Poonawalla Fincorp shares to deliver 42% returns in long term, says Anand Rathi

Shares of financial services company Poonawalla Fincorp (PFL) jumped 1.84 per cent to settle at ₹293.15 apiece on the BSE in Friday’s trade.

With digital as core for the new management, the brokerage expects robust growth, competitive cost of funds and tech savviness to drive a 38 per cent loan CAGR over FY23-25 for the standalone unit.

PFL is now a tech led high growth NBFC backed by a strong promoter and having top-notch processes and best-in-class cost-of-funds.

The brokerage believes that the company’s strong tech would allow faster product innovation and a low turnaround time. A best-in-class cost of funds and a strong capital base would buoy standalone AUM 38 per cent CAGR over FY23-FY25.

Key risks

Key risks, as per the brokerage, include higher than expected slippages on account of slowdown in economy. Increasing competition from banks in retail lending could impact loan growth.

“PFL has developed conservative underwriting practices(no new-to-credit) along with strong risk management, which resulted in 60+ DPD of sub-0.4% for the entire book (focused book) which originated over the last 15 months, including the Covid-19 period. Our channel checks suggests underwriting is prioritized over growth,” the note stated.

Ahead, the brokerage expects credit cost to be benign, averaging 1.1 per cent of advances over FY24-FY25.

Low cost-of-funds and agile tech fuel customer mix to premium. A strong promoter has led to a steep, 250 basis point decline in cost of funds (post-takeover) for PFL in 18 months.

A healthy balance sheet and competitive CoF (7.5 per cent in December 2022) will allow PFL to compete with larger NBFCs and banks.

“Magma had a DSA-heavy model, with high opex and prone to cyclical downturns. However, post-acquisition of Magma by PFL, its spending on tech has been comparable to the best in FY20 and FY21,” the note stated. 

The brokerage believes a competitive CoF advantage, tech-led model and superior customer experience would allow PFL to build a premium customer franchisee. 

The erstwhile Magma Fincorp, now Poonawalla Fincorp has seen perhaps, one of the fastest turnarounds in the BFSI sector, the note said, adding that PFL has the ability to grow its AUM over 38 per cent with sustainable RoAs of more than 3.8 per cent in the medium to long run.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.