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Earnings miss due to NIM compression; loan growth strong

* Poonawalla Fincorp (PFL)’s 1QFY25 NII grew ~37% YoY to ~INR5.8b (5% miss), while its PPoP increased ~47% YoY to ~INR4.3b (9% miss). PFL’s 1QFY25 PAT grew ~46% YoY and declined ~12% QoQ to ~INR2.9b (9% miss).

* Opex rose ~33% YoY to ~INR2.4b (~15% above estimate), with the C/I ratio broadly stable QoQ at ~36% (PY: ~38%). Provisions stood at INR425m (vs. estimated credit costs of ~INR500m).

* PFL articulated its strategy under the new MD & CEO Mr. Arvind Kapil (exHDFC Bank). The new management team will prioritize scalability by improving collections and distribution. It plans to double its product suite with new product offerings. Risk management will be a key focus area.

* We cut our FY25/FY26E earnings by 9%/13% to factor in NIM compression and elevated opex from investments in distribution, management team, and collections. We model a ~34%/29% AUM/PAT CAGR over FY24-FY26E and expect PFL to deliver an RoA/RoE of ~4.4%/~17% in FY26. Reiterate BUY with a TP of INR465 (premised on 3.3x FY26E BVPS).

Disbursements hit by a caution in the short-term personal loans (STPL)

* AUM grew ~52% YoY and ~8% QoQ to ~INR270b. Discontinued AUM (including legacy/DA) contributed ~4% to the AUM mix. The share of unsecured loans remained stable at ~51% of the AUM mix.

* PFL reported disbursements of ~INR74b, which grew ~5% YoY.

* Management guided ~30-35% AUM growth in FY25 and ~35-40% AUM CAGR over the next five years. We model an AUM CAGR of ~34% over FY24-26E.

NIM contracts ~85bp QoQ due to ~70bp decline in yields

* NIM (calc.) contracted ~85bp QoQ to ~10%, due to a decline in yields. Spreads (calc.) declined ~50bp QoQ despite ~20bp dip in CoB (calc.) to ~8%.

* Unlike the short-tenure loans, which were earlier disbursed under the colending model, the direct origination model features personal loans with an average tenure exceeding one year, resulting in a fee amortization over a longer period. Management guided stable borrowing costs. We model a NIM of ~8.8% over FY25-FY26E.

Highlights from the management commentary

* STPL (launched in 4QFY24) is not seasoned yet and will be monitored closely. The new management sensed that it needed to tweak credit policies and strengthen its collection capabilities in this segment. PFL will not accelerate STPL until the new management team gets a complete hold on it.

* PFL shared that investments in collections will be a key imperative for the company. Alongside, it will also be making investments in the new management team. From the third year onwards, PAT growth will mirror AUM growth.

Asset quality continues to improve; credit costs still benign

* Asset quality improved with GS3/NS3 at 1.2%/0.6% and the PCR on S3 loans rose ~2pp QoQ to ~49%.

* We model credit costs at 0.6%/1.1% over FY25/FY26.

Senior management rejig under the leadership of the new MD & CEO

* With the appointment of Mr. Arvind Kapil (ex-HDFC Bank) as MD & CEO, PFL has seen a management rejig. A few more individuals from HDFC Bank will join PFL’s senior management team.

* Mr. Kapil shared that PFL aims to achieve productivity, predictability, and sustainability through higher investments, mainly in collections, technology, and launch of new businesses. The company plans to launch consumer durable loans, PL prime, shopkeeper loans, and used-CV loans in FY25.

Valuation and view

* Strong leadership teams across functions, realignment of customer and product segments, and focus on leveraging technology and analytics position PFL well to build scale and deliver superior risk-adjusted returns. Reiterate BUY with a TP of INR465 (premised on 3.3x FY26E 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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