Poonawalla Fincorp Limited analyst Q&A

Thank you very much. The first question is from the line of Sameer Bhise from JM Financial.

Thank you for the opportunity and congrats on a strong quarter. Also, congratulations to Mr. Bhutada for having delivered one of the most remarkable transformations in recent times in NBFCs. I had a few questions. Firstly being, what still remains as the fundamental pillars with respect to Poonawalla Fincorp after you move ahead? And would there be any scope for improvement with respect to some easy pickings in the business? That would be one. And secondly, given that we are seeing increased regulatory scrutiny and stringent actions in the space as a whole. How is Poonawalla Fincorp placed? Some thoughts there would be useful. Yes, that's it from my side.

Thank you so much, Sameer. On the transformation side, if you see, we have changed the product range, we have changed the target market segment, the choice of customers. We have prudent credit policies. Additionally, we have done a lot of consolidation in terms of branches, manpower, and we have done the technology changes, most of the things are system-driven, policy-driven. We have enhanced the employee productivity, and again, we have shifted from branch model to branch-lite model. We have improved on the opex side. And the focus area was customer, better TAT, and the customer service. This is our differentiated business model completely nonconventional, branch-lite model. We have explained this in detail multiple times in all the investor calls. These are the factors, both internal as well as the external changes, have resulted in this great transformation and we need to continue with the strategy to continue with the good work. This is not the first time we are doing this. Multiple times I have explained that I was running my own NBFC, TAB Capital, which I sold to Adar Poonawalla in 2019, after 3 years of experience into digital lending, wherein I was the first one to go complete digital. And then, again in Poonawalla Finance, which was an unlisted NBFC of the group for 2 years. So, this is just a third stint, and is not an overnight transformation. We have learned a lot of things in the past. We always used to do a write-off at 90 plus for most of the products for last 7 - 8 years. So, we have a habit of controlling the credit cost at the time of sourcing only. I think, considering all these past experiences, we have done the complete transformation here. And most of the people, what you see here, the core team, is from Poonawalla Finance, starting from Mr. Manish Chaudhari, who is Head of Retail Assets, Mr. Anup Agarwal, who is the Internal Auditor Head, Mr. Manoj Gujaran, who is the Compliance Head, Smita, who is the HR head and a lot of other business heads and great people from accounts, finance team, who have integrity, are hardworking and have industry-specific knowledge because we always wanted to grow that company, although it was unlisted. We got this opportunity and then acquired, and we have done this transformation. So, though according to the industry, it is one of the successful and the fastest transformation. There is a lot of hard work behind this, and we have a right team and technology in place, and we further enhance on that. So, this answers your first question. On the regulatory side, I think historically, we have seen that any regulatory changes have always been beneficial in the long run. And we always follow and are in line and alignment with what the RBI is expecting. And secondly, with a strong capital base, credit rating and prudent risk management practices, we are well placed to encash this opportunity. Weaker hands will find it difficult to cope up comparatively going forward as the interest rate starts to come down. We will be at an advantageous position as majority of our advances are on a fixed rate, whereas majority of our borrowing are at a variable rate. Thirdly, as an organization, we are more focused on compliance, governance, and risk culture, which will be further helpful for us in this tightening of regulatory environment.

This is very helpful. Just one clarification. There is a ₹ 332 Crore profit for this quarter. And the last quarter, net worth was around ₹ 8,075 Crore, but the closing net worth for this quarter is roughly ₹ 8,114 Crore something. Can you explain the difference, please?

So, opening net worth as on 31 December 2023 was ₹ 8,075 Crore. For ESOP conversion, you can add around ₹ 50 Crore, you can add the profit for this quarter, which was ₹ 332 Crore. And you can minus the payment of interim dividend, which is ₹ 154 Crore. And since we have created this ESOP Trust. So, this accounting adjustment, treasury share, you need to get it consolidated, and you have to deduct ₹ 187 Crore which comes to ₹ 8,116 Crore. But in real sense, you have to add back this ₹ 187 Crore adjustment of this ESOP trust which we created for the employee. So, ₹ 8,116 Crore, plus ₹ 187 Crore will be actual net worth, but on paper, ₹ 8,075 Crore, plus ESOP conversion of ₹ 50 Crore, plus addition profit of ₹ 332 Crore, minus payment of interim dividend ₹ 154 Crore, minus ESOP trust, treasury share, which got consolidated to ₹ 187 Crore, which, then comes to ₹ 8,116 Crore.

Next question is from the line of Kaitav Shah from Anand Rathi.

Congratulations, sir, on a good set of numbers. My #1 question to you is on growth. You have delivered industry-leading growth numbers. So, what has contributed to this in the last scheme of 3 to 4 years? And how do you see the growth path from here on?

See, so across all products, I think we have seen the growth be it preowned car, loan against property, personal loan, business loan. All of these are the main 4 products wherein I think, if you do the apple-to-apple comparison, then we have taken a leadership position. We are already in top 2 in this segment and always we are focused on the top 100 geographies and our approach is of going deep rather than going wide. Market focus being urban and semi-urban, focus is on building the right digital processes that makes the entire model more scalable. And if you see, whenever we think of building the entire organization, which has a tech focus, these are the main reasons behind these growth numbers. And one year back, we stopped new- to-credit, considering the low base, considering the total addressable market, and considering the target segment, going forward, whatever guidance we have given, we are confident of achieving the numbers in terms of growth.

Got it. Sir, my second question is related to asset quality. I mean, you have consistently improved the asset quality. Do you see any challenge in maintaining this going forward? Also, in the context of some peer NBFC seen higher credit cost and actually even guiding for the near term, a higher credit cost. So how do you see that for your firm?

Our focus has always been a credit-led model rather than a collection-led model. We are into risk business and not into the collection that was our model. We continue to strengthen our credit policies, basis our internal learning. And I'm happy to share that our GNPA and NNPA is one of the best in the industry and you can expect further improvement in both the GNPA and NNPA. If you see the numbers we have showcased as GNPA and NNPA, so this is including the legacy. If you see the new book is performing better than our expectation. The segment which we are targeting, that is much different than what others you are talking about in the competition. So, we are confident of achieving our guidance in terms of GNPA and NNPA and you can expect further improvement over the period of next 4 quarters, in both the GNPA and NNPA.

Got it. And we have seen a rise in NIM scenario, even when players are struggling. And we also have some amount of increase in cost of funds. So how do you see the interest rate environment going forward, particularly for you, and can we expect a similar kind of performance for next year? Or do you think that the cost of funds can impact?

As we speak, we are among the lowest in terms of cost of fund. Last year, we got CRISIL AAA rating. There are a very few NBFCs at this size, those who got CRISIL AAA rating. And recently, we have started borrowing from the commercial paper and short-term limits, considering our ALM. So, considering that, we have enough scope with one of the best ALM the industry. So going further, depending on the requirement, we will focus on the NCDs as well as on the CP side. So, you can expect quarter 3 onwards, there will be a further improvement on the cost of fund side. And on the NIM side, we have always guided that we will be able to maintain NIM above 10%, but we have delivered above 11% during the last 4 quarters. And going further also, the same guidance we will continue, which we have given in the past that because we target the risk- adjusted return, the low Opex model, and overall other things, on the NIM side and also on the profitability side.

Got it. And one last question, if I can squeeze it in. So, you briefly touched about the transformation of how the journey has been over the last 3, 4 years. So, in your mind, where have you reached in this journey so far and what would be it going ahead, especially in the context of RBI tightening its regulatory reach. So, I mean, where do you see this journey now? Was there a low-hanging fruits that you can tighten up from compliance, et cetera? Or I think they're pretty good enough from that standpoint.

I think we have a very unique business model, which we have created, and we have explained in our investor presentation also that we have a combination of physical and digital mode. We have a unique combination of FinTech, Bank and NBFC. FinTech in terms of the user experience. Bank, in terms of fair practice and no hidden charges to the customer. NBFC in terms of practical approach and cash flow-based lending. So that is the main reason why we are different than the others. In terms of the regulatory environment, we got one of the highest advantages because of the environment, reason being as a Poonawalla group, considering the legacy of the group, we follow the highest level of corporate governance. Our Compliance led by Mr. Manoj Gujaran, who is one of the top guys we have in our team. And constantly, we focus because we are not going to compromise on the compliance. So, if you see on the KFS side, we are offering zero prepayment across all our products. Hardly, there is any compliance with regards to misselling or hidden charges from the customer side because our approach was customer-centric from day one. We are the only NBFC who is offering at this scale, zero prepayment. This I'm telling you all from more than 2 years in each of the investor calls. Considering all these things, whatever is happening in the regulatory environment, I think it is beneficial for this sector. And with regards to Poonawalla Fincorp, I think we will get the biggest advantage of whatever the tightening policy from the regulatory side. And here, internally also on a quarterly basis, we are reviewing or our policies. The base is so low. We don't see any challenge in terms of the growth. So, we have enough choice of rejection. We have created that choice of rejection model. So, as I told you, once we reject the customer, then only he is going to the market because you will not get all the things at one place, i.e. lesser rate, reasonable processing fees or turnaround time, zero prepayment penalty and no hidden charges. It is very difficult to get everything at one place. We are very happy with all the regulatory changes, and we are hopeful that now everyone, the entire sector will have to focus more on the compliance side.

Next question is from the line of Mayuresh Joshi from William O'Neil.

Congratulations on a great set of numbers. My first question is on the opex side. You briefly touched upon that with the previous analyst. We have consistently seen improvements in the opex ratio. So, what is your forecast in the next few quarters. How do you see these fixed ratios move from the current standard?

Yes. We are constantly giving the guidance that we are trying to reduce the opex. If you see last 4 quarters, there is a consistent reduction in the opex. Year-on-year also, starting from 5.5% level to almost at 4% level, we have reduced. And this includes ESOP charge of 0.64% also. So, this is net opex ratio. If you see, this is only 3.35%, which is again one of the best in the industry. And as we continue to focus on the productivity and efficiency and our AUM increases, you can expect further improvement on the opex going forward.

That helps, Abhay. I might have missed this one, but can you just side us for how do you see the next financial year, both in terms of growth, profitability? And you briefly touched upon asset quality as well. So how do you see the asset quality playing over the next?

We'll stick to our guidance, on the long-term metrics, of 35% to 40% on the growth side. And on the GNPA and net NPA side also, we have given the guidance, and if you see, I think we will be able to maintain that. Profit growth of 30% - 35%, we have already given in the investor presentation, GNPA of 1.3% to 1.8%, net NPA guidance of 0.5% to 0.9%, AUM growth, we have given 35% to 40% and ROA guidance of 4% to 4.5%. And whatever guidance we have given, I think if you see that consistently for last eight quarters, we have overdelivered on all these parameters and we will continue to maintain on the same guidance.

That certainly helps, Abhay.

We are confident of achieving this.

Yes. Sure. Just one last question. This might be a little bit personal from my side, but it would be great if you can help me. I've been tracking Poonawalla, your contribution in terms of Poonawalla's performance, and the performance has been fantastic in Q4 for the entire quarter of FY24. You have guided for a very strong FY25. So, when everything is going so well, the company is seeing a good turnaround, you are in the driving seat. What prompted this sudden change of the MD position, because I think a lot of people on the street are probably viewing this on why and for what reason.

At the outset, I would like to thank you for your kind words on the Company's performance and individual performance. It was not a sudden change, but in fact, a well thought out decision. After having successfully transformed this 3-decade-old, almost a sick unit to one of the most prominent NBFC in the country, as we speak, the platform is very well set for the next level of growth. And as I did not wish to be occupied by the day-to-day operations, it was my decision only. I have requested and convinced our Chairman, Mr. Adar Poonawalla, that I will not handle the day-to-day operation and will play a strategic role at a group level and will be ready to continue as NED and continue to guide the team. If you see, I've always been an entrepreneur. I sold my TAB Capital, a digital lending startup, to Mr. Poonawalla in 2019, after running that for 3 years. Then there was, the unlisted NBFC, Poonawalla Finance. Technically merged TAB Capital into that. So, I have transferred team, technology, and majority of the loan book there. We got AA+ standalone rating there. We have built up a book of more than ₹ 2,000 Crore in the short span of 2 years. We recruited a lot of team members. There was a plan to scale up pan-India, then in between, we got this opportunity of Magma, and we renamed it to Poonawalla Fincorp. This is almost my third stint. So, I never wanted a day-to-day operation. I think, I have built this Company, built these products. And I thought now I will focus, in fact, I wanted to do a lot of things at a personal level, diversification as well. So now I have been elevated at a group level to focus on strategic decision as well as to focus on the treasury. But here also, I am continuing as a non-executive director, will continue to guide the team in terms of strategy and other things. And this platform is well set for the next level of growth, as transformation is fully done with all the post-acquisition issues, fully resolved during my tenure itself. I have always been supported by our Chairman, Mr. Adar Poonawalla, and entire board during the last 3 years. I know it was very difficult to convince him when we have transformed everything. So, it was not a sudden decision. We got one of the best talents from the industry. I had decided that unless I get a good guy, there would be no plan to change from MD to NED. We have got one of the best guys from the industry who can head this, and who was the Retail Asset head in the HDFC Bank, and now a Mortgage head. So, considering that only, I was able to convince our Chairman that now I would not focus on day-to-day operations and will continue to guide as an NED and to operate at a group level in terms of strategy, in terms of treasury and few other important functions. Absolutely, I can understand, but it was a well thought out decision, no need to worry. I am here, the entire team is fantastic and most of the things are in auto mode.

That's certainly helps, Abhay. So, I think, again, congratulations on a great set of numbers, but parting comments from my side that you've definitely left an imprint on Poonawalla Fincorp. And all the best for your elevated strategic roles within the group itself. You will be missed at Poonawalla Fincorp.

Thank you so much.

Next question is from the line of Sameer Bhise from JM Financials.

Thanks for the opportunity again. Just quickly, what's the update on the co-branded credit card that we had announced a quarter or so back? And secondly, any other changes to the current team that you envisage? Those are my 2 questions.

Yes. So basically, on the co-branded credit card side, we have received the regulatory approval. And right now, we are ready to go. And maybe in the month of May, next 2 to 3 weeks, we will be able to launch the co-brand credit card. Considering the group philosophy and current regulatory environment, we have never done any kind of misselling on any of the products. With IndusInd bank, we have a tie-up for co-branded credit card, though the entire collection, risk, and so many other compliance things lie with them, but as a group policy, since we are sourcing the customer, we will get a onetime payout and some revenue sharing as per the regulatory guideline. At the same time, we thought we will go ahead but we vetted the entire thing. We have one of the best compliance team here in Poonawalla Fincorp. That is why it took time and instead of launching in Q4, we thought to wait. We are not in a hurry because we are a long-term player. Now everything is done. I think we are good to go, and we have a strategy in place for sourcing as well as the integration with the co-brand partner and the entire disclaimer, product brochure, “no mis-selling to the customer”, and the unique product proposition, which you will get to know in next 2 weeks wherein broad features are that we are not charging any joining fee or annual fee. Otherwise, there is no need of launch when you have so many options in the market. So, there also, I think we will come out with our unique product proposition, and we will give you an update in next 2 to 3 weeks once we launch that co-branded credit card. And on your question in terms of the management team, see, we are one of the best teams for the retail NBFC and the digital lending space. And we have a successful track record of delivering consistent, superlative, quarter-on-quarter performance, and we have done the massive transformation in the sector. If you look at some of these resources like starting from Mr. Sunil Samdani, who is our Executive Director, he had joined 6 months back, if you see his experience in the BFSI space, more than 20 years, and he was instrumental in setting up Bandhan Bank for 9 years, taking it to the IPO and scaling it further. He has a deep understanding of the finance, treasury, risk management, Investor Relationship. And if you see our Head of Retail Assets, Mr. Manish Chaudhari, again, he is ex-Poonawalla Finance, the existing NBFC of the Poonawalla Group, which was unlisted. He has almost completed 5 years with the group, including 3 years with Poonawalla Fincorp, 2 years with Poonawalla Finance. One of the best guys in the retail industry as we speak. Next is Mr. Manoj Gujaran, who is our Chief Compliance Officer. Again, the old guy of Poonawalla Finance, with 2 years there, and 3 years with Poonawalla Fincorp, in total 5 years with Poonawalla Group, of handling the regulatory risk and the compliance and he has led the acquisition of Magma, sale of housing, other regulatory tasks. Mr. Anup Agarwal, who heads the Internal Audit function, has a deep understanding in managing risk, audit function, considering his background with Citibank, Kotak Bank, State Bank of India and all MNC banks. Ms. Smita Mitra, who heads the HR, is again, the old Poonawalla Finance HR. She has also completed 5 years. Before that she was with a leading NBFC and was handling more than 8,000 people. Our Chief Risk Officer, Mr. Rajendra Tathare, Mr. Hiren Shah, who is our Head IR and Strategy, these are all experienced people, more than 20 years of experience, relevant skill set, and an NBFC background. So, as we speak, we have recruited one of the best teams. With this team, I think we can easily deliver more than ₹ 50,000 Crore - ₹ 60,000 Crore AUM, but transformation is a journey, and we are going to invest in team and technology as and when required, depending on the new product launch, depending on the geographies which we target, depending on the target segment. So as and when required, we have continued to strengthen the team, continue to strengthen the board, and continue to strengthen the technology as well, Sameer.

Ladies and gentlemen, that was the last question of the day. I now hand the conference over to Mr. Hiren Shah for closing comments. Over to you, sir. Hiren Shah Thank you, everyone, for joining this earning call with us. I would like to thank Abhay sir for all he has done for this organization, has built the best-in-class management team, and he has showcased best in the industry turnaround in the history of BFSI segment. He will be surely missed at our end, and he will be there for guiding us at the board level. Thank you, sir, for everything. For any further queries or communications, please write to us at investor.relations@poonawallafincorp.com Thank you.

Thank you. On behalf of Poonawalla Fincorp Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.