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Poonawalla reported a good quarter, with profit, AUM growth, asset quality, and credit cost broadly in-line-to-slightly-better than consensus/our estimates. The arrival of new MD & CEO Arvind Kapil has brought along a number of senior professionals from HDFC Bank and other banks, aimed at building second-layer capabilities, broadly replacing the existing one. Kapil has well-articulated his vision to grow AUM by 5-6x over the next 5-6 years, with PAT growth tracking AUM growth. Sustainability, and predictability of growth and profitability remain at the core of the strategy, to achieve which the product (secured/unsecured), distribution (digital and physical), people, and tech capabilities are being aligned. Though the strategic vision is impressive, such strategic realignment and execution will take some time to justify the current premium valuation. We reiterate our REDUCE rating on the stock, with Jun-25E TP of Rs410/sh (Rs440 earlier), implying a multiple of 3.0x FY26E P/BV.

Good performance in Q1FY25

Poonawalla reported PAT of Rs2.92bn in Q1FY25 which is better than estimated, on account of lower than expected opex and credit cost. Overall AUM (~Rs270bn) continues to grow at 8% QoQ (52% YoY), with the personal and consumer segment registering sequential growth of 29% (72% in Q4FY24), while the disbursement for the quarter remained weak on account of seasonality, coming at Rs74bn (-24% QoQ/5% YoY). the management commentary highlighted that onboarding an experienced management for some products and using the ‘Phygital’ mode would call for physical geographical expansion, though it expects the overall cost-to-income to be stable/improve on account of increased revenue and efficiency. Also, credit cost during the quarters remained under control (68bps in Q1FY25), while asset quality is still robust with GS3/NS3 at ~0.67%/0.32% – improving 49bps/27bps, which could be the result of utilization of management overlay of Rs9.1bn created in Q2FY24. (Exhibits 1 & 4)

Broadbased senior-management rejig to drive the new strategic vision

With Arvind Kapil taking charge as Poonawalla’s new CEO, the top management has been reshuffled and a new, experienced management appointed. The management indicated that such changes would bring more sustainability and predictably to the business. PFL targets increased focus on 4 products (CD; Shopkeeper loan; Prime PL; Used CV), which are expected to improve customer franchise and cross-selling, thus improving overall margins; these are expected to incubate for eight months. Following successful implementation of the new strategy, the management expects the AUM to grow 35-40% (5-6x AUM in the next 5-6 years) and increase predictability of the profitability. In terms of credit cost, the mgmt highlighted its cautious stance on its unseasoned STPL book in the near term, and the expected overall credit cost to be stable given the core expertise of the new management in business segments, supported by investment in developing a strong collections infrastructure which would keep asset quality robust. (Exhibit 5)

Priced to perfection; execution risk puts a cap on valuation

The new strategic vision is impressive, and a management team being put in place to execute the strategy looks highly credible. However, the strategic realignment will have a bearing on growth, cost, and profitability in the near term, and it will take some time for this new strategy to deliver. Against such a backdrop, we see POONAWALLA stock trading at premium valuation of FY26E P/B of 3.0x, and reiterate our REDUCE rating with revised down Jun-25E TP of Rs410/sh. (Exhibit 3)

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