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We resume coverage on Poonawalla Fincorp (PFL) with a BUY recommendation and Jun-24E target price of Rs430/share (June 25E P/ABV: 3.0x), implying ~25% upside. Our positive stance on PFL is underpinned by three factors: 1) Strong capitalization and promoter’s strength to drive strong credit rating and competitive cost of funding. 2) Focused approach towards customers, products and geography, for driving higher growth with better underwriting and lower credit cost. 3) An extensive digital-first approach with branch/employee-light model, for delivering operating leverage-led accelerated profit and RoE improvement. On the back of these factors combined, we expect PFL AUM To clock 37% CAGR over FY23-26E to ~Rs416bn and the RoA/RoE to improve to ~4.6% and ~15.2%, respectively, by FY26E.

Right strategy to complement the right ingredients for a successful lending franchise

PFL is among the best capitalized NBFCs today, with a healthy capital adequacy ratio of 39% as of Mar-23. Its strong parentage enables it to access low cost funds and has resulted in the company quickly reaching parity with established industry peers, in terms of CoFs. PFL has a winning strategy in place for driving growth. Its approach is highly calibrated towards customers, who are credit tested and have a high credit score; this aids in achieving a superior asset quality. With its expansive product suite, PFL has achieved an optimum scale of offerings so at to not spread itself thin, and follows a similar approach in the geographies it caters, with focus on urban tier 1 & 2 cities.

Digital First and Employee-/Branch-Light model is the way forward

Technology is the cornerstone of the Poonawalla project, with substantial investments propping PFL to become a tech-led behemoth since the acquisition of Magma Fincorp. PFL is focused on providing end-to-end digital journeys (from sourcing, all the way to collection) to its customers, for most of its products. PFL is currently in the 2nd phase of its tech revolution, and is on course to likely complete it over the next two quarters. With Digital at its core, PFL intends to follow an employee- and branch-light model, and is confident about operating over the next 3-4 years with ~2,500 employees and ~100 branches, which will primarily assist the company in making collections.

AUM to compound at 37% over FY23-26E; RoA to reach ~4.6%; we resume coverage on PFL with BUY and TP of Rs430/share

With an experienced management, competitive product suite, and right strategy in place, we expect disbursement growth of ~31% over FY23-26E for PFL which should translate into AUM growth of ~37% over the same period. With NIMs expected to expand, opexratios expected to decline, and credit costs likely to be moderate, we expect RoA/RoE of 4.6%/15.2% in FY26E. We resume coverage on PFL with a BUY recommendation and Jun-24E TP of Rs430/sh (earlier Rs300), which implies Jun-25E P/ABV of 3.0x. Key risks: Any shocks in the current uncertain macro environment can result in growth slowdown as well as deterioration in asset quality, especially given the larger unsecured portion of PFL’s book.

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