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Soft quarter; one-off erodes profit

In 3Q24, PEL reported a loss of INR -23.8bn (incl. associates income of INR730mn) leading to miss on our estimates at INR 2.2bn largely driven by chunky provisions for AIF investments (INR 26.7bn- post tax). However, there was a beat on PPOP at INR 3.9bn (+53% QoQ, +40% vs JMFe) driven by healthy NII growth (+11% QoQ/ -20% YoY), sharp increase in other income (one-off pertaining to interest income from income-tax refund of INR 640mn) and lower opex (+5% QoQ). Cost to income moderated to 64.2% (vs 72.6% QoQ). NIM expanded by 20bps (at 4.9%) due change in product mix and slower increase in COF by 10bps (at 8.7%). Headline asset quality improved with overall GS3/ NS3 (as percentage AUM) at 2.41%/ 0.97% (-16 bps QoQ/ -26 bps QoQ) with PCR at 55%. Wholesale GS3/ NS3 stood at 3.06%/ 0.87% (flat QoQ/ -47 bps QoQ) with PCR at 72%. Although, credit cost inched up to 153bps (+32bps) due to lower recoveries on the legacy wholesale book as opposed to last quarter. PEL’s AUM stood at INR 673bn (+0.5% QoQ, +3.7% YoY) led by retail business growing at brisk pace (+12% QoQ/ +54% YoY). Whereas, it was impacted by run down on the legacy wholesale 1.0 resulting decline in overall wholesale book (-14% QoQ/ -34% YoY). We expect PEL to gradually navigate through its changing product mix leading to reduced uncertainty on cashflows supported by strengthening of the risk standards and meaningful process improvements ensuring improvement on profitability over the medium term. Strategic changes at key leadership positions also support the transformation story. Maintain BUY at TP of INR 1250 (valuing core PEL business at 0.9x FY26E P/BV).

Retail growth stays put: In 3QFY24 PEL’s AUM stood at INR 673bn (+0.5% QoQ, +3.7% YoY) led by retail business growing at brisk pace (+12% QoQ/ +54% YoY). Whereas, it was impacted by run down on the legacy wholesale 1.0 resulting decline in overall wholesale book (-14% QoQ/ -34% YoY). Wholesale 1.0 contracted by 22% QoQ and 47% YoY while wholesale 2.0 saw accelerated growth 24% QoQ , +2x YoY. Retail growth was broad based with Housing/ Secured MSME/ Other secured/ Unsecured growing at +7%/ +15%/ +32%/ +17% QoQ. Among unsecured loans, PL saw sharp rise of +42% QoQ whereas, Digital/ Unsecured MSME/ MFI loan grew at +10%/ +19%/ +1% QoQ. PEL’s has majority share of secured retail loans aggregating at 76% as against unsecured book at 24%. PEL saw a robust customer addition at INR 0.29mn with customer base of +3.9mn. We expect PEL to witness retail CAGR of 34% vs. decline in wholesale book by 23% over FY24-26E, translating into overall CAGR of 13% over FY24- 26E.

Credit cost inched up; as recoveries on wholesale book slowdown: In 3Q24, overall GS3/ NS3 (as percentage AUM) stood at 2.41%/ 0.97% (-16 bps QoQ/ -26 bps QoQ) with PCR at 55%. Wholesale GS3/ NS3 stood at 3.06%/ 0.87% (flat QoQ/ -47 bps QoQ) with PCR at 72%.Wholesale assets observed an increase in stage 2 with GS2 at 16.4% vs 11.5% QoQ as an account witnessed downgrade to stage2. PEL’s unsecured 90+ dpd witnessed slight deterioration of +10bps QoQ with unsecured consumer loans at 1.7% (flat QoQ) showcasing improvement in 50k ticket size 90+ DPD at 1.8% (-10bps QoQ). Mgmt. indicated that delinquency rates on unsecured retail lines have come down within thresholds after corrective actions taken over last couple of quarters. While net credit cost remained elevated at ~INR 2.6bn (153bps vs 121bps QoQ), impacted by lower recoveries in the legacy wholesale book. We build in avg. credit cost of 1.3% over FY24- 26E and continue to monitor the same closely.

Valuations benefitted by structural improvements: We expect PEL to gradually navigate through its changing product mix leading to reduced uncertainty on cashflows supported by strengthening of the risk standards and meaningful process improvements ensuring improvement on profitability over the medium term. Strategic changes at key leadership positions also support the transformation story. Maintain BUY at TP of INR 1250 (valuing core PEL business at 0.9x FY26E P/BV).

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