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* Poonawalla Fincorp (PFL)’s 1QFY24 standalone PAT grew 95% YoY to ~INR2b. The healthy operational performance was driven by: a) ~10bp QoQ margin expansion, and b) improved efficiency driving moderation in cost ratios.

* NII grew 58% YoY to INR4.2b, while PPOP jumped 150% YoY to INR2.9b. PFL is focused on improving productivity, supported by digitization, and is confident of scaling up without investing in additional manpower or branches. The cost-income ratio (CIR) fell ~12pp QoQ to ~38% (PQ: 50%), including lower ESOP expenses.

* 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 of strong 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%/53% over FY23-FY25E and expect PFL to deliver a RoA/RoE of 4.8%/12.5% in FY25. Reiterate BUY with a TP of INR425 (premised on 2.8x FY25E BVPS).

Business momentum strong; rise in DDP will lower acquisition cost

* Standalone AUM rose 41% YoY/10% QoQ to ~INR178b. Focused AUM grew 66% YoY and contributed ~96% to the AUM mix (PY: 82%). Unsecured loans contributed ~55% to the AUM mix.

* Standalone disbursements grew 143% YoY to INR70.6b.

* The company continued to focus on accelerated customer acquisitions with improving proportion of Direct, Digital and Partnerships (DDP) in the sourcing mix to ~86% (PQ: 81%). 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 1.42%/0.76% and the PCR on S3 loans increasing ~25bp QoQ to ~46.4%. Restructured book in 1QFY24 declined to 0.6% of AUM (PQ: 0.8%), and ~51% of the restructured book was in the 0 dpd bucket.

* Legacy discontinued book (GS3: 22.7%) contributed a large part of non-performing loans, while the newly originated book had GS3 of 0.4%. This, we believe, can help sustain healthy asset quality and benign credit costs going forward as well.

* Net credit costs of INR60m included a gain of INR200m from the sale of the legacy portfolio and an impairment of INR260m on financial instruments. We model credit costs of 0.7%/1.2% in FY24/FY25.

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