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Poonawalla Fincorp (PFL) reported a strong operational beat of +7.4% as PPoP grew +48% YoY, +6% QoQ to INR 4.3bn led by higher non-interest income (+28% QoQ) and improved cost to income of 36% (-34bps QoQ). NII growth was subdued at INR 5.8bn (+37% YoY, +2.4% QoQ) as NIMs (calc on AUM) declined -72bps QoQ to 8.9%. Credit costs stood higher at INR 445mn (68bps of AUM vs 41bps QoQ) which led to an in-line PAT of INR 2.9bn (+46% YoY,-12% QoQ). PFL continued its strong AUM growth (+52% YoY, +8% QoQ), led by personal and consumer loans (+52% YoY, +8% QoQ) while secured business also grew at a healthy pace (LAP – +60% YoY, +13% QoQ, pre-owned car – +33% YoY, 3.5% QoQ). Asset quality improved as GS3/NS3 declined to 0.67%/0.32% (-75bps/-49bps QoQ) respectively. PCR on stage-3 inched up to 52.4% (+302bps QoQ). PFL’s new MD&CEO highlighted broad strategic direction for the company with incremental investments going towards strengthening collection infrastructure, presence and credit and analytics. This is likely to entail higher opex in the near-term. Management has indicated launch of 4 new products, namely, consumer durables, shopkeeper loans, prime personal loans and used CVs and has ambitious plans to scale up AUM by 5-6x over the next 4-5 years (implying an 38% CAGR). PFL has also undergone a significant rejig in its senior leadership team (largely from HDFC Bank, details in Exhibit 1). As the change in business strategy plays out, we closely watch for execution and stabilization of emerging return profile for PFL. Another pertinent fact is that PFL has not seen any asset quality deterioration despite concerns on unsecured loans which should calm nerves around balance sheet risks. We build incremental opex of ~INR 2bn over FY25E/26E and expect growth to accelerate FY26 onwards. This results into revised RoA/RoE of 4.24%/4.3% for FY26 in our estimates. Our revised target price stands at INR 535. Maintain BUY. Inability to scale up newer products or significant slowdown in growth trajectory are key risks.

* Strong growth momentum continues: PFL’s strong disbursement of INR 74bn (+4% YoY, -24% QoQ) in 1Q25, translated into robust growth in AUM of INR 259bn (+52% YoY/ +8% QoQ) driven by personal & consumer loans (+119% YoY, +29% QoQ); while secured business also grew at a healthy pace (LAP – +60% YoY, +13% QoQ, pre-owned car – +33% YoY, 3.5% QoQ). Discontinued legacy book continued its rundown at -26% QoQ. The company plans to launch 4 new products in the portfolio in the near term viz. consumer durables, shopkeeper loans, prime personal loans and used CVs and expects a growth of 30-35% over FY25E. Mgmt aims to grow its AUM by 5-6x in next 4-5 years aiming to grow at 35-40% post FY26E. We estimate PFL to deliver AUM CAGR of 37% over FY24-26E.

* Operational beat led by lower opex: In 1QFY25, PFL reported NII of INR 5.8bn (+37% YoY/+2.4% QoQ) as NIMs (calc on AUM) declined -72bps QoQ to 8.87%. Cost of funds declined -1bp QoQ while calculated yields (on AUM) declined -58bps QoQ. Lower cost to income at 35.8% (-34bps QoQ) led to a beat in PPoP at INR 4.3bn (+48% YoY, +6% QoQ, +7.4% JMFe). Credit costs stood higher at 68bps of AUM (vs 41bps QoQ) which resulted in lower PAT of INR 2.9bn (+46% YoY, -12% QoQ). A significant portion of PFL’s borrowings are floating in nature (70% of total) which is expected to provide CoFs tailwinds when the rate cycle turns leading to margin accretion. Though the operating leverage has been playing out well, the company plans to invest in collections, AI, analytics and new senior management team for next 1.5 years which will keep opex elevated for the near term. We build in incremental opex of ~INR 2bn over FY25E/26E.

* Robust Asset Quality: Asset quality improved as GS3/NS3 declined to 0.67%/0.32% (- 75bps/-49bps QoQ) respectively. PCR for stage3 inched-up to 52.4% (+302bps QoQ). We As the GS3 not stands below1%, we do not expect meaningful rise in credit costs from here and thus build in average credit costs of ~110bps over FY25-26E.

* Valuations and view: During the quarter, PFL’s new MD&CEO announced the launch of 4 new products, namely, consumer durables, shopkeeper loans, prime personal loans and used CVs and articulated its ambitious plans to scale up AUM by 5-6x over the next 4-5 years (implying an 38% CAGR). PFL has also undergone a significant rejig in its senior leadership team (largely from HDFC Bank, details in Exhibit 1). Management highlighted broad strategic direction for the company with incremental investments towards strengthening collection infrastructure, presence and credit and analytics. As the change in business strategy plays out, we closely watch for execution and stabilization of emerging return profile for PFL. We build in incremental opex of ~INR 2bn over FY25E/26E to result in our revised RoA/RoE of 4.24%/4.3% for FY26E, entailing a target price of INR 535. Maintain BUY. Inability to scale up newer products or significant slowdown in growth trajectory are key risks.

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SEBI Registration Number is INM000010361