Poonawalla Fincorp : Credit Rating Upgrade

PRESS RELEASE

Poonawalla Fincorp's rating upgraded to AAA by Care Ratings

Pune, Sept 30, 2022: Care Ratings Ltd (Care) has upgraded the long-term rating of Poonawalla Fincorp Limited (PFL) and its subsidiary, Poonawalla Housing Finance Limited (PHFL) to "CARE

1. (Triple A), Stable". This rating is applicable for bank loan facilities, non-convertible debentures, market linked debentures and subordinated debt.

Mr. Adar Poonawalla, Chairman, PFL stated, "The financial services business has been identified to be of strategic importance for Cyrus Poonawalla Group. The current rating upgrade by CARE to AAA (Triple A) reaffirms the strength of the organization and its leadership along with the financial and operational excellence. This is an important milestone in our journey towards becoming a leader in financial services and is a testimony of our commitment towards building a strong institution."

Commenting on the upgrade, Mr. Abhay Bhutada, MD, PFL, said, "This upgrade reflects our relentless focus on executing our stated strategy and building a strong foundation for a long-term sustainable leadership in the industry. This upgraded rating would further strengthen our liability franchise and accelerate our growth journey in line with our vision and mission. We stay committed to be amongst the top 3 NBFCs in consumer and MSME segments through tech- enabled growth in a customer centric manner and create value for all stakeholders"

The complete details of the rating upgrade can be found in the appended annexure.

About Poonawalla Fincorp

Poonawalla Fincorp Limited (Formerly known as Magma Fincorp Limited) is a Cyrus Poonawalla group promoted non-deposit taking systemically important non-banking finance company (ND-SI-NBFC), registered with the Reserve Bank of India (RBI). The Company started operations nearly three decades back and is listed on the BSE Limited (BSE) and the National Stock Exchange in India (NSE). Consequent to the capital raise of Rs 3,456 Crore in May'21, the Company is now part of the Cyrus Poonawalla Group with majority stake owned by Rising Sun Holdings Private Limited, a company owned and controlled by Mr. Adar Poonawalla.

The Company's new identity "P" stands for Passion, Principles, Purpose, People and Possibilities. Poonawalla Fincorp Limited ("PFL") has a widespread coverage with 231 branches across 21 States. The Company along with its subsidiary has AUM of ₹17,660 crore and employs more than 5,000 people. Its financial services offerings include pre-owned car finance, personal loans, loan to professionals, business loans, SME LAP, supply chain finance, medical equipment, consumer loans and affordable home loans.

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Poonawalla Fincorp Limited

September 30, 2022

Ratings

Facilities/Instruments		Amount (₹ crore)			Rating1		Rating Action
	12,655.65			CARE AAA; Stable		Revised from CARE AA+; Stable
Long-term bank facilities		(Enhanced from
		(Triple A; Outlook: Stable)		(Double A Plus; Outlook: Stable)
	9,655.65)
					CARE AAA; Stable / CARE A1+		Revised from CARE AA+; Stable /
Long-term /Short-term bank						CARE A1+
344.35			(Triple A; Outlook: Stable/ A One
facilities				(Double A Plus; Outlook: Stable / A One
				Plus)
						Plus)
Short-term bank facilities	200.00			CARE A1+		Reaffirmed
		(A One Plus)
	13,200.00
Total bank facilities		(₹ Thirteen thousand
	two hundred crores
		only)
Perpetual debt	79.10			CARE AA+; Stable		Revised from CARE AA; Stable
		(Double A Plus; Outlook: Stable)		(Double A; Outlook: Stable)
Subordinate debt	230.00			CARE AAA; Stable		Revised from CARE AA+; Stable
		(Triple A; Outlook: Stable)		(Double A Plus; Outlook: Stable)
					CARE PP-MLD AAA; Stable		Revised from CARE PP-MLD AA+; Stable
Market-linked debentures-						(Principal Protected-Market Linked
250.00			(Principal Protected-Market-linked
proposed				Debentures Double A Plus; Outlook:
				debentures Triple A; Outlook: Stable)
						Stable)
Non-convertible debentures	189.88			CARE AAA; Stable		Revised from CARE AA+; Stable
		(Triple A; Outlook: Stable)		(Double A Plus; Outlook: Stable)
Proposed Non-convertible	4,251.02			CARE AAA; Stable		Revised from CARE AA+; Stable
	(Enhanced from
debentures			(Triple A; Outlook: Stable)		(Double A Plus; Outlook: Stable)
2459.50)
Total long-term	5,000.00
	(₹ Five thousand
instruments
	crore only)
	3,000.00			CARE A1+		Reaffirmed
Commercial paper		(Enhanced from
		(A One Plus)
	1,000.00)
Total short-term	3,000.00
	(₹ Three thousand
instruments
	crore only)

Details of instruments/facilities in Annexure-1.

Detailed rationale and key rating drivers

The rating reflects the expectation of strong support from the Cyrus Poonawalla Group, and the healthy financial flexibility of the Group to provide this support. This is derived from the fact that the promoter, i.e., the Cyrus Poonawalla Group holds 61.49% stake through their core investment company (CIC), Rising Sun Holdings Private Limited (RSHPL) with Mr Adar Poonawalla, as the Chairman of the Board. Furthermore, during FY21 and FY22, the group's flagship company, Serum Institute of India Pvt Ltd (SIIPL; CARE AAA; Stable/ CARE A1+) invested around ₹5000 crores in RSHPL through compulsorily convertible cumulative preference shares. This capital was used to infuse funds in various businesses of the group including Poonawalla Fincorp Ltd (PFL), with RSHPL making equity infusion of ₹3,206 crore in PFL in May 2021. This sizeable investment made in the acquisition of PFL reflects the strategic importance of the financial services business to the group and expectation of timely need-based financial support.

Over the past 12-18 months, apart from significant capital infusion from the group, PFL has been strengthening its systems and processes across all functions including digitisation of its entire customer life cycle. PFL has also revamped its underwriting norms and monitoring mechanisms, in an attempt to make loan book more robust. The company has also modified some of the vintage products of erstwhile Magma Fincorp; PFL is now underwriting business for retail consumer and small businesses in urban and semi-urban locations with higher CIBIL score and better creditworthiness. PFL's well-diversified loan book coupled with increased focus on risk management, aggressive write-off policy and digitisation is expected to enable it to efficiently manage its asset quality going forward. Furthermore, the group had appointed seasoned professionals across all major functions and product segments to run the day-to-day activities who have now stabilised in their roles. The group also has

1Complete definition of the ratings assigned are available at www.careedge.inand other CARE Ratings Ltd.'s publications

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strong representation on the board. These leads Care Ratings Limited (CARE Ratings) to believe that the takeover has been successfully consummated. Furthermore, given the strong association with the Cyrus Poonawalla group, PFL has been able to raise incremental funds at competitive rates in the debt market reflecting the market perception of the strong group support.

The ratings also factor in the change in name from 'Magma' to 'Poonawalla' which is the family name of the promoters creating a strong moral obligation to support PFL, stability in the senior management team consisting of seasoned professionals, revised product strategy with targeting better quality retail consumers and small businesses, lower dependency on cash collection, downsizing the low value-added businesses, improvement in the overall resource base with borrowings at competitive rates, improvement in asset quality and sufficient provisioning to cover from any major shocks along with sequential improvement in profitability.

Furthermore, the ratings continue to factor in strength from PFL's long track record of operations [erstwhile Magma Fincorp and the group's earlier operations in Poonawalla Finance Pvt Ltd (PFPL)] and wide branch network. The ratings also factor in significant infusion of equity capital (₹3,456 crore in May 2021) resulting in comfortable capital adequacy ratio (CAR) and low leverage.

The ratings also consider the relatively modest AUM of ₹17,660 crore (consolidated) as on June 30, 2022. The ability of the company to profitably scale up the business with new product lines remains a monitorable. Furthermore, parentage and strategic importance to the group, overall gearing, asset quality and profitability are the key rating sensitivities.

The Cyrus Poonawalla group is one of the leading players in the pharmaceuticals & biotechnology segment. The group's flagship company; Serum Institute of India Pvt Ltd (SIIPL; rated 'CARE AAA; Stable/CARE A1+'), is one of the world's largest manufactures of Measles/DTP vaccines. The group has also set up Serum Institute Life Sciences Pvt. Ltd. (SLS; rated 'CARE AAA; Stable/CARE A1+') to fulfil the group's adequate response to COVID-19. SIIPL has diverse product offerings in vaccine segment, including the COVID-19 vaccine 'Covishield'.

Rating sensitivities

Positive factors - Factors that could lead to positive rating action/upgrade:

Not Applicable

Negative factors - Factors that could lead to negative rating action/downgrade:

• Weakening of linkages with the parent group/promoter group/promoter family
• Overall gearing exceeding 3.5x-4x on a consolidated basis
• Deterioration in asset quality parameters such that consolidated NNPA remains above 2%
• Decline in profitability with ROTA declining below 2%

Detailed description of the key rating drivers

Key rating strengths

Strong and resourceful promoter:

The Cyrus Poonawalla group holds 61.49% stake in PFL through Rising Sun Holdings Private Limited (RSHPL). RSHPL is the core investment company (CIC) of the group having investments in insurance, retail, pharma and financial services segment. During FY21 and FY22, the group's flagship company, Serum Institute of India Pvt Ltd (SIIPL; CARE AAA; Stable/ CARE A1+) invested ₹5,000 crore in RSHPL through compulsorily convertible cumulative preference shares. This capital was used to infuse funds in various businesses of the group including Poonawalla Fincorp Ltd, with RSHPL making equity infusion of ₹3,206 crore in PFL in May 2021.

In addition to this, PFL is strategically important to the group as indicated by sharing of the 'Poonawalla' name, Mr Adar Poonawalla being the Chairman of the board and the large investment made by the group to diversify into financial services segment with the acquisition of retail lending, housing finance and general insurance business of the erstwhile Magma.

The Cyrus Poonawalla group is one of India's reputed business houses and is a leading player in the pharmaceuticals & biotechnology segment. The group's flagship company, SIIPL is one of the world's largest manufactures of vaccines supplying to around 170 countries. SIIPL has a robust financial profile with total operating income (TOI) of ₹25,634 crores with PAT of ₹10,849 crore in FY22, along with healthy net worth of ₹32,689 crore as on March 31, 2022.

SIIPL floated SLS (rated 'CARE AAA; Stable/ CARE A1+') which is currently engaged in the marketing and distribution of 'Covishield', the COVID-19 vaccine. Apart from 'Covishield', SIIPL has a diverse product basket in the vaccine segment. Over the years, the group has operated with minimal debt and has one of the lowest leverage ratios amongst business groups in India.

SIIPL has a healthy liquid investment portfolio to the tune of ₹23,313 crore as on March 31, 2022. Furthermore, SIIPL had generated gross cash accruals (GCA) of ₹12,065 crore during FY22 and is expected to generate significant GCA in the medium term. Thus, the group has a robust financial profile with healthy cash accruals and minimal debt obligations.

Stability in senior management:

PFL is being led by Mr Adar Poonawalla as the Chairman and Non-Executive Director of the Board along with a team of seasoned professionals having specialization in financial services business with a track record of successful market leadership, which are stable at all levels.

The company is governed by ten-member Board of Directors, including five independent directors. The Board comprises qualified and experienced professionals with considerable experience in functional areas. The Board is ably supported by a qualified senior management team led by Mr. Abhay Bhutada (Managing Director), who is a seasoned finance professional with over 15 years of diversified experience in commercial and retail lending domain. He is driving the digitization initiatives for the company and has been instrumental in setting up the initial foray into retail lending business for the group.

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Pan-India presence with wide branch network and digitising its operations:

PFL has pan-India presence through a network of over 242 branches (as on March 31, 2022) spread across 21 States/Union Territories. The consolidated loan book of the company was diversified geographically with north contributing around 31%, east around 15%, south around 28% and west contributing around 27% as on March 31, 2022. PFL's business plan aims to rationalise the branch network suiting the needs of its realigned product suite. Furthermore, the company plans to intensify its use of technology and digitalization in its entire customer life cycle which is likely to achieve operating efficiencies.

Focused and diversified product approach in retail segment:

The new management's business plan revolves around a revised product strategy, targeting better quality retail consumers and small businesses in urban/semi-urban locations. Professional management and strong financial flexibility would be key enablers for PFL's product strategy. PFL plans to achieve a 3x growth (over FY21) in AUM by FY25 with a focused product approach consisting of a mix of unsecured (Digital Personal Loans, Digital Loans to Professionals, Digital Business Loans) and secured (Pre-owned Car Loan, Digital SME LAP, Affordable Home Loans, Affordable LAP, Machinery/medical equipment loans) products. As a part of the new business strategy, PFL has also discontinued products like Tractors, CVs, CEs and new cars for business and operational efficiency. PFL plans to achieve operating efficiencies through increasing use of technology, fintech partnerships and rationalisng branches and has undertaken conservative provision buffers/write-offs in FY22 along with a prudent write-off policy going forward.

PFL shall continue to focus on affordable housing loan (around 30% of the existing consolidated AUM) in its subsidiary Poonawalla Housing Finance Limited (PHFL) and the pre-owned car loans (around 13% of existing consolidated AUM) from its existing portfolio as a part of the new product suite. Each of the product segments is being led by business heads who have significant experience in respective products. Moreover, unsecured products (personal loans, loan to professionals, business loans) which were done under PFPL, have been migrated to PFL and will be a key focus going forward. PFL uses branchless digital model for its unsecured loan products, enabling deeper customer reach, aiding scalability with diversification. PFL has end-to-endtechnology-enabled process covering origination, underwriting, analytics, credit policy, disbursals, collection, and recovery.

Improved access to funding:

With a strong parent coupled with strong management team, the company has a wider access to more diversified liability market along with a significant reduction in the cost of funds. The company has received fresh sanctions at much lower rates of interest and has replaced the entire re-priceablehigh-cost legacy debt. It is also expected that the company shall be able to gainfully approach lending institutions who have not been associated with the erstwhile MFL. This is expected to give the company stable borrowings profile, with better access to funding and lower cost of funds going forward. The same has witnessed consistent decline over the last four quarters since acquisition by the Cyrus Poonawalla group.

Low leverage and diversified resource profile:

The company has a diversified resource profile in terms mix of bank and debt capital markets borrowings. PFL's consolidated borrowings as on March 31, 2022, were in the form of 55% of term loans, 22% in the form of cash credit and working capital demand loans, 10% in the form of NCDs, 7% in the form of securitisation and balance 6% in the form of perpetual & sub-debt. Moreover, the overall gearing continues to remain lower at 1.7x primarily due to equity infusion. PFL had a large equity infusion of ₹3,456 crore by way of a preferential issue of equity shares which has resulted in low leverage of 1.7x and a comfortable liquidity position as on March 31, 2022.

The resource profile has seen improvement since March 2021 and the company has increased its lender base by onboarding private and foreign banks and has commenced capital market borrowings by tapping the CP market and issuing its maiden NCD under 'Poonawalla Fincorp' name in July 2022.

It is expected that the company shall be able to leverage and raise further debt capital to embark on a growth plan envisaged by management to take its AUM to around 3x (over FY21) level by FY25. The diversification of resource profile, with increasing relationship across various categories of banks and capital market investors has resulted in a stable liability profile.

Improved asset quality with adequate provisioning and aggressive write off policy:

The reported Gross Stage III and Net Stage III assets of the company decreased substantially from ₹914 crore and ₹580 crore, respectively, as on March 31, 2020, to ₹367 crore and ₹158 crore respectively as of June 30, 2022. (₹413 crore and ₹170 crore as on March 31, 2022). The Gross Stage III & Net Stage III assets as a percentage of advances thus reduced to 2.19% and 0.95% as of June 30, 2022 (2.66% and 1.11%, respectively, as on March 31, 2022, as compared with 6.44% and 4.19%, respectively, as on March 31, 2020).

With the new management taking over control in May 2021, the company has remodelled its underwriting practices and implemented an aggressive write off and provision coverage policy. The Stage III provision coverage was healthy at 58.90% as on March 31, 2022, as compared with 36.54% as on March 31, 2020. (68.6% as of March 2021).

Key rating weaknesses

Moderate AUM, scale of operations and market position:

As on March 31, 2022, PFL's consolidated AUM stood at ₹16,579 crore, as compared to ₹14,225 crore, as on March 31, 2021, registering a growth of around 17%. However, the AUM is spread across six asset classes. While this gives PFL the benefit of diversity, the scale of operations and market position remains moderate within each asset classes. However, there is a growth in AUM in all asset classes quarter on quarter in fiscal 2022.

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Furthermore, for Q1FY23, PFL's consolidated AUM stood at ₹17,660 crore recording growth of 7% Q-o-Q. The company reported PAT of ₹141 crore for Q1FY23 (₹375 crore for March 2022).

New product segments

The company over the past few quarters has forayed into new product lines in which its market share remains modest. The company's ability to profitably scale up the portfolio across diverse segments remains a key monitorable. Furthermore, parentage and strategic importance to the group, overall gearing, asset quality and profitability are the key rating sensitivities.

Liquidity: Strong

The group (on consolidated basis) had strong liquidity of ₹4,654 crore (including undrawn lines of ₹2,935 crore) as on June 30, 2022. The proceeds from equity infusion were utilised for debt repayment creating headroom for borrowings. As on June 30, 2022, the ALM profile of both PFL and PHFL shows significant surplus position across all time buckets aided by large equity base, reduced debt level and inherently short-to-medium duration of assets. With RSHPL now being the largest shareholder, financial flexibility is improved significantly.

Analytical approach

CARE Ratings has taken a consolidated view of PFL and its wholly-owned subsidiary, Poonawalla Housing Finance Ltd (PHFL), along with factoring the group linkages in the ratings with the expectation of need based timely support to PFL and PHFL from Cyrus Poonawalla Group, whose flagship company is Serum Institute of India Private Limited (SIIPL, rated; CARE AAA/Stable/CARE A1+), given the majority ownership and high strategic importance, the shared brand name and managerial control.

Applicable criteria

Policy on default recognition

Rating Methodology: Non-Banking Financial Companies

Financial Ratios: Financial Sector

Rating Methodology: Consolidation

Factoring Linkages: Group Linkages

Rating Outlook and Credit Watch

Short Term Instruments

Market Linked Notes

Policy on Withdrawal of Ratings

About the company

PFL (earlier known as Magma Fincorp Limited, MFL) is a non-deposit-taking systemically important non-banking finance company, registered with the Reserve Bank of India. Incorporated as Magma Leasing Limited, the company entered the financing business in 1989. It was renamed MFL in 2008, and PFL in 2021 post acquisition of controlling stake of 60% by Rising Sun Holdings Private Limited (the entity owned and controlled by Mr Adar Poonawalla). PFL has various product offerings in the consumer and small business finance segments including home loans, personal loans, pre-owned car loans, business loans, loan against property as well as general insurance. It operates through a network of above 242 branches as on March 31, 2022, across 21 states of India.

Brief Financials (₹ crore)	March 31, 2021 (A)	March 31, 2022 (A)	Q1FY23 (UA)
Total income	2352	2041	572
PAT	-559	375	141
Overall gearing (times)	5.59	1.70	1.70
Assets under Management (AUM)	14,225	16,579	17,660
Net NPA (%)	1.20	1.10	0.95
ROTA (%)	-3.93	2.53	3.4
A: Audited; UA: Unaudited

4	CARE Ratings Ltd.