Poonawalla Fincorp : Transcript of conference call for Q3 result of FY23

"Poonawalla Fincorp Limited

Q3 FY23 Earnings Conference Call"

January 23, 2023

MANAGEMENT: MR. ABHAY BHUTADA - MANAGING DIRECTOR -

POONAWALLA FINCORP LIMITED

MR. HIREN SHAH - HEAD OF INVESTOR RELATIONS - POONAWALLA FINCORP LIMITED

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	Poonawalla Fincorp Limited
	January 23, 2023
Moderator:	Ladies and gentlemen, good day, and welcome to the Poonawalla Fincorp Limited Q3 FY '23
	Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode,
	and there will be an opportunity for you to ask questions after the presentation concludes. Should
	you need assistance during the conference call, please signal an operator by pressing star and
	then zero, on your touchtone phone. Please note that this conference is being recorded. Anyone
	who wishes to ask a question, may press star and one on their touchtone telephone. If you wish
	to remove yourself from the question queue, you may press star and two.
	I now hand the conference over to Mr. Hiren Shah. Thank you, and over to you, sir.
Hiren Shah:	Thank you, Mike. Good evening and a very happy new year to everyone. Thanks for joining this
	conference call. It's our pleasure to welcome you all to discuss Poonawalla Fincorp's business
	and financial performance for the quarter ending December 2022. We will take this opportunity
	to update you on the recent developments in the industry and Poonawalla Fincorp during the
	quarter.
	To discuss all this in detail, I've got with me our Managing Director; Mr. Abhay Bhutada; other
	Senior Management officials; and myself, Hiren Shah, Head of Investor Relations.
	Now I would like to request our Managing Director, Mr. Abhay Bhutada, to brief you all about
	company's operational and financial performance, along with developments for the quarter
	ending December 2022. Over to you, sir.
Abhay Bhutada:	Thank you, Hiren. Good evening, everyone. I wish you all very Happy New Year. I welcome
	you all to the Q3 FY 2023 Earning Conference Call of Poonawalla Fincorp, and trust you are all
	doing good.
	Let me take you through the key highlights for the quarter.
	In December 2022, we announced the sale of our housing subsidiary, Poonawalla Housing
	Finance Limited to TPG Capital, at a valuation of ₹3,900 crores. This is subject to regulatory
	approval. We have received the shareholder approval; regulatory approval is under process. To
	update you all further, for the next three to four months, we can expect all the pending regulatory
	approval will be received.
	Firstly, this transaction will maximize shareholders' value and provide growth capital to
	Poonawalla Fincorp as it focuses on building a tech-led,digital-first financial services company
	with leadership position in consumer and MSME financing.
	Secondly, as both the entities cater to different customer segments across different geographies
	and with distinct distribution model, this transaction will focus on maximizing value creation by
	optimizing resource allocation and increasing management focus on their respect business needs.
	As we embark on this journey, there will be a consolidation of both manpower and branches
	with primary focus on tech-led and branch-lite model. We already initiated the manpower
	consolidation and rationalization exercise to address the excess bandwidth created because of
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this group structure, along with the branch consolidation as we focus on top 100 branches, while catering to others through a digital-led model, which would be completed in the next one to two quarters. This strategic move will enable us to achieve our stated Vision 2025 at a stand-alone level with a focus on growth, asset quality and profitability.

Moving on to the performance for the quarter gone by, it has been an excellent all-around quarter for Poonawalla Fincorp as we continued to deliver growth, asset quality and profitability. We recorded our highest ever quarterly disbursement along with highest ever PAT and ROA, along with improved asset quality with lowest GNPA and NNPA numbers.

During the quarter, our PAT increased to ₹150 crores. I am giving all the stand-alone numbers. During the quarter, our PAT increased to ₹150 crores, up 88% YoY & 16% QoQ. Our ROA reached the highest level at 4.5%, an improvement of 150 bps YoY & 46 bps QoQ. We started the journey of reducing in Opex by 3% QoQ, while pre-operating profit (PPoP) stands at ₹156 crores, which is up by 23.3% QoQ & 34.1% YoY.

Our AUM stood at ₹13,929 crores, which is up by 28% YoY & 6% QoQ despite sharp reduction in the legacy book. The focused AUM growth was even higher at 75% YoY & 10% QoQ as fresh disbursement grew 157% YoY and 8% QoQ to ₹3,369 crores. This AUM growth is despite a sharp rundown of the discontinued legacy book. The focused book continues to perform well within our risk acceptance criteria. We continued with our focus on developing diversified disbursement engine that has aided growth of organic disbursement. 100% of our disbursements have been organic over the last couple of quarters, and we continue to focus on the same. Our focus on Direct Digital Program ecosystem has accelerated the disbursement and customer acquisition with lower cost of customer acquisition compared to traditional distribution model. The DDP mix is around 66% in Q3, up from 54% in last quarter and 39% in Q1. On the product side, currently, we have presence across all product range except the card-based products, which we propose to launch in next two to three quarters. The diversified product suite has also enabled us to acquire more customers and help us to increase our presence across consumer and MSME products at a pan-India level.

NIM of the company was at 10.7% in Q3, an increase of 94 bps YoY & 33 bps QoQ. NII stood at ₹360 crores, which is again an increase of 33% YoY & 7% QoQ, while the average cost of borrowing was contained at 7.54% for the quarter, despite the rising interest rate environment, increase in our cost of borrowing was largely contained. Against the cumulative, repo rate increase of 225 bps, our cost of borrowing increased only by 57 bps from Q1 FY '23. Also, we have been able to protect our NIM by passing on rate hikes to our customer without any impact on the business growth. Our long-term credit rating upgraded by CARE to highest AAA Stable further help us to contain our cost of borrowing.

In terms of asset quality, GNPA reduced to 1.69%, down 236 bps YoY & 8 bps QoQ, while net NPA reduced to 0.89%, down 108 bps YoY & 5 bps QoQ. This is despite the alignment with revised NPA definition as per RBI circular. The superior asset quality is given by our chosen customer segment, the high credit bureau score portfolio, superior collection infrastructure, close monitoring of early warning signals coupled with proactive credit policy changes. We continue

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to have healthy recoveries from the write-off pool and expect that to continue in the coming future as well.

Let me now move on to our business strategy and the way forward.

We are now in growth phase, having consolidated all various aspects of products, people, branches, and technology. Also, the new book has been performing much better than our expectations coming from our experience of having done all these products within the Poonawalla Group existing NBFC, which is Poonawalla Finance, with all this experience, we don't see any challenges going further with legacy issues behind us, an excellent performance of the new book, we are confident of our performance growing consistently going forward.

Moving ahead with the product offering, we have expanded our product offering over the last few quarters. During the quarter, we further expanded our digital loan offering to cover not only consumption finance but also transaction credit and consumer finance. With primary product in place, we'll now focus on offering different variants to create innovative solutions for our customers. In line with the regulatory requirement, we are working on card-based product that will take two to three quarters.

The diversified product suite is helping us to accelerate our customer acquisition as well as enhancing our presence. Product strategy is focused on building a healthy mix of short-term and long-term products. This is also a part of acquisition and risk management strategy, critical to building a higher profitability with best asset quality. We have a healthy mix of products, which are short term in nature, enabling us to acquire and test more customers as we prepare for strong cross-sell and upsell campaigns. The use of analytics in short-term loans to understand the customer profile, propensity and behavior is helping us to offer better customer experience. The mix of short-term and long-term loan is also going to be an important element in our liability strategy in line with the product mix. On a steady-state basis, we expect about 20% to 25% of our AUM to come from short-term loans.

On the geography footprint, we will continue to be a pan-India player. However, having seen the changes in preference of our customer segment towards convenience of getting online service, we endeavor to offer our services as digital first only. The branches are used mostly for collection, customer service, which is now fast moving towards digital collection. Given this trend, we will have a physical branch network of approximately 100 branches going further spread across 22 states and union territories. This will be primarily the urban centers covering majority of the addressable markets.

We are committed to building a digital first technology-led organization. As outlined in our last quarter investor deck, we are now in Phase two of our digital journey and moving ahead strongly. We have done the heavy lifting required and completed about 20% to 25% of our journey. We expect the same to be completed over the period of the next 2-3 quarters.

Customer centricity is another key area for us, wherein we are making rapid progress with the use of latest technology. We'll be coming out with a full stack app in next two to three quarters,

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	which should address not just origination and onboarding, but the entire servicing aspect as well.
	We are also in the process of building alternate channels of origination and should come out
	with the first such channel in the next quarter.
	On people front, we have a strong team in place across all the functions. The focus is on
	improving productivity and building team for the future. We see the digitalization benefit
	kicking in, as the future business scale-up will not lead to additional manpower requirement. We
	expect the headcount to remain flat from here even as business continues to grow, which will
	bring in operational efficiencies and get reflected in our Opex numbers as well going forward.
	As per our long-term guidance on financial metrics presented in the current quarter's Investor
	deck, we expect to grow our AUM about 35% to 40%, along with profitability growth of 30-
	35%. We will strive to maintain the GNPA and NNPA number, GNPA below 2% and NNPA
	below 1%. In terms of specific range, GNPA will be in the range of 1.3% to 1.8%, and NNPA
	will be in the range of 0.5% to 0.8% along with an ROA of 4% to 4.5%. We have executed our
	plans with precision quarter-on-quarter and confident of delivering these numbers with the same
	consistency.
	While there could be intermittent glitches in the economic environment, the market segment in
	which we operate, that is consumer and select MSME are resilient, large and will continue to
	grow, which makes us confident of delivering in line with our long-term guidance. Also, the
	ongoing technology disruption in lending favors digital-first,tech-led players like us.
	Thank you, everyone. And now we can start the Q&A session.
Moderator:	We have the first question on the line of Sameer Bhise from JM Financial.
Sameer Bhise:	Thank you and congratulations on a strong quarter. I just wanted to get a sense on the AUM mix
	as of December on the stand-alone side as well as the disbursements, if you can provide that?
Abhay Bhutada:	Thank you, Sameer. On the AUM side, the outstanding AUM was ₹13,929 crores as on
	December. Pre-owned car is ₹2,455 crores. Auto lease is ₹326 crores. Unsecured loan, including
	consumer loans, loan to professional, personal loan, business loan is ₹6,083 crores, and supply
	chain is around ₹100 crores. Loan against property is around ₹1,588 crores. Machinery and
	equipment loan is around ₹60 crores. And then we have a acquired DA portfolio, which is around
	₹2,200 crores and discontinued book is around ₹1,192 crores, out of which ₹800 crores is on
	book. So, this comes to ₹13,929 crores.
Sameer Bhise:	Okay. And how would have been the disbursement mix for the quarter because I see margins
	have gotten a bump up.
Abhay Bhutada:	Disbursement mix for the quarter, Pre-owned car is around ₹500 crores. Then unsecured auto
	lease is around ₹100 crores. Unsecured loan, including consumption loan, PL, or personal loan,
	LTP and BL is around ₹2,300 crores. And loan against property is around ₹415 crores. Then the
	machinery and equipment loan are around ₹30 crores. So, this is the breakup of ₹3,369 crores,
	and this is 100% organic.
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