Domestic brokerage house Motilal Oswal has initiated coverage on financial firm Poonawalla Fincorp with a ‘buy’ call and a target price of ₹350, implying a potential upside of 25 percent from its current market price of ₹280. This comes on the back of recent credit rating upgrades, robust asset quality, significant improvement in liability franchise and a strong outlook.
The stock has risen nearly 50 percent in the last 1 year from its 52-week low of ₹192, hit on December 27, 2021. It has also given consistent returns in the last 10 years, up 250 percent from ₹80 in December 2012.
Poonawalla Fincorp (PFL) is an NBFC that focuses on consumer and small business finance via products like personal loans, loans to professionals, business loans, SME loans, etc. It operates across 21 states with a lean branch network and standalone AUM of ₹13,200 crore as of Sep’22. This NBFC is the erstwhile Magma Fincorp wherein consequent to a capital raise of ₹3,500 crore in May’21, the Poonawalla Group acquired a controlling stake in the company.
"Consumer and small business finance – the segments targeted by PFL – have a huge market opportunity. While we expect the early green shoots of a transformed company to become visible within the next three-to-six months, PFL has laid down a robust foundation for sustainable profitability through initiatives that will lead to lower operating costs (as a percentage of AUM), higher business volumes and robust asset quality," stated the brokerage.
Key positives
Credit rating upgrades: According to the brokerage, there were several improvements that transpired after the new management took control around May’21 – including but not limited to – sharpening the underwriting framework, front-ending of write-offs by implementing a stringent write-off policy and leveraging analytics for policy optimisation. Collections were further strengthened to exercise tight control over asset quality. All these interventions along with a strong promoter led to an improvement in credit rating to AA+ (up two notches), noted MOSL. CARE recently upgraded both PFL and PHFL to AAA.
The brokerage further pointed out that the improvement in credit ratings allowed PFL to get most bank loans re-priced at lower rates and enabled the company to tap diversified sources of borrowings (including debt capital markets) leading to a marked improvement in liability franchise. PFL now has one of the lowest costs of borrowings in the NBFC cohort, said MOSL.
Robust asset quality: Robust underwriting processes and a change in the company’s customer universe have led to strong asset quality, noted the brokerage. Following the acquisition, PFL’s customer profile transformed into a formal income group (from an informal earlier). More than 80 percent of the customers have a CIBIL score >730, implying stability, informed the report. MOSL expects asset quality to remain robust and credit costs to stay benign at 1 percent going ahead, due to its strong risk management and focus on credit-tested customers.
It also sees recoveries from the legacy written-off portfolio to continue in H2FY23 and even in early FY24. Unlike some of its peers, PFL is a pure-play retail franchise and MOSL projects NNPA (net non-performing assets) to remain below 1 percent and model credit costs to be at 0.5/1.2 percent (including recoveries) during FY24/FY25E.
Digital-first at its core: PFL has rapidly transformed into a ‘digital-first’ organisation whereby it has reconciled the physical and the digital initiatives to widen its footprint without having to increase the branch distribution, employee count, or operating costs proportionately, stated the brokerage. The firm will eventually transform its distribution model from a DSA-driven model to one of direct sourcing, it added.
The company has also partnered with various fin-techs and consumer techs such as Cars24, PaisaBazaar and KrazyBee. Seamless tech integration has made PFL the partner of choice, highlighted MOSL. Direct, digital and partnership (DDP) contribution in organic disbursements stood at 47 percent (v/s 17 percent in 4QFY22), which has led to lower customer acquisition costs (CAC), reduced TAT and customer delight, said the report.
Financial performance: Poonawalla Fincorp's net profit rose by 70.8 percent Year on Year (YoY) to ₹163 crore in the second quarter ended September 2022 (Q2FY23) on improvement in disbursement and margins. Its net interest income (NII) for reporting quarter grew by 33 percent YoY at ₹446 crore. Sequentially, NII was up by 12 percent over Q1FY23. The net interest margin (NIM) rose to 9.8 percent in Q2FY23, 77 basis points over a year ago level. Sequentially, it was up 35 basis points, PFL said in a statement today.
Its assets under management (AUM) expanded by 22 percent YoY to ₹18,560 crore. Sequentially they grew by 5 percent over AUM at end of June 2022.
Abhay Bhutada, managing director, PFL, said the quarter was marked by the highest-ever organic disbursement, customer acquisition, and lowest GNPA & NNPA in 38 quarters. This sets the momentum for an even more exciting second half and beyond.
The asset quality profile improved with gross non-performing assets (NPAs) declining by 259 basis points YoY to 1.52 percent at end of September 2022. Its net NPAs were down 118 basis points YoY to 0.83 percent as of September 2022.
Outlook
At its current size (one-fifth to one-tenth of peers in similar segments), a huge opportunity beckons in its target product segments and with a healthy capital position, MOSL believes PFL has a strong and long runway for growth ahead. It predicts an AUM/PAT CAGR of 37 percent/65 percent over FY22-FY25E, respectively. It also models an RoA/RoE of 4.8 percent/12 percent in FY25E. PFL will have more levers from its fee income and operating cost ratios to deliver a further improvement in RoE driven by an improvement in its RoE profile when it reaches steady-state, MOSL noted.
Key downside risks: a) Inability to execute its articulated strategy despite a new management team and investments in technology and processes and b) aggressive competitive landscape leading to pressure on spreads/margins and/or deterioration in asset quality, added the brokerage.
9 analysts polled by MintGenie on average have a 'strong buy' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
