This Midcap Stock Grew 426.68% In 3 Years, Motilal Oswal Initiates Buy For Strong Returns In 2023

Current Market Price, 52 High & low, Returns, & market cap

The share price of Poonawalla Fincorp on NSE trading at Rs 274.55 apiece, 11.56% up from its previous close. It recorded its 52 week high on 13 April 2022 at Rs 343.80/share, whereas its 52 week low was recorded on 27 December 2021 at Rs 192.80share. This is a midcap stock with a market capitalisation of Rs 20,887.68 Crore.

It has fallen 4.46% in the past 1 week, 12.02% in the past 1 month and 3.79% in the past 3 months, respectively. However, over the past 1 year, the stock has given 39.43% positive returns. In the past 3 years, it gave 426.68% multibagger returns. In the past 5 years, it gave 66.25% positive returns.

Digitial-first at its core; Focus on DDP model will aid scalability

PFL has rapidly transformed into a 'Digital-first' organization 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. PFL will eventually transform its distribution model from a DSAdriven model to one of direct sourcing. The company has partnered with various fin-techs and consumer-techs such as Cars24, PaisaBazaar and KrazyBee. Seamless tech integration has made PFL the partner of choice. Direct, Digital and Partnership (DDP) contribution in organic disbursements stood at 47% (v/s 17% in 4QFY22). This has led to lower customer acquisition costs (CAC), reduced TAT and customer delight.

Realignment largely complete; expect 37% AUM CAGR over FY22-FY25

Post-acquisition, the Poonawala group has strengthened its leadership team across functions. This was accompanied by reorientation of the customer mix realignment of the product suite and implementation of stringent credit policies across existing and newer businesses. The company implemented a Unified Loan Origination System (LOS), Loan Management System (LMS) and Customer Relationship Management (CRM) platform. PFL leveraged upon its expertise at erstwhile Poonawalla Finance to deepen its data analytics and enhance the customer value proposition as well as cross-sell function. "It is now in a sweet-spot to deliver sustainable AUM growth and profitability. We estimate an AUM CAGR of 37% over FY22-FY25E," the brokerage said.

Upgrade in credit ratings; significant improvement in liability franchise

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 optimization. Collections were further strengthened to exercise a 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). CARE recently upgraded both PFL and PHFL to AAA. Improvement in credit ratings allowed PFL to get most bank loans re-priced at lower rates and enabled the company tap diversified sources of borrowings (including debt capital markets) leading to a marked improvement in liability franchise. PFL now has one of the lowest cost of borrowings in the NBFC cohort.

Conservative portfolio guardrails to enable best-in-class asset quality

Robust underwriting processes and a change in the company's customer universe have led to a strong asset quality. Following the acquisition, PFL's customer profile transformed to a formal income group (from informal earlier). More than 80% of the customers have a CIBIL score >730, implying stability. "We expect recoveries from the legacy written-off portfolio to continue in 2HFY23 and even in early FY24. Unlike some of its peers, PFL is a pure-play retail franchise. We project NNPA to remain below 1% and model credit costs to be at ~0.5/1.2% (including recoveries) during FY24/FY25E," the brokerage has said.

A ‘valued’ NBFC franchise in the making; initiate with a BUY rating

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 % of AUM), higher business volumes and robust asset quality. "We model an AUM/PAT CAGR of 37%/~65% over FY22-FY25E, respectively. We also model an RoA/RoE of 4.8%/~12% in FY25E. PFL will have more levers from its fee income and operating cost ratios to deliver a further improvement in its RoE profile when it reaches steady-state. Initiate coverage with a BUY and a TP of INR350 (premised on 2.3x FY25 BVPS)," the brokerage has said.

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.