Poonawalla Fincorp (BUY) – Initiating Coverage – On a strong pedestal: Ready to fire on all cylinders*
We initiate coverage on Poonawalla Fincorp (PFL) with a BUY rating and a target price of INR 400. Poonawalla Fincorp (erstwhile Magma Fincorp) has undergone a metamorphosis of sorts after significant capital infusion by the Poonawalla group (~62% stake) in early-CY21. The backing of a respected, longstanding, non-levered promoter group has enabled the company to reduce its cost of borrowings significantly and thus focus on the credit-tested, high quality customer base while also making strong long-term investments in technology, presence and talent. All this, with clear visibility of a strong RaRoC. Having strengthened the foundation over the last year or so, we expect PFL to enter a strong acceleration phase of customer acquisition and offer digital-first products. We expect PFL to deliver an AUM-CAGR of 36% over FY22-25E and achieve a mix of 60:40 between secured:unsecured loans over this period. Asset quality is likely to remain strong given the focus on credit-tested customers, past experience of digital lending, and sharp focus on risk. Near-term RoEs appear suppressed given high capitalisation levels (~47% Tier1, as of FY22) and we expect expansion ahead as operating leverage kicks in to drive RoA of 3.4% (RoE of 15.4%) in FY25E. We believe with its strong growth runway (size 1/6th-1/10th of relevant NBFC peers) and strong liabilities advantage, PFL will trade at premium valuations. We value the stock at 4x Sep’24e P/BV to arrive at our TP of INR 400 (38% upside).
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