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Growth drivers gathering momentum

* Diversified franchise enters the next phase of profitable growth: Poonawalla Fincorp (PFL)'s transformation into a diversified retail lender has moved beyond the investment phase. The newer businesses have attained meaningful scale and are emerging as incremental growth drivers, supported by a wider distribution footprint, improving digital capabilities and disciplined execution. As the portfolio becomes more diversified across products, customer segments, and collateral types, we expect growth to become more resilient and earnings quality to improve.

* Margin expansion to be driven by better mix: The company's profitability outlook continues to strengthen as higher-yielding businesses scale up, portfolio yields improve, and operating leverage begins to offset the elevated investment spend of the past two years. With borrowing costs likely to remain broadly stable, we expect margin expansion to be increasingly driven by product mix optimization and execution rather than external tailwinds.

* Asset quality improvements provide earnings visibility: Credit performance continues to improve as stronger underwriting, portfolio recalibration, and robust collection efficiencies reduce incremental stress formation. The growing share of secured products and lower-risk customer segments should support a gradual normalization in credit costs, improving the sustainability of earnings over the medium term.

* Reiterate BUY – structural transformation creating a high-quality franchise: We believe PFL is transitioning from a transformation story to an earnings compounding story. The combination of multiple growth engines, improving operating efficiency, AI-led productivity gains, and strengthening asset quality should drive superior earnings growth over the next few years. We model ~43% AUM CAGR and ~117% PAT CAGR over FY26-28E, with RoA/RoE improving to ~2.4%/~17% by FY28E. At 2.5x FY28E P/BV, valuations remain attractive relative to its medium-term earnings potential. We reiterate our BUY rating with a TP of INR570, based on 3.0x Mar'28E BVPS.

New growth engines power the next leg of growth

PFL's emerging businesses are becoming an increasingly meaningful growth driver, with new products contributing ~26% of total disbursements and ~17% of AUM in 1QFY27. Momentum is being led by the rapid scale-up of gold loans, consumer durable financing, Prime PL, CV, and education loans, supported by an expanding distribution network, strengthened digital capabilities, and technology-led underwriting. The resulting diversification across borrower segments, products, and collateral types will reduce concentration risk while enhancing earnings resilience. We expect PFL to deliver AUM/disbursement CAGR of 43%/36% over FY26-28E, supported by management's continued emphasis on profitable growth over volume-led expansion.

Higher yields and operating leverage to drive profitability

Disbursement yields expanded ~50bp QoQ in 1QFY27 (vs ~15.9% in 4QFY26), driven by a higher mix of better-yielding products and improved pricing, supporting portfolio yield expansion. PFL expects yield expansion to offset funding pressure, and we expect NIM of ~7.6%/~7.7% in FY27E/FY28E. Meanwhile, improving digital adoption, AI-led efficiencies, and operating leverage from scale are driving structural cost efficiencies. With the heavy investment phase largely behind, we expect the C/I ratio to decline to ~43% by FY28E (FY26: 52%)

Valuation and view

* PFL's transformation into a diversified retail lender is beginning to translate into stronger financial outcomes. The company has successfully built multiple lending franchises across secured and unsecured retail segments while simultaneously strengthening its underwriting framework, digital capabilities, and operating infrastructure. With the heavy investment phase largely behind, the focus is now shifting toward scaling these businesses profitably, supported by improving operating leverage and a more favorable portfolio mix.

* The company's earnings outlook is underpinned by four structural drivers:

(1) healthy loan growth led by both legacy and newly launched businesses

(2) gradual margin expansion driven by better product mix and improving portfolio yields

(3) normalization in credit costs as portfolio seasoning improves

(4) operating leverage supported by technology-led efficiencies and disciplined cost management. Collectively, these should drive a meaningful improvement in profitability and return ratios over the medium term.

* We estimate ~43% AUM CAGR and ~117% PAT CAGR over FY26-28E, with RoA/RoE improving to ~2.4%/~17% by FY28E. While the pace of margin expansion and credit cost normalization remains key to monitor, we believe PFL is well positioned to deliver superior earnings growth, supported by a diversified lending franchise and disciplined execution. Reiterate our BUY rating with a target price of INR570, based on 3.0x Mar'28E BVPS.

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