverage kicks in beginning FY24. Its small size (size 1/6th-1/10th of relevant NBFC peers), access to capital and strong technology focus should result in RoA hitting 3.4% by FY25 (with upside risks through fee potential), in our view. We expect PFL’s valuation to expand as it begins delivering on its growth target with a stable asset quality. We believe with a steady-state RoE profile of 19-22%, the business will continue to command premium valuations over the medium term. Our target price of INR 400 is based on 4x Sep-24 P/BV. We initiate with a BUY.

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