IGI Logo

Provision reversals boost Q2FY23 earnings

* For Q2FY23, Poonawalla Fincorp (PFL) reported earnings of Rs1.6bn, much above consensus’ and our estimates, mainly owing to provision reversals & higher fee-income on account of sale of the legacy book. Pre-provision operating profit was in line with our estimates. Aggressive writeoff of the legacy portfolio, coupled with reversal of macro-prudential provisions taken in Q1FY23, resulted in improved GS3 and Rs0.4bn of net provision reversals. Disbursements grew by 8.3% QoQ (97% of which were organic), increasing 32% QoQ. AUM growth was 5.1% QoQ/21.5% YoY, with the de-focused book constituting 8.3% of the portfolio (Q1FY23: 13%). Asset quality improved, with GS3 at 1.52% (Q1FY23: 2.2%) and NS3 at 0.83% (Q1FY23: 0.95%). The restructured portfolio stands at 2.5% of AUM (Q1FY23: 3.5%).

* Management expects tripling its FY21 AUM-base by FY25, with RoA moving to 3.0% on lower cost of funds, portfolio shift towards secured (~65% share) loans, and tighter asset-quality control.

* We retain our HOLD rating with unchanged Sep-23E TP of Rs270, valuing PFL at 2.7x Sep-24E BVPS using the excess return on equity (ERE) method. Downside risk: New product lines could result in higher than expected credit costs. Upside risk: We forecast FY25 credit costs of 131bps (in line with that of other consumer financiers like Bajaj Finance) vs management estimate of 50- 70bps. Steady-state provisions below our forecast offer an upside to earnings.

Q2FY23 result highlights: In Q2FY23, PFL recorded its highest-ever quarterly & monthly disbursements, with strong traction in digital business loans, personal loans, and loans to professionals. Calculated NIM declined by 10bps QoQ to 7.95%, whereas opex-to-AUM increased by 42bps QoQ to ~5.95%. Management expects 1-1.5% reduction in opex-to-AUM from FY23. Costto-income in Q2FY23 was 60.4% (Q1FY23: 59.4%). GS3 improved to 1.52% (Q1FY23: 2.2%) and NS3 enhanced by 0.83% (Q1FY23: 0.95%). The restructured book as of Sep-22 stood at Rs4.7bn (2.5% of AUM) vs. Rs6.1bn (3.5% of AUM) as of Jun-22. For Poonawalla Housing Finance (PHFL), disbursements increased by 14% QoQ/ 57% YoY. AUM growth was 6.2% QoQ/31% YoY, with AUM of ~Rs56bn as of Sep-22. Earnings grew 8% QoQ/75% YoY. GS3 for the quarter was 0.84% (Q1: 0.87%), while NS3 was 0.53% (Q1: 0.54%). Coverage ratio remained flat at ~37%.

Earnings call KTAs: 1) As part of AUM, housing loans (including DSA acquired) entail ~30%, unsecured PL/BL and loans to professionals are ~28%, pre-owned car loan form ~12%, the legacy Magma book is ~8%, other acquired loans are ~14%, with auto lease and others constituting the rest. 2) Opex-to-AUM was ~6% in Q2 vs 5.5% in Q1FY23 due to ESOP-related expenses and investment in technology & people. 2) ESOP charge is expected to fall by ~Rs0.5-0.6bn from FY23 and by another ~Rs0.25-0.3bn in FY24. 3) Legacy book would run down below ~Rs5bn by Mar-23. Full run-down of the legacy book is expected by Jun-23. 4) Considering past trends, there would be 40-45% write-backs against the total written-off legacy loans which can be expected to accrue over the next 12-18 months.5) On account of sale of of ~Rs.2.3 bn the legacy book, fee income has increased by ~Rs331mn; similar one-off gains may accrue even over the next 2-3 quarters. 6) More than 90% of the customers have been acquired under the direct digital program with digital ecosystem partners, and only ~5% of the total customer count is via DSA.

Changes in estimates: Unlike our earlier expectations of retention of macro prudential provisions on the balance sheet, we now factor-in complete reversal, coupled with 45% of recoveries from the fully written-down book of Rs11bn over FY23-24. Consequently, our credit cost forecasts for FY23/24 are revised down to 88bps on an average, while credit cost for FY25 is revised up, to 131bps from 117bps earlier (Exhibit 3).

To Read Complete Report & Disclaimer Click Here

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354

Above views are of the author and not of the website kindly read disclaimer