Buy Poonawalla Fincorp Ltd For Target Rs.360 by Motilal Oswal Financial Services Ltd
Legacy book stress keeps credit costs elevated
AUM grew ~41% YoY; 1QFY26 launch of six new products on track
* Poonawalla Fincorp’s (PFL) 3QFY25 PAT declined ~93% YoY to ~INR187m (vs. MOFSLe: INR1.52b).
* NII grew ~25% YoY to ~INR6.1b (in line), while PPoP grew ~7% YoY to ~INR3.7b (in line). Other income declined ~2% YoY and ~32% QoQ to ~INR581m, due to no assignment income or write-backs in 3Q.
* Opex in 3QFY25 rose 50% YoY to INR3b, with C/I ratio declining to ~45% (PQ: 57%). In 2QFY25, there was a one-time opex of INR710m.
* Provisions stood at INR3.5b (est. ~INR1.6b), translating into annualized credit costs of ~4.7% (PQ: 13% and PY: -0.1%). In 2QFY25, the company took a one-time provisioning of INR6.7b on the STPL book.
* The company outlined its vision to evolve into a multi-product lender, expanding its offerings from four to ten products. Additionally, it plans a phased rollout of 400 new branches starting from 1QFY26. The company remains on track to launch its six new products in new locations.
* Management has guided for AUM growth of ~30-35% in FY25 and ~30%- 40% from FY26 onward, reaffirming its confidence in achieving these targets. We model AUM growth of ~34%/33% in FY26/FY27.
* We cut our FY25E/FY26E/FY27E PAT by 91%/1%/6% to factor in higher credit costs and high opex. We model a CAGR of 34%/16% in AUM/PAT over FY24-FY27E and expect PFL to deliver RoA/RoE of ~3.2%/~17% in FY27. The near-term outlook warrants a detailed understanding of the various pillars of execution, and we will look forward to more clarity from the company management. Maintain BUY with a TP of INR360 (premised on 2.8x Sep’26E BVPS).
Healthy AUM growth of ~41% YoY; new products to be launched
* AUM grew ~41% YoY and ~9% QoQ to ~INR310b. AUM mix consisted of ~36% MSME finance, ~24% personal and consumer finance, ~22% LAP and ~14% pre-owned cars.
* Equipment Lease Financing will be introduced as a new product, in addition to the six products the company had already announced. They will be launched in 1QFY26.
NIM rose ~15bp QoQ due to ~40bp expansion in yields
* NIM (calc.) rose ~15bp QoQ to ~9.35%, driven by improvement in yields. Spreads (calc.) rose ~40bp QoQ, driven by decline in CoB and improvement in yields. CoB (calc.) declined ~20bp QoQ to ~7.8%.
* We model a NIM of ~8.4%/8.6% in FY26E/FY27E.
Credit costs elevated; GS3 improves ~25bp QoQ
* GS3 declined ~25bp QoQ to ~1.9%, while NS3 rose ~50bp QoQ to ~0.8%. PCR on S3 loans declined sharply to ~57% (PQ: ~85% and PY: ~47%). Management guided that credit costs will continue to decline in the subsequent quarters.
* We model credit costs of ~1.9%/1.7% in FY26/FY27 (vs. ~5.5% in FY25E).
Highlights from the management commentary
* Out of provisions of ~INR3.5b taken during the quarter, ~INR2b was toward the STPL book and the rest was spread across other products. Write-offs stood at ~INR6.8b, which was also spread across multiple products. However, the bulk of write-offs (~INR5.2b) were toward the old STPL book.
* PFL has calibrated even its STPL now and is confident of growing it.
* Management has guided for robust profit growth of ~26-27% and AUM growth of 30-40% over the medium term.
Valuation and view
* The near-term outlook will warrant a detailed understanding of the various pillars of execution, and we will look forward to more clarity from the company management. Reiterate BUY with a TP of INR360 (premised on 2.8x Sep’26E BVPS).
* Key downside risks: a) inability to execute its articulated strategy despite a new management team and investments in technology, distribution, and collections; and b) aggressive competitive landscape leading to pressure on spreads and margins and/or deterioration in asset quality.
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