Poonawalla Fincorp : Transcript of conference call for Q1 result of FY24

"Poonawalla Fincorp Limited

Q1 FY 2023-24 Earnings Conference Call"

July 24, 2023

MANAGEMENT: MR. ABHAY BHUTADA - MANAGING DIRECTOR -

POONAWALLA FINCORP LIMITED

MR. HIREN SHAH - HEAD- STRATEGY, BIU, AND

INVESTOR RELATIONS - POONAWALLA FINCORP

LIMITED

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Poonawalla Fincorp Limited

July 24, 2023

Moderator:Ladies and gentlemen, good day, and welcome to the Poonawalla Fincorp Q1 FY 2023-24 Earnings 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. Anyone who wishes to ask a question may please press star and one on the attached tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Should you need assistance during the conference call, please signal the operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded.

I now hand the conference over to Mr. Hiren Shah. Thank you, and over to you, sir.

Hiren Shah:Thank you, Lizann. Good evening, everyone. Thanks for joining this conference call. It's our pleasure to welcome you all to discuss Poonawalla Fincorp's business and financial performance for the quarter ending June 2023. To discuss all this in detail, I have with me our Managing Director, Mr. Abhay Bhutada, 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 30th June 2023. Over to you, sir.

Abhay Bhutada: Thank you, Hiren. Good evening, everyone. I welcome you all to the Q1 FY '24 Earnings Conference Call of Poonawalla Fincorp Limited, and trust you are all doing great. Q1 FY '24 marks the beginning of a new fiscal year and brings with it a sense of new hope, innovations, and opportunities. We have recorded the highest ever quarterly disbursement, strong growth in asset under management with robust asset quality, resulting in the highest ever quarterly profit after tax.

This performance is reflective of our sound strategy, excellence in execution, digital capabilities, and unwavering commitment towards our stakeholders. During the last year, we started the value unlocking process of our housing finance subsidiary. We have received all the requisite approvals and the transaction is expected to conclude over the next one week.

The key stand-alone financial numbers for the quarter ended June 30, 2023, are:

Our AUM has grown by 41% year-on-year and 10% quarter-on-quarter, now stands at ₹ 17,776 crores. Our AUM is well diversified across MSME and consumer segment with multi-sourcing channel.

On the composition side of our total AUM, unsecured MSME loan constitutes 36%, followed by personal and consumer finance at 19%, loan against property and pre-owned car at 16% each. Secured to unsecured ratio of the total AUM stood at 45% to 55%.

We are mainly focusing on prime customer segment with a bureau score of 700-plus within the formal income segment. We reported our highest ever disbursement of ₹ 7,063 crores, up 143% year-on-year and 11% quarter-on-quarter. Disbursement under direct digital program constituted 86% of our total disbursement in Q4 as compared with 81% in the previous quarter.

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Poonawalla Fincorp Limited

July 24, 2023

Our target was to achieve 80%, which we have achieved in the last quarter itself. The DDP distribution model has accelerated disbursement and expanded our customer base, thereby lowering the cost of customer acquisition.

Now, as we speak, our live customer base is more than 3 million approximately 32 lakhs and in quarter one, we added approximately 7 lakh new customers. And as we guided earlier two quarters before, we'll be able to cross one crore customers in next two to three years.

GNPA stands at 1.42%, down 126 bps year-on-year and 2 bps quarter-on-quarter. Net NPA is at 0.76%, down 35 bps year-on-year and 2 bps quarter-on-quarter. Provision coverage ratio stood at 46.43%.

The average cost of borrowing was at 8% for Q1 FY '24. NIM was at 11.4% during the quarter, which is up by 108 bps year-on-year, 12 bps quarter-on-quarter. The Opex to AUM ratio has come down by 105 bps from 5.43% in Q4 FY '23 to 4.38% in Q1 FY '24, this is including the ESOP charge.

Operating profit for the quarter stood at ₹ 294 crores, up by 148% year-on-year and up by 39% quarter-on-quarter. Profit after tax for the quarter stood at ₹ 200 crores, up by 62% year-on-year, 11% quarter-on-quarter. Return on asset was at 4.8% for Q1 FY '24, which is up by 67 bps year- on-year.

Now will take you through our business strategy and the way forward. We remain completely aligned to our strategy of building a strong consumer and MSME focused tech-led retail lending franchise. We continue to scale up on both these segments. Our LAP and unsecured business loans, along with supply chain finance business contributed to a healthy growth on the MSME side, while our personal loan, consumption loan, preowned car loan, led the growth on the consumer side.

While the competition intensity continues to be high, the unique proposition that we bring by being a lender of choice for the customer that offers user experience, agility of a Fintech and customer understanding along with practical approach of an NBFC, the fair pricing, service, and transparency of a Bank, has ensured that we are ahead of our competition.

We continued our focus on low cost of funds as we diversified our lender base as well. We enhanced our capital market presence, our focus on increasing productivity and improving efficiency has continued to give us the desired result as we reduce our Opex for the second successive quarter, and our Opex to AUM ratio for the quarter has reduced to 4.38% as compared to 5.43% in the previous quarter.

Given our deep technology inclination and digital-first approach, we have been able to create a truly digital organization where the benefits of technology are visible with increased productivity per employee. Our focus on clearly defined segments, credit-tested customers, digital data collection, rule-based underwriting and graded approach to loan exposure is aimed at getting better risk-adjusted returns.

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Poonawalla Fincorp Limited

July 24, 2023

Our strategy further clearly defines the optimal mix of secured and unsecured portfolio. We continue to work on the same, and it has helped us to focus on the right risk segment and leverage it further for cost of capital advantage and as a driver of higher profitability.

On the manpower and branch network front, we have continued with our focus on tech-led and branch-lite model. There has been a reduction in our manpower by 5% over previous quarter. So, we have approximately 2,200 on-roll employees, and around 600 off-roll employees.

We continue to further strengthen our team in the technology and digital space. We have consolidated our business across the top 100 branches to increase our business penetration across all product lines. This sets us to deliver on our stated guidance of AUM growth of 35% to 40% and profit growth of 30% to 35% on a year-on-year basis.

In Q1 FY '24, we further strengthened our existing businesses, started scaling up the instant consumption loan business, as we get ready to launch our Phase I of Super App, which is expected to be launched around 15 August. This would help us to penetrate deeper into the unsecured digital lending ecosystem, short-term loans and enable the dreams of consumers as well as all small businesses.

We continue to build a well-diversified book across different product lines, tenures, and segment to manage our risk better. Short tenure book now constitutes 26% of our total book, and this is in line with our guidance. This also helps us to further optimize our borrowing mix and drive customer acquisition in the future.

The new book build over the last two years continues to perform well. We have benchmarked our performance against the industry data through the credit bureau, and we continue to outperform portfolio of competitors. The asset quality is performing much better as per the expectation since we have completed two years on the new origination side.

On the new origination side, if you see, out of ₹ 245 crores of total gross stage-3, discontinued book is ₹ 104 crores; legacy continued, which is SME and POC is ₹ 40 crores; and new origination is ₹ 101 crores, out of that partnership is ₹ 26 crores, acquired is ₹ 52 crores and our origination was ₹ 23 crores.

GS3, whatever was self-sourcing in last 2 years, stands at only ₹ 23 crores out of ₹ 245 crores. So this is the validation of our last 2 years of efforts that the new book is performing really well. And we are focusing on the maximum recovery on the balance discontinued legacy book and the continued legacy book. We continue to increase our digital agenda across all product lines as well as the customer life cycle.

We have completed about 70% of the digitization agenda as outlined in our Phase II approach. As we move ahead, our digital journey is now fully available across all product lines and has also digitized the customer servicing process. We are leveraging WhatsApp for giving us a complete do-it-yourself journey, and the results have so far been promising.

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Poonawalla Fincorp Limited

July 24, 2023

We are now leveraging WhatsApp across the entire life cycle for our customers. As an organization with an employee-centric culture, we have built a strong team for the future, which is, in turn, driving productivity across the organization.

We have crossed approximate ₹ 45 lakh profit before tax per employee, which was ₹ 35 lakh last quarter. The productivity improvement is well reflected in our numbers. This reinforces the real digital tech-led and branch-lite model that we are creating.

As the scalability of the business model continues, it uniquely positions us for much stronger growth going forward. We have taken the FY '23 momentum ahead with a fantastic start to FY'24. The business growth has been strong, complemented with best-in-class asset quality and superior profitability.

Our fintech model with a focus on increasing productivity, improving efficiency has led to further reduction in operating expenses. We continue to focus on the future as we constantly innovate, invest in future trend, and build a deep ecosystem play.

We are all geared up and excited about the journey ahead and we are confident of delivering an exceptional performance going ahead. Thank you, everyone. And now we can start the question- and-answer session.

Moderator:Thank you. The first question is from the line of Sameer Bhise from JM Financial. Please go ahead.

Sameer Bhise:Congrats on another strong quarter. Firstly, I just wanted to understand that credit cost has turned positive after a prolonged period, so what's the driving factor behind this? And at the same time, I see another ₹ 20 crores of gain on derecognized financial instruments in the income line. So, if you could just explain this, that would be helpful? Should I take more questions, or we take this first?

Abhay Bhutada: Yes, I will take this first. Thank you so much, Sameer. Basically, I will just explain to you the GS3 percentage first. I've given you the absolute number, which was 104, 40, 101 new originations, out of that breakup of partnership is 26, acquired is 52 and self-origination is 23.

If you see the GS3 percentage of discontinued legacy book, it is at 24.42% and legacy continued is 6.66% and the remaining is 0.62%. So, we have started cleaning up the legacy book. When we acquired the legacy book, it was, more than ₹ 10,000 crores and now the legacy book, the balance is very less.

Out of 300 branches, now we have 100 branches. Out of 8,000 employees, now we have close to 3,000 employees. This is the balanced legacy book and post-consolidation of branches and employees, whatever we can recover, we are trying to recover, but this was expected that balanced legacy book will give us certain kind of NPA. If you remember last quarter also, we have given the breakup, which was 15.5% on a discontinued legacy and around 5% on the continued legacy book.

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