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Sale of housing finance subsidiary to TPG

* Sale of the housing finance subsidiary: Poonawalla Fincorp (PFL), in its board meeting held on 14-Dec-2022, approved the sale of its housing finance subsidiary – Poonawalla Housing Finance (PHFL) – to TPG (Perseus SG Pte., an entity affiliated with TPG Global, LLC). The deal has been struck at Rs39bn, which values PHFL at a trailing Sep-22 P/BVPS of 3.4x. This is broadly in line with our TP implied trailing Sep-22 valuation of 3.3x for the consolidated entity. As per our interactions with the management, post the approval from the respective regulatory authorities, shareholders and lenders, the deal is expected to be completed within 3-6 months. As of Sep-22, PFL (standalone) had an AUM of ~Rs129bn and reported RoA of 4%, while PHFL’s AUM stood at ~Rs56bn and RoA at 2.4%.

* Stated rationale for the transaction: The sale is in line with one of Poonawalla Fincorp’s stated ‘Vision 2025’ objectives – of value unlocking of the housing finance subsidiary. Management believes the transaction will help them focus on maximizing value creation by optimizing resource allocation and increasing Management focus on the business needs of the standalone entity. With rapid growth in the digital ecosystem, Management believes that the growth opportunities for PFL are aplenty. PFL is expected to continue building a strong retail franchise in consumer and MSME financing.

* Management guidance on the way forward: PFL has laid out a six-fold future roadmap for the standalone business which includes:

* focus on tech-led growth by leveraging technology and digital capabilities. PFL targets AUM growth of 35-40% YoY over the next 3 years;

* risk-calibrated growth and operational efficiencies to aid in achieving constant RoAs of 4-4.5%;

* net NPAs expected to remain below 1%, on the back of prudent underwriting and collection capabilities;

* branch and manpower rationalization to reduce operating expenses;

* with PFL already being well-capitalized and having one of the lowest CoFs, the sale is expected to grant further strength for exponential growth over the next 5-7 years,

* deep capital base to enable PFL to explore deep investments in technology and analytics through both, the organic and inorganic routes.

* Our view: Poonawalla Fincorp’s existing consolidated portfolio is a dichotomy – of the old world legacy-acquired Magma Fincorp portfolio comprising of CV/CE/Agri/affordable housing loans that resides beside the digital-first-technology-led, mainly urban, consumer/SME loans that originated post the acquisition of Magma. As of Q2FY23, the PFL portfolio comprises of housing loans (incl. PHFL DSA acquired) at ~30%, unsecured PL/BL and loans to professionals at ~27%, pre-owned car loans at ~12%, legacy magma book at ~8%, other acquired loans at ~14%, with auto lease and LAP constituting the rest. The legacy CV loans in the standalone entity were expected to run down by Q1FY24. Now, with the sale of Poonawalla Housing Finance expected to be culminated during H1FY24, the business will become a purely technology-led, asset-light retail consumer/SME play.

* PFL’s consolidated portfolio excluding the legacy CV/CE loans and mortgage portfolio will primarily be composed of LAP (11%), pre-owned car loans (20%), unsecured personal/business loans (44%), DA acquired portfolio of 23% and the rest in auto lease. In our assessment, almost two-thirds of the portfolio would be unsecured loans, while the rest would be quasi secured, like LAP and pre-owed car loans.

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