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Poonawalla Fincorp (PFL) has corrected over the past month (-9% vs +5% for NIFTY FIN SERVICES, +5% for NIFTY). We believe this is an opportunity to add exposure to the name given continued momentum on business and its strong profitability profile. We observe PFL’s digital lending app is already functional (can be downloaded for iOS and Android users) and should see incremental traction w.r.t to new originations. In our view, this should reduce the origination through fintech partnership mode meaningfully over the coming quarters. We expect 51% CAGR in AUM for PFL over FY23-25E. In addition, as the proceeds of the sale from Poonawalla Housing Finance accrue, it would be prudent from a risk management perspective that some part of such gains are utilized for creating future buffers against exigencies. This would impart comfort to future earnings sustainability in our view. Overall, given stability in mgmt. team led by Mr. Bhutada, we expect PFL to continue delivering on its stated medium-term objectives w.r.t to growth and profitability (EPS CAGR of 50% over FY23-25) and avg RoAs of 4.5% over this period. Maintain BUY with INR480 (valuing PFL at 24x FY25 P/E ad 3.0x FY25E P/B).

* App launch to accelerate organic origination: Poonawalla’s current origination mix stands at 61% through partnerships, 14% through branch/DSA route and balance 25% through direct digital and non-partnership channels. We believe the launch of its own app should see acceleration of organic acquisition of customers. This will assuage medium term customer acquisition worries in our view. We expect meaningful reduction in partnership led acquisition going ahead as app usage scales up.

* Housing proceed sales to aid NIMs: PFL had sold Poonawalla Housing Finance last year to TPG, the proceeds of which will accrue in 2QFY24. We expect post-tax gains of INR ~30bn to accrue from this sale. We believe this will help improve NIMs and at the same time, we believe it will be prudent on the management’s part to create some provision buffers for future exigencies and/or legacy portfolio. Mgmt. indicated that the overall interest cost would benefit at the extent of INR 180-200mn from the proceeds of housing sub sale. In addition, the company also started raising short term funds via CPs which would further benefit CoFs by 10-20bps in the coming quarters.

* Valuations reasonable; maintain BUY: We believe PFL’s strong business model, solid operational execution aided by benign credit environment and CoF benefits from the sale of housing sub can deliver PAT of 50% CAGR over FY23-25 and achieve ROA/RoEs of 4.85%/ 13.3% in FY25. In our view, its quality focus, strong balance sheet and long growth trajectory should see the stock re-rate further. We maintain our BUY rating on PFL with a revised target price of INR480 (values PFL at 24x FY25E P/E and 3.0x FY25E P/B).

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CIN Number : L67120MH1986PLC038784