This Small-Cap NBFC Stock Gets 'Buy' Call For 35% Gains, Turning Ex-Dividend In 2 Weeks

Stock Outlook

On July 06, the stocks of Poonawalla Fincorp opened at Rs 229 per share, and closed at Rs 230.20 per share, after gaining 1.21%. Its 52-week low level is Rs 140.75 per share, whereas, the 52-week high is Rs 343.80 per share. Investors buying the stock at the CMP and considering the Target price of Rs 310, investors can expect a potential gain of 35% in 12 months.

The PE ratio of the stock is 46.94. PB ratio is 2.88. ROE is 6.19%. Face value is Rs 2. EPS TTM is Rs 4.90. it is a small-cap stock with a market capitalisation of Rs 17,608.54 crore.

The stock has given positive returns on long-term investment. It has not performed well in the last 1 year, however, it has given positive returns of 46.16% in the past 1 year. In the past 3 years, it has given positive returns of 83.79% and in the past 5 years, it has given positive returns of 39.43%.

Poonawalla Fincorp Dividend

On 12th May 2022, the company announced the final dividend of 20% amounting to Rs 0.40 per equity share for ending March 2022. The ex-dividend date of the announced dividend is 21st July 2022. The company is yet to announce the record date for the dividend.

Investment Rationale Target FY25 is in line

The management has laid out the Vision for FY25. The management goal is 1) to achieve ~3x current AUM by FY25, 2) be amongst top - 3 NBFCs for consumers and MSMEs, 3) ~200bps reduction in borrowing cost, 4) NNPA guidance of less than 1% (current level: 1.1%) and ROA target of ~3.5%. Poonawalla Fincorp has delivered the guidance and exited FY22 with ROA of 2.5%, disbursement of 1.6x, AUM growth 17% YoY, NNPA of 1.1% and credit cost of 60bps. The company's focus markets would be Tamil Nadu, Maharashtra and Gujarat, furthermore, the customer segment targeted is mid-income group in semi-urban and urban markets. Factoring the execution during transition phase, we believe the stipulated goals can be accomplished.

The brokerage said, "We incorporate 30% AUM growth for FY23-24E and stable NIMs of 7.9%; hence estimating a ROA of2.9% for FY24E."

Re-alignment of loan book likely to be fruitful

The Company discontinued used CV/CE, tractors and auto lease financial businesses, which has higher delinquencies. The new strategy and product lines are more focused towards consumers and MSMEs, with higher CIBILs and creditworthiness. The management guidance of 3x AUM of ~Rs 400bn by FY25 (implied CAGR of 30%) would be more towards the new product lines.

Collection Efficiency at 108.4%, Gross Stage - 3 at 2.7%

The previous quarter has demonstrated better collection efficiency (108.4% v/s 99.1% in Dec-21). Consequently, Asset Quality improved with Gross Stage - 3 declining 80bps sequentially to 2.7%. Stage - 3 for Housing Finance decreased to 1% from 1.9%. Moreover, Gross Stage - 2 also plunged 320bps for consolidated entity to 9.6%. Restructuring pool moderated to Rs 7.9bn (4.7% of AUM) and it carries provision of 19.6%. With improvement in delinquencies bucket, we believe the comfortable buffer will translate into lower credit cost for FY23E/24E.

Stake divestment in Magma HDI to strengthen core capital

The Company entered into Joint Venture with HDI Gerling in 2012. In order to meet the regulatory requirement of RBI and IRDA, the company plans to divest its stake in Magma HDI General Insurance, which will free up capital of Rs 4.6bn. The divestment will enable PFL to focus on its core competency of lending business.

Buy for a target price of Rs 310 per share

The brokerage said, "We value Poonawalla Fincorp at Rs 310 based on FY24E BVPS of Rs 97 with a multiple of 3.2x. In a business where the principal resource is deployable corpus, the induction of Poonawalla Group is an immense advantage. The new promoters, their vision and strategic growth is likely to unlock value for the company. Target segment of high yield loans and better credit underwriting may lead to NIMs expansion and slower credit cost. Therefore the target ROA of ~3.5% is achievable by FY25E. A high growth capital (Tier - 1 of 19.4%) places Poonawalla Fincorp in a sweet spot."