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Poonawalla Fincorp reported disappointing Q2 numbers with the credit cost of Rs9.1bn (including Rs6.7bn one-time provisioning on the STPL book) leading to the company posting a Rs4.7bn loss. The management provided comfort by stating that review of the entire portfolio is complete and there should not be any need for additional provision. The company unveiled 6 new products and its omnichannel phygital distribution that shall help it deliver 5-6x AUM growth in the next 6 years. With the Poonawalla name, strong capital adequacy, AAA rating at his disposal, and past baggage likely cleaned up, the new CEO, Arvind, is trying to build the franchise by hiring competent top and middle management, expanding product and distribution, and tightening the risk management. However, this strategy should moderate profitability over the medium term on account of higher opex, and the execution of this ambitious plan amid tightening regulatory environment and heightened competition will be a daunting task. We reiterate our REDUCE rating on the stock with revised Sep-25E TP of Rs240 (vs Rs400 earlier), implying FY26E P/BV of 2x.

Clean up of the past and preparation for the future, cost dearly in the present

PFL reported a net loss of Rs4.7bn due to a sharp surge in credit cost to Rs9.1bn, owing to a one-time provision of Rs6.7bn on review of past STPL book. The operating expenses growing to 5.4% of AUM (from 3.9% a quarter earlier) were due to a one-time expense on investments for future growth of Rs0.7bn. GS3 spiked QoQ to 2.1% from 0.67%, but higher provisioning ensured NS3 remained flat QoQ to 0.33%. AUM growth moderated to 5% QoQ/40% YoY from 8%/52% in Q1, owing to a credit policy review reducing Personal Loan disbursals to 1/5th of the earlier run rate.

Expanding people, product, and distribution to achieve ambitious growth plans

The management emphasized that they have done a comprehensive review of the entire portfolio and have decided to provide an additional one-time provision of Rs6.7bn on the STPL book. With the clean-up act done, the focus shifts toward building the organization for the future, which delivers 5-6x AUM growth profitably in the next 5 years. To achieve this ambitious target, the company has announced comprehensive plans to expand the product offering by adding 6 new products (Prime PL, Gold Loan, Consumer Durables, Shopkeeper Loan, Education Loan, and Used CV), adding branches for products (that require branch presence), and strengthening management and field-level manpower strength (already underway). To support growth, the management is also very clear about its Phygital strategy (a sharp departure from the earlier Digital only), focusing on ramping up branch infra for products like gold, while continuing to work with DSA, Call centre, App/Web-led Digital sourcing for many other products.

Material cut in estimates; reiterate REDUCE with revised TP of Rs240

To reflect the Q2 developments (credit cost and OpEx spike) and the management commentary on future growth and profitability (increased OpEx guidance), we have changed our estimates leading to 74%/28%/29% earnings cut over FY25/26/27E. We reiterate our REDUCE rating on the stock with revised downwards Sep-25E TP of Rs240 (Rs400 earlier), implying FY26E P/B of 2x. Despite the recent correction, the stocks are currently trading on relatively richer valuation of FY26E P/B of 2.5x. While we view the new management team and their plan as a more sustainable one, the investors will prefer to watch from the fences over the next few quarters as: 1. Execution of ambitious growth plan has to be observed closely for progress, as the competitive and regulatory landscape appear difficult; 2. Given the outcome of past scorching growth phase cycle leading to ~4% true credit cost over FY21-25E, the investors will take time before differentiating current growth from the past. Against this backdrop, PFL shares are likely going to underperform in the near-to-medium term.

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