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Earnings in line despite NIM compression

* Poonawalla Fincorp (PFL)’s 3QFY24 NII grew 63% YoY to INR4.9b (6% miss), while PPOP jumped 125% YoY to INR3.5b (in line). 3Q PAT surged 76% YoY to ~INR2.65b (in line), while 9MFY24 normalized PAT grew 72% YoY to ~INR6.95b.

* Opex declined 2% YoY to ~INR2b (~6% lower than estimate), while the C/I ratio remained broadly stable QoQ at ~36% (PY: ~57%). Provision writebacks stood at INR65m (vs. estimated credit costs of ~INR300m)

* PFL is dedicated to enhancing productivity, aided by digitization. It is gearing up for expansion with new products such as co-branded credit card, EMI cards, and dropline flexi products.

* PFL has laid down a robust foundation for sustainable profitability through initiatives that will lead to lower operating costs (as a % of AUM), higher business volumes, and robust asset quality. We model a CAGR of ~42%/51% for AUM/PAT over FY23-FY26 and expect PFL to deliver an RoA/RoE of ~5.0%/~20% in FY26. Reiterate BUY with a TP of INR580 (premised on 4x FY26E BVPS).

Strong momentum in AUM growth; DDP contribution healthy

* AUM rose 58% YoY/9% QoQ to ~INR219b through market share gains in its existing product suite. Discontinued AUM (including legacy/DA) contributed ~8% to the AUM mix. Unsecured loans contributed ~48% to the AUM mix and short-tenor loans formed 22% of the AUM mix (vs. guidance of 20-25%) in 3QFY24.

* PFL reported 3QFY24 disbursements of INR87.3b, which grew 160% YoY.

* The company continued to focus on accelerated customer acquisitions, with the proportion of Direct, Digital, and Partnerships (DDP) in the sourcing mix at ~80% (PQ: 81% and PY: 66%). This has been driving down the customer acquisition costs (CAC).

* The company has obtained approval for a co-branded credit card, and PFL anticipates its launch in the ongoing quarter. Dropline flexi loans and EMI cards are the new offerings in the development pipeline.

NIM compression due to lower yields from interest income reversals

* Reported NIM declined ~40bp QoQ to ~11% (PQ: ~11.4%) in 3QFY24.

* The cost of borrowings (CoB) remained stable QoQ at ~8% despite tight liquidity conditions and higher interest rates in the system. The run-down of legacy borrowings of INR3b will help PFL bring down its CoB further.

Highlights from the management commentary

* Management guided for a steady-state NIM of ~10% (vs. ~11% in 3QFY24). In the medium term, NIM may contract marginally, but PFL is confident of delivering its RoA guidance.

* The company will strive to maintain its long-term guidance of AUM growth of 35-40%. It will focus on reducing opex and improving profitability

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