Poonawalla Fincorp: Potential To Outpace National Growth

Poonawalla Fincorp: Potential To Outpace National Growth

The company is a diversified asset financier both in term of products as well as geographies, which helps mitigate risks. It possesses a sound business model with a presence in high-yield, high-growth business segments and superior sustainable returns

Poonawalla Fincorp Limited (formerly known as Magma Fincorp Limited) is a non-deposit taking, non-banking finance company (NBFC), registered with the Reserve Bank of India (RBI). Magma Fincorp Limited went into business in 1988. In more than three decades, the company emerged as a trusted NBFC, addressing the growing and widening needs of more than 5 million customers, largely rural and semi-urban. The Poonawalla Group of Companies acquired a majority stake in Magma Fincorp Limited in the first quarter of FY 2021-22, following which it emerged as the promoter group of the company.

The new promoter owns 60 per cent of the company’s equity. The company has a widespread coverage and presence across 21 states, 297 branches and the customer base stands at approxi-mately 5.4 million with a loan book of more than Rs14,000 crore. They offer a bouquet of financial products including SME finance, mortgage finance, unsecured loans and general insurance. The company’s physical presence is complemented by a digital footprint that empowers field executives to conduct business from channel and customer locations, enhancing sales productivity, deepening market coverage and improving the customer experience.

Sector Overview
NBFCs have become important constituents of the financial sector and have been recording higher credit growth than scheduled commercial banks (SCBs) over the past few years. NBFCs are continuously leveraging their superior understand-ing of regional dynamics, well-developed collection system and personalised services to expedite financial inclusion in India. Lower transaction costs, quick decision-making, customer orientation and prompt provision of services have typically differentiated NBFCs from banks. Considering the reach and expanse of NBFCs, these are well-suited for bridging the financ-ing gap. Systemically important NBFCs have demonstrated agility, innovation and frugality to provide formal financial services to millions of Indians.

Over the last decade, NBFCs have witnessed phenomenal growth. From being around 12 per cent of the balance-sheet size of banks in 2010, these are now more than a quarter of the size of banks. The business model of the NBFC sector was severely tested in FY21. The overall loans and advances contracted in H1FY21 due to weak demand on the back of nationwide lockdown. However, as the economic activities gradually resumed, loan disbursements gained momentum in H2FY21. Collection efficiency also gradually improved to be near normal in Q4FY21. The fact that many NBFCs have managed to overcome these severe stresses without significant impact is a testimony to their resilience.

The growth in FY22 is envisaged to be driven by the improve-ment in demand from all key target segments vis-à-vis the current fiscal, which was impacted by the pandemic-related lockdown. Growth would be contingent upon access to adequate funding lines i.e. incremental bank loans to non-banks, which would in turn depend on overall bank credit growth. With superior capital adequacy, better margins, frugal cost management and lower non-performing assets (NPAs), the NBFC sector is well-poised to seize the opportunity provided in the post-pandemic revival cycle. The revised regulatory framework proposed by the RBI intends to make the NBFC sector more resilient. 

Financial Overview
Quarterly : In terms of quarterly consolidated financial performance, the company registered a 15 per cent fall in its interest income to Rs483 crore in Q2FY22 versus Rs566 crore in Q2FY21. Its total income during Q2FY22 fell nearly 15 per cent to Rs513 crore as against Rs603 crore in Q2FY21. The company reported a 2.53 times jump in its Q2FY22 net profit to Rs96 crore, relative to net profit of Rs38 crore during the corresponding quarter of the previous financial year. The company continues to maintain a strong liquidity position with around Rs1,700 crore of surplus liquidity, with additional term loan sanctions in the hand of Rs1,750 crore. Collections showed an improving trend from 93.1 per cent in June 2021 to 98 per cent in July to further 99.9 per cent in September 2021.

Assets under management (AUM) grew nearly 6 per cent quarter-on-quarter to Rs15,275 crore at the end of Septem-ber 2021. In terms of annual consolidated financial perfor-mance, the company registered a 8.21 per cent de-growth in total income from Rs2,562.88 crore in FY20 to Rs2,352.48 crore in FY21. The company reported net loss of Rs564.45 crore in FY21, in comparison to a profit of Rs28.06 crore. The company’s net interest margin (NIM) increased to 8.2 per cent in FY21 as compared to 7.6 per cent in FY20 on account of decreased finance cost. The write-offs and provision increased from Rs485.79 crore in FY20 to Rs1,447.99 crore in FY21 as the company has moved to stricter write-off policy and made additional provision for likely adverse impact of the second wave of the pandemic.

During FY21, the consolidated disbursements declined by 43 per cent i.e., from Rs6,428 crore in FY20 to Rs3,680 crore in FY21. The decline was mainly due to disruptions in business, induced by the pandemic. Within the company, there was a focus on maintaining portfolio quality in the light of adverse economic trends. Hence, the company followed a cautious policy with respect to lending. Assets under management declined 12 per cent i.e., from Rs16,134 crore in FY20 to Rs14,225 crore in FY21. On a standalone basis, the capital risk adequacy ratio (CRAR) for the year FY21 was 20.3 per cent as against the RBI stipulated norm of 15 per cent for non-deposit-taking asset finance companies.

Outlook
The company’s asset-backed financing (ABF) business is the largest, accounting for 59 per cent of the company’s overall assets under management as on March 31, 2021. With the recent sizable net worth infusion by the new promoter group, there is optimism of faster business growth than the retrospec-tive average. The company intends to right-size its portfolio with the following products being discontinued: pre- owned trucks, pre-owned construction equipment, tractors and automotive leads. The company plans to focus on the pre-owned car segment, which is growing at 10-11 per cent CAGR with increasing demand from the middle-income customers upgrading from first-time buyers finding a value proposition in pre-owned cars.

The company is increasing weight of the pre-owned cars financing in their portfolio as financing penetration is ~20 per cent of overall sales, which is less than one-third of the new cars’ value sold under finance (which is 75 per cent). Only 30 per cent of the pre-owned car market access is organised; with the digitisation of sale of products, focus of OEMs on second-hand asset sales and increase in formal financing, the market is getting organised. In FY21, Poonawalla Fincorp touched an estimated 7 per cent market share in the organised pre-owned car financing segment and is relatively well-positioned to grow in the segment based on a low cost of funds.

Despite FY21 being unusually challenging, the company emerged with a robust balance-sheet marked by a capital adequacy ratio higher than that mandated by the Indian central bank, relatively low delinquency when compared with the Indian average for undocumented customers and multi-year business sustainability better than the broad sectoral average. The company prudently protected the integrity of its balance-sheet with adequate cash on the books, unutilised credit limits and a strong disbursement pipeline that could be growth-ready at all times. With a conservative policy in place the company holds provision of Rs1,192 crore as on March 31, 2021 to counter the pandemic-related impact on their prospective profitability.

Poonawalla Fincorp is a diversified asset financier both in term of products as well as geographies, which helps mitigate risks. The company possesses a sound business model with a presence in high-yield, high-growth business segments and superior sustainable returns. The company is present in business verticals that are likely to grow faster than national growth and has invested heavily on technology as a strategic enabler which has helped it to run operations even during the pandemic. Other strengths include customer focus, product innovation and superior delivery. Hence, we recom-mend HOLD. 

 

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