Poonawalla Fincorp : Transcript of conference call for Q4 result of FY24

POONAWALLA FINCORP LIMITED

"Q4 FY2023-24 RESULTS CONFERENCE CALL"

APRIL 29, 2024

MANAGEMENT: MR. ABHAY BHUTADA - MANAGING DIRECTOR

MR. SUNIL SAMDANI - EXECUTIVE DIRECTOR

MR. HIREN SHAH - HEAD, STRATEGY, BIU &

INVESTOR RELATIONS

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	Poonawalla Fincorp Limited
	April 29, 2024
Moderator:	Ladies and gentlemen, good day, and welcome to Poonawalla Fincorp Limited Q4FY24 Results
	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 then zero on
	your touch-tone phone. Please note that this conference is being recorded.
	I now hand the conference over to Mr. Hiren Shah, Head of Investor Relations, Strategy and
	BIU. Thank you, and over to you, sir.
Hiren Shah:	Thank you, Ria. Good evening, everyone, and thanks for joining this conference call.
	It is our pleasure to welcome you all to discuss Poonawalla Fincorp's business and financial
	performance for the quarter and year ending March 31, 2024. To discuss all this in detail, I have
	with me our Managing Director - Mr. Abhay Bhutada, our Executive Director - Mr. Sunil
	Samdani, and other senior management Officials, and myself Hiren Shah, Head of Strategy,
	BIU, and 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 development for the quarter
	ending March 31, 2024. Over to you, sir.
Abhay Bhutada:	Thank you, Hiren. Good evening, everyone.
	I welcome you all to this Earning Call of Poonawalla Fincorp, and I hope you are doing great.
	Before I give a snapshot of our performance and highlights of the quarter and the financial year
	gone by, I will first start with a quick macroeconomic update.
	We are in middle of a dynamic macroeconomic environment with the convergence of multiple
	factors ranging from inflation, interest rates and geopolitical conditions, which influence the
	economic decisions. Looking at inflation control, which is one of the critical goals for the
	economy, the current projections indicate a manageable scenario. In terms of the monsoon as
	predicted by Skymet, monsoon season is expected to be normal. Agriculture production could
	remain stable, thereby controlling food inflation. A normal monsoon is crucial as it directly
	impacts the inflation and growth rates. The agriculture sector's outlook, which is heavily
	dependent on monsoon also be a significance for the RBI's policy framework.
	Further, looking at the crude oil prices, the volatile nature of crude oil prices intensified by
	geopolitical tension present an external challenge for the economy with crude oil prices expected
	to remain elevated, one will need to account for the impact of higher energy cost on inflation,
	and the current account deficit.
	The Reserve Bank of India's monetary policy earlier this month decided to keep the policy repo
	rate unchanged at 6.5% as retail inflation continues to be above its target of 4%. According to
	RBI, India's GDP is projected to grow at 7% in FY25, while the retail inflation is likely to be

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4.5%. In the Post Monetary Policy Press Conference, RBI Governor did mention that inflation is moderating, and the GDP growth is robust.

The overall outlook remains largely positive while the GDP growth for FY2024-25 is retained at 7%, a bit lower than 7.6% of last fiscal. It is still a good growth. Retail inflation is expected to average 4.5% this fiscal, much lower than 5.4% in FY24, with rural demand catching up, consumption is expected to support economic growth in FY25.

Outlook for agriculture, rural activity, appears bright, with good rabi crop and improved prospects of kharif crop due to expected normal monsoon. Strong rural demand, moderating inflationary pressure and sustained momentum in manufacturing and services sector will boost private consumption. The headwinds from geopolitical tension and increased reception in trade routes may pose risk to the outlook. However, in my view, there may a slight adjustment in interest rates over next couple of quarters to support economic growth while keeping inflation in check.

The fundamentals of India economy are strongly deep rooted and represents an opportunity for us as we expect this to get translated into steady credit growth for both MSME as well as consumer segments. Our efforts to build a strong and sustainable MSME and consumer segment, focused organization, position us best to leverage this opportunity and in the process, enable the dreams of our customers.

Let me now take you through the company's performance for the financial year ended 31st March 2024.

I am excited to share with you all an update of it, another fantastic year of all-around performance. I feel proud of the last 3 years journey to spread the biggest transformation of Poonawalla Fincorp that the NBFC space has ever witnessed. When we acquired Magma, we set ourselves on an ambitious journey, well expressed in our Vision 2025 statement.

Our execution excellence has ensured that we have continuously outperformed and consistently given superior performance, resulting in achieving significant milestones of our AUM crossing

• 25,000 Crore and Profit After Tax crossing ₹ 1,000 Crore. We also recorded the highest ever quarterly disbursement and best-in-class asset quality numbers, resulting in an overall superlative performance.

Our differentiated strategy and relentless execution are reflected across all business metrics and have made a thought leader in the lending space. This year has been a phenomenal year across the board for us, with Q4 being the best ever quarter.

Now let me take you through the key financial numbers for the quarter.

We reported our highest ever quarterly disbursement of ₹ 9,688 Crore, up 52% year-on-year, 11% quarter-on-quarter. On Asset Under Management side, we stood at ₹ 25,003 Crore, reflecting a growth of 55% year-on-year, 14% quarter-on-quarter.

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As regards to the composition of our total AUM, MSME constitutes about 37% of our book, followed by personal and consumer finance at 23%, Loan against property at 16% and preowned car contributing to 15%.

The secured to unsecured book stood at 49% to 51%, the secured book is growing at a steady rate as disbursement in LAP, POC and MSME continue to grow. Despite of our decision of sale of housing, we have been able to maintain the ratio of 50-50 approximately on towards the secured and unsecured book.

With longer tenure of LAP book, we expect our secured book to continue to grow. Our guidance on the secured to unsecured mix is 50% each in the medium to long term. On the tenure mix of our book, the short tenure loans up to 12 months tenor stood up 15% of the book as per our guidance. While the medium- to long-term loans of more than 12 months are at 85%. The tenure mix is helping us to improve our profitability, while also keeping the AUM growth in place. We continue to be a national player with our presence across 19 states, having a branch network of 102 branches.

The portfolio continues to grow across all our markets, and we have a well-diversified geographic spread of portfolio with no large market concentration. Our portfolio is also well diversified across both MSME and Consumer segment.

Asset quality continued to be the best in class and in line with our guidance. Gross NPA stands at 1.16%, down by 28 bps year-on-year, 17 bps quarter-on-quarter. While net NPA is at 0.59%, down 19 bps year-on-year and 11 bps quarter-on-quarter. The asset quality is reflective of our prudent credit policy and right selection of customers. Our provision coverage ratio stood at 49.39%.

Our cost of borrowing stood at 8.17% for Q4FY24 as against 7.99% in Q3FY24. Our cost of borrowing continues to remain one of the lowest in the industry despite hardening of rates due to tight liquidity condition and increase in risk weight.

Our Net Interest Margin stood healthy at 11.06% during the quarter, which is up by 4 bps quarter- on-quarter. Our operating efficiency has continued to improve further. The Opex to AUM ratio has come down drastically by 144 bps from 5.43% in Q4FY23 to 3.99% Q4FY24. Of the 3.99% and 0.64% is contributed by ESOP charge. So, if you exclude this 0.64%, which is an ESOP charge, we have maintained the Opex to AUM below 3.5%, much better than our guidance. Reduction in Opex ratio signifies the productivity enhancement that have been achieved. As we grow these ratios, we should continue to optimize this further. The interplay of all the above is reflected in superior profitability.

The Operating Profit for the quarter is ₹ 409 Crore, which is up by 93% year-on-year and 17% quarter-on-quarter. Profit After Tax for the quarter stood at ₹ 332 Crore, which is up by 84% year-on-year, 25% up on quarter-on-quarter basis.

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Our Return on Assets was at 5.73% for Q4FY24, which is up by 73 bps year-on-year and 42 bps quarter-on-quarter is one of the highest in the industry as we speak.

I will take this opportunity to give a quick recap of the successful transformation that we have done over the last 3 years since the acquisition of Magma, which was a 3-decade-old company.

When I reflect at the Q4FY21 deck, where we first mentioned the strategy after taking over Magma and me taking over as the Managing Director of Poonawalla Fincorp, the journey so far, I feel happy and satisfied to see the tremendous progress that we have made. We had clearly defined strategy of what and how we wanted to deliver. Our product strategy, target market, customer focus, multi-tiered customer proposition, branch rationalization, robust corporate governance, risk management and digital focus along with the best-in-class technology and analytics have all combined to enable the fantastic results and successful transformation of the company. We have delivered on all the points, whatever we have mentioned 3 years back at the time of acquisition, you can validate each of the points within the defined timeline and in fact, not just delivered, but surpassed the expectations too. The visible transformational shift in the numbers from December '20, that is preacquisition, till 31st March '24 is a clear reflection of the well-thought-through strategy along with the clinical execution.

Look at these numbers, gives an understanding of the scale of the transformation undertaken. Our AUM has increased by 2.4x to ₹ 25,003 Crore over the last 3 years. The GNPA and NNPA have reduced significantly from the levels of 8.23% and 5.35% respectively, to 1.16% and 0.59% respectively. The Return on Assets has increased multifold from 0.04% to industry best number of 5.73%.

On efficiency and productivity metrics, AUM per employee has increased from ₹ 2.14 Crore to

• 11 Crore per employee. It is one of the best in the industry. The profit before tax per employee has increased from ₹ 0.12 lakh to ₹ 68 lakh. Employee headcount has reduced from 5,431 to 2,384, majorly because of the digital model what we have. While number of branches have been consolidated from 255 to 102, all the above improvements across the parameter was well reflected by a 3-notch rating upgrade from AA- from CARE rating agency to AAA by CRISIL and CARE. We are one of the very few NBFC in the industry being rated by CRISIL AAA.

The approach of digital-first play, cashless collection, data-driven lending, and lean structure is well entrenched in the organization today and has been key contributor of this transformation story. We continue to move in line with our Vision 2025, while we are maintaining the same growth rate through focus on our customer segment of prime bureau-tested customer having lower credit risk, we also continue with our customer-centric approach, that is optimum pricing, best turnaround time, convenience, and excellence in customer service. This approach has ensured that, as we have grown, we have created differentiation for ourselves in the marketplace, thereby providing us right to win. We have built a significant digital presence while going deep in urban and semi-urban market, focusing on risk-adjusted return delivery rather than just spreads by leveraging technology for operational efficiencies.

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Our phased strategy execution of "Consolidate, Grow and Lead" was spread over 3 years period as Consolidation for initial first 9 to 12 months, Growth over next 9 to 18 months, and Lead over the next 18 to 36 months. We have ensured that we have flawlessly executed our phased strategy, and we are already in "Lead" phase now. Our leadership in the products, geographies we operate in, in the process of good governance, risk management, along with analytics is visible and providing us the competitive advantage. The same have been well acknowledged by the industry across the streams.

There have been many firsts in this journey, which are cemented our place as a thought leader. We were the first one who set out to make a Tech-led NBFC in its true sense. It was not an easy decision, but we were very clear that for us to build a "Future Ready" organization, we need to do the hard work now. What it has resulted is something no one in the industry has ever achieved, an inverse relationship between headcount and group. We are today, 44% of the headcount from the preacquisition level while we have more than doubled our AUM. We are the only NBFC irrespective of this scale, which has defined linear growth in manpower and business as well.

We are the first one who caught the trend of changes in consumer preferences and moved away from branch led to a branch-lite model. While the industry is expanding the branch footprint, we have grown by consolidating the branch network. We focus on "going deep rather than going wide" and the same has yielded tremendous results for us. We are today having a decent market share in geographies we operate in, making us a significant player in the lending space for most of the products.

We have been pioneers in adopting technology to service our customers better. We are the first one to provide a full stack customer service solution through WhatsApp journey. This has ensured that we have moved our customers to "Do-It-Yourself" journey, thereby not just empowering them, but also enhancing their overall experience. More than 70% of our customer service interactions are now digital.

We have also created an industry-first feature, wherein, anyone can access their bureau report through WhatsApp. This is a part of our customer engagement, awareness, and education series. We have seen good traction here and getting positive reviews about the same.

We are the leaders in providing wealth creation opportunity for our employees with ESOP coverage. We have given ESOP to more than 300 employees and a lot of incentive schemes to retain the top talent. Our incentivisation schemes are the best in the industry and drive efficiencies across lines of businesses.

We are one of the youngest organizations to be certified as a Great Place to Work and have made our way into the top 50 in BFSI space in such a short span of time. Our wellness programs have become an industry benchmark and got industry-wide recognition.

I'm proud of the risk and good governance culture that we have built in the organization. We always believed in and built a credit led model. Today, we have some of the best risk management practices, early warning signals, scorecard, business rule engine, fraud risk

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management framework, operational and InfoSec risk management practices. Corporate governance and compliance are one of the critical elements in any financial services business, and we maintain the highest standard in the same.

Our technology stack today is one of the best in the industry. The end-to-end digitized journeys with the use of all available technology solution to automate and digitize the processes have been our hallmark. We use the best solution available without compromising on the infosec risk, the stability of system and customer convenience. We have all our systems on cloud, thereby enhancing the systems availability and scalability.

Our sales and distribution are multi-pronged with a balanced mix of direct, channel, and digital. The digitization and automation in sales is helping increase the efficiency of our sales workforce and is a productivity driver. In collections, we have adopted technology to ensure that cash collections are almost negligible. Today, we have reached a level where our cash collection is lowest in the industry.

All these have been possible because of our "forward-thinking" approach, and our ingrained philosophy of "Going for excellence in all that we do". We have grown as an organization in a full 360-degree way as a sustainable organization always, we have holistic approach to growth. Today I can proudly say that we are an organization, which has learnt to not just adopt to the best practices but create the best practices for others to follow as well.

Over the last 3 years, we have been able to build critical blocks for our next phase of journey. The progress on the product launches, branch consolidation, digital transformation, risk culture, along with the people agenda have been some of the key wins for us. As we have seen the lending environment has undergone a lot of change over the last couple of years and will continue to further evolve. Our agility has been our biggest strength, and we believe that this strength will continue to help us succeed in the future as well. As we are in the last leg of our Vision 2025, we have already started work towards the "Next" and are well positioned and confident of delivering a consistently superior performance on the back of a strong foundation built over the last 3 years. I firmly believe, we have it all that is required to build a truly sustainable organization.

I would also like to take this opportunity to thank you all for the support extended to me in carrying out this huge transformation exercise. This successful transformation has been made possible because of unwavering support of all our stakeholders. The success is not mine alone; it is a culmination of efforts put in by the entire team for each of the projects, each of the challenges faced resulting in the successes that we experienced together. None of it was easy, and we had our own share of exceptional challenges, but we stood up firm and face them head on with our grit and determination and emerge out much stronger. This has ensured that we have been shaping our future proactively, and we have been a creator.

Every interaction with each one of you has been a special one, and I really enjoyed meeting and speaking to each one of you. The discussions have always been thought provoking and have helped me immensely. It has been a privilege to lead such an exceptional team and to interact

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	with such distinguished investor community. I look back with immense pride and I would like
	to express my deepest gratitude for trust and confidence placed in me over the year.
	Thank you once again.
	And now I will request our Executive Director, Sunil Samdani, to take you through the financial
	and operational aspects of the business. Thanks.
Sunil Samdani	Thank you, Abhay, and good evening, everyone.
	Let me take you through the financial and operational updates.
	Let me start once again, highlighting two significant achievements. First, we crossed the ₹ 1,000
	Crore PAT mark for the full financial year which now stands at ₹ 1,027 Crore, and second, we
	crossed the ₹ 25,000 Crore AUM mark as of March 2024, which now stands at ₹ 25,003 Crore.
	As we all know, the interest rate environment remains tight for the quarter and is expected to do
	so in the near future. In line with that, our cost of borrowings has gone up by 18 basis points
	quarter-on-quarter to 8.17%. While the same has increased, it is in line with the industry increase.
	Our cost of borrowing has moved up, but we continue to be among the lowest cost fundraiser in
	the industry. Again, while the cost has increased 18 bps, we have been able to pass it on to our
	customers, and this has resulted in improving our NIMs by 4 basis points from 11.02% to
	11.06%. We will continue to diversify our liability franchise to further optimize the cost of
	borrowing. Majority of our portfolio on the lending side is on the fixed rate basis, while our
	borrowings are on a variable rate. Hence, as, and when the interest rates start coming down, we
	will benefit from the same and it should help us improve our NIMs further.
	On the ALM side, we remain comfortable with positive cumulative mismatch across all buckets,
	and we carry a surplus liquidity of ₹ 3,932 Crore as of 31st March 2024. The LCR as on 31st
	March stands at 130.45% against the regulatory requirement of 85%.
	We continue to gain on our operational efficiency and our opex to AUM ratio stands at 3.99%
	in Q4FY24. This was 4% in Q3 and 4.18% in Q2FY24. If we compare it with the previous year
	same quarter, it stood at 5.43%. These opex ratios are one of the best in the industry.
	As far as margins are concerned, as we spoke, it is up 4 bps quarter-on-quarter at 11.06%. This
	has been possible because we focus on low-risk customers and optimal product mix and low
	cost of borrowing.
	Now coming to customer acquisitions. We are constantly working on broadening our customer
	funnel through a phygital model while maintaining a superior risk management aided by data
	accessibility and technology. We are now focused on further enhancing paperless journey for all
	loan products as well, just like we did it for consumer and personal finance.
	We believe the essence of building a complete digital lending experience is using technology
	across all product lines and strive to use digital across all forms of lending. As we continue to
	further enhance our app journey, we expect more direct acquisition in our secured lines as well.
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In addition to app, we are actively using WhatsApp channel, not only for lead generation, but also for a full loan journey along with customer service. We believe this is an investment for future as customers are having preferences for app less solutions as well. We will stay invested across our app, web, and app less channel.

Now coming to customer service. We have developed multiple customer service touch points to ensure quick and effective service delivery, such as WhatsApp, app-basedself-service, call centers, branch-based customer touch points. Our WhatsApp channel today addresses more than 70% of our customer request, which helps us to be instantaneous as well as cost effective. Customer service is a moat that we have, and we are working to further strengthen the same. On internal service level agreements, we ensure that we address any customer query in minimum time period.

On the collection side, we have built a robust digital infrastructure for collection in addition to a strong in-house workforce of more than 400 employees. More than 95% of our total collections are through digital models. This has helped us to be cost effective and efficient on the ground. In addition to this, we have a technology framework to ensure systemic review of our daily rigor to further maintain overall effectiveness. We continue to invest in latest collection solutions as we see collection channels changing in line with the changes in payment system.

On people front, I am happy to share that we have been progressing our efforts to build a healthy workplace with the right culture. As a young organization, we work tirelessly towards making PFL an aspirational workplace, and our efforts have yielded results as we secured a place in top 50 list of Best Place to Work in India in BFSI sector for 2024. This is a moment of pride of us as we rub our shoulders with some of the biggest names in BFSI space. Also, our pursuit of creating a healthy workplace with focus on employee wellness has led to us getting recognized as India's best workplace in Health and Wellness. Apart from our technology interventions in HR, like Amber, which is an HR chatbot has been accepted well in the industry. We have taken multiple initiatives in past few months to ensure that we keep moving towards building a people- centric future-ready organization.

To summarize, on an overall basis, we are well placed on the operational aspects as we continue to further improve the operational efficiency. Technology is being leveraged across the board to get more gains. Also, as we see that the environment is more dynamic than ever, hence, we are also looking at all our internal processes closely to see further changes, improvements and enhancements as may be required. We have a road map for what we want to do and what we have and for which we are working on actively.

Customer service continues to be an area where we want to spend disproportionately. We are adding more and more digitization in customer service as we see customers wanting more self- service options at their convenience. We are also investing in HR tech to further improve internal employee experience. Productivity and efficiency continue to be a driver as we look improving further, our best-in-class benchmarks. Also, we continue to recalibrate our product mix to ensure we have an optimally balanced portfolio.

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	We have ticked the right boxes in our journey so far and as a result of the same is visible across
	metrics of our growth, profitability, and efficiency. Our strategic thinking, execution capabilities
	and agility have been our core strength and our journey ahead will build on it.
	I would also like to take this opportunity to thank Abhay for his exemplary leadership and
	invaluable contribution in transforming the organization into a high-growth, highly efficient and
	highly profitable organization.
	Thank you, everyone. We can now start the question-and-answer session.
Moderator:	Thank you very much. The first question is from the line of Sameer Bhise from JM Financial.
Sameer Bhise:	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.
Abhay Bhutada:	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.
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