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Good traction in newer businesses; asset quality stable

NIM declined ~80bp QoQ; opex ratios and credit costs remain elevated

* Poonawalla Fincorp’s (PFL) 1QFY26 PAT declined ~79% YoY to ~INR626m (~40% miss). NII in 1QY26 grew ~11% YoY to ~INR6.4b (~6% miss). Other income rose ~29% YoY and ~23% QoQ to ~INR1.3b. Higher non-interest income was due to higher fee income and gain on assignments during the quarter.

* Opex rose 82% YoY to ~INR4.4b, with the C/I ratio rising QoQ to ~58% (PQ: 53% and PY: ~36%). PPoP declined ~25% YoY to ~INR3.2b (~16% beat). Provisions stood at INR2.4b (~70% higher than MOFSLe), translating into annualized credit costs of ~2.7% (PQ: ~3.2% and PY: 0.7%).

* The Board of Directors approved a primary equity infusion of INR15b through preferential allotment to the promoter at a price of INR452.5 per share.

* Management indicated that over the next 3 to 4 quarters, the company aims to scale up its AUM through calibrated credit growth, particularly across newly launched products that are witnessing promising early traction.

* Management highlighted that the erstwhile STPL book has declined to just 4% of the AUM as of Jun’25 (from ~8% in Mar’25). Notably, ~80% of the STPL book is now 0dpd, and the company does not anticipate any further stress from this segment. Meanwhile, the remaining ~20% is adequately provided, which will mitigate any potential impact on credit costs.

* PFL further shared that the newly originated STPL portfolio is scaling up well and is delivering encouraging early outcomes. Cheque bounce rates have declined by 70%, while collection efficiency has improved by 40%, reflecting better borrower quality and enhanced underwriting.

* Management guided for healthy AUM growth in FY26, likely exceeding its previous guidance of 35-40%. We model AUM growth of ~53%/45% in FY26/FY27.

* We cut our FY26E PAT estimate by ~22% to factor in higher credit costs and keep our FY27 estimates broadly unchanged. We model a CAGR of ~50% in AUM over FY25-FY27E and expect PFL to deliver RoA/RoE of ~2.8%/~16% in FY27. Reiterate BUY with a TP of INR520 (premised on 3.5x Mar’27E BVPS).

AUM grows ~53% YoY; healthy early traction in newer businesses

* AUM grew ~53% YoY and ~15% QoQ to ~INR413b. The AUM mix consisted of ~36% in MSME finance, ~23% in personal and consumer finance, ~25% in LAP, and ~13% in pre-owned cars. Disbursements grew ~44% YoY to ~INR107b in 1QFY26.

* The company reported strong momentum across key segments, with LAP growing 128% YoY and business loans rising 57% YoY. Prime personal loan disbursements reached INR3b in Jun’25, with significantly better asset quality than the legacy STPL book. The 24x7 Digital PL platform, driven by fintech partnerships, continues to gain traction and is expected to scale meaningfully over the next 4 to 6 quarters.

NIM (calc.) contracts ~80bp QoQ; share of NCD rises significantly

* NIM (calc.) contracted ~80bp QoQ to ~7.2%, driven by a decline in yields by ~65bp QoQ to ~13.4%. CoB (calc.) was largely stable QoQ at ~7.75%.

* The company significantly increased the proportion of NCD borrowings in its liability mix to optimize funding costs. NCD share rose from ~6% in Mar’25 to ~23% in Jun’25. It plans to further increase this proportion to ~35% over the next couple of years as part of its long-term liability strategy.

* Management shared that NIMs are expected to reach ~9% over the next 3-4 quarters as the newer, high-quality STPL and other product portfolios scale and the old STPL book runs down. We model an NIM of ~7.2%/7.9% in FY26/FY27 (vs. ~7.8% in FY25).

Asset quality stable; credit costs excluding STPL decline

* GS3 was largely stable QoQ at ~1.85%, while NS3 was also stable QoQ at ~0.85%. PCR on S3 loans declined ~50bp QoQ to ~54% (PQ: ~54.5% and PY: ~52.4%).

* Management remains confident of a sustained decline in credit costs, driven by its robust underwriting practices and portfolio diversification. The company further shared that excluding the STPL portfolio, credit costs for the remaining 12 products (which comprise ~80% of the AUM) stood at 1.43% (compared to overall reported credit costs of ~2.6%). PFL guided for steady state credit costs of ~1.5%-2%, and we model credit costs of ~2.1%/1.7% (as a % of loans) in FY26/FY27 (vs. ~5.1% in FY25).

Highlights from the management commentary

* Management shared that credit costs from the erstwhile STPL book have reduced to INR640m in 1QFY26 from INR1.37b in 4QFY25.

* In the MSME segment, the company maintains a strong focus on borrower-level risk assessment, actively avoiding customers with multiple credit inquiries. This disciplined approach has helped preserve overall portfolio quality. MSME’s portfolio is ~60-70% secured, well-calibrated, and does not show any major early warning signals.

* The company targets to reach 400 branches by Mar’26. It has already opened 80 gold loan branches across GJ, HR, RJ, and MH.

Valuation and view

* PFL reported healthy AUM and disbursements growth during the quarter, even as the earnings missed expectations due to higher credit costs, partially offset by lower-than-expected operating expenses. We believe that FY26 will be a crucial year for the company to demonstrate its ability to achieve guided loan growth while sustaining asset quality and keeping credit costs contained. We remain watchful and will closely monitor the on-ground execution of the company's stated strategy. Reiterate BUY with a TP of INR520 (premised on 3.5x Mar’27E 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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