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Poonawalla Fincorp: Conference call transcript for Q2 FY24 results


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    "Poonawalla Fincorp Limited

    Q2 FY 2023-24 Earnings Conference Call"

    October 21, 2023

    MANAGEMENT: MR. ABHAY BHUTADA - MANAGING DIRECTOR

    MR. SUNIL SAMDANI - WHOLE-TIMEDIRECTOR

    MR. HIREN SHAH - HEAD STRATEGY, BIU & INVESTOR RELATIONS

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    Poonawalla Fincorp Limited

    October 21, 2023

    Moderator:Ladies and gentlemen, good day and welcome to the Poonawalla Fincorp Conference Call. 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, Zico. Good morning, 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 ending September 30, 2023. To discuss all these in detail, I have with me, our Managing Director - Mr. Abhay Bhutada, other senior management officials and myself Hiren Shah, Head - Strategy, BIU & Investor Relations.

    I would like to take this opportunity to extend our warmest welcome to Mr. Sunil Samdani, who has joined us as an Executive Director. He has expertise and extensive experience of over 20 years in the banking and finance sector and we are excited to embark on this growth journey together. Now, I would like to request our Managing Director - Mr. Abhay Bhutada, to brief you all about the company's operational and financial performance along with development for the quarter ending September 30, 2023. Over to you Sir!

    Abhay Bhutada: Thank you, Hiren. Good morning, everyone.

    I welcome you all to today's earning call and trust you are all doing great.

    Before I take you through our performance and highlights of the quarter gone by, I would like to give you a quick sense of the market, the opportunity it represents and how we are well placed to leverage this opportunity thereby partnering in India's growth story and enabling dreams of our customers.

    India is one of the fastest growing economies with GDP expected to grow @ 6.5% plus over the next 5 to 7 years. Our per capita income is expected to rise by 80% by FY31. Government initiatives such as Make In India, Production Linked Incentive schemes, massive infrastructure push are driving growth and increased employment while favorable demographics continue to drive consumption. This along with Digital-India theme, faster digital adoption provides both unique and significant opportunity to our lending solution through digital first tech-led approach for the rapidly growing mass middle income and high- income segment.

    With the completion of Q2FY24, we are midway through this financial year and what makes me happy is our remarkable progress on the stated path as per our guidance. I am glad to share that we have recorded the highest ever quarterly disbursement, strong growth in AUM along with robust asset quality, which is resulting in the highest ever quarterly profit after tax.

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    Our team is focused on execution and has been instrumental in our progress and sets up for an exciting second half of FY24.

    Now, let me take you through the key numbers for the quarter and the half year ended September 30, 2023.

    We reported our highest ever quarterly disbursement of ₹ 7,807 crore which is up by 151% Y-o-Y and 11% Q-o-Q. During the last quarter, we started offering instant personal loans through our recently launched cutting-edge mobile app, a step forward in shaping the financial landscape and as per our strategy of going direct, going digital, going organic. Disbursement under DDP constituted 81% of the total disbursement in Q2.

    Speaking about AUM, we crossed milestone of ₹ 20,000 crore during this quarter and stood at ₹ 20,215 crore, reflecting a growth of 54% Y-o-Y and 14% Q-o-Q. We have come a long way in terms of AUM growth, which was ₹10,563 crore at the time of acquisition, this is the standalone number.

    Coming to the composition of our total AUM, MSME constitutes about 35% of the total book, followed by personal and consumer finance, which stands at 22%, pre-owned car contributes 15%, followed by loan against property at 14%.

    Now secured is almost picking up because target is again to focus on Loan Against Property (LAP) and Pre-Owned Car (POC), machinery loan, medical equipment loan, apart from unsecured book. Secured to unsecured ratio of the loan book stood at 46%:54%. The secured book is growing at a steady rate as disbursement in LAP and POC continue to grow. With longer tenure in LAP book and POC average tenure of three years, we expect our secured book to continue to grow.

    On the tenure mix of our loan book, short term tenure is 12 months which is approximately 27% of the total book, fairly in line with our guidance of 20 to 25%. Similarly, the medium to long-term loan of more than 12 months are at 73% against the guidance of 75 to 80%. The ideal tenure mix is helping us to improve our profitability while keeping the AUM growth intact.

    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 MSME and the consumer segment.

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    Asset quality continues to be robust and in line with our guidance. Gross NPA stands at 1.36% down 41 bps Y-o-Y, 6 bps Q-o-Q. While net NPA is at 0.72% down 22 bps Y-o-Y and 4 bps Q-o-Q. We continue to have one of the best asset quality, as we build a portfolio with a very different kind of customer segment. Our asset quality is a reflection of our credit policies of giving loans to bureau-tested customers. Our provision coverage ratio stood at 47.2%.

    We continue to optimize our cost of borrowing further; it stood at 7.98% for Q2FY24. There is a drop of 6 bps Q-o-Q down from 8.04% in Q1FY2024. We have been able to manage our cost of borrowing well despite rate hikes earlier. As we move ahead further, optimization of the cost of borrowing will continue. As guided earlier, we will borrow a lot through commercial paper. There is no ALM issue as such. Our net interest margin was 11.42% during the quarter, up 106 bps Y-o-Y and 2 bps Q-o-Q.

    Our operating efficiencies continue to improve further. The Opex to AUM ratio has come down by 20 bps from 4.38% in Q1FY24 to 4.18% in Q2FY24. The reduction in Opex ratio signifies the productivity enhancement achieved by us. As we grow, this ratio will continue to enhance further.

    The interplay of all the above has resulted in superior profitability. The operating profit for the quarter of ₹ 336 crore which is up by 167% Y-o-Y and 14% Q-o-Q. Profit after tax stood at ₹ 230 crore up by 77% Y-o-Y, 15% Q-o-Q this is excluding the impact of exceptional item. Our return on asset ratio was at 5% during Q2FY24, which is up by 96 bps Y-o-Y and up by 19 bps Q-o-Q.

    In line with our strategy of strengthening our organic distribution, we have launched our mobile application on both Android as well as iOS platforms. This app will give impetus to our customer lending as it makes instant credit available in a convenient manner. With the launch of our own app platform, we have also discontinued fresh origination through co- lending for unsecured personal loans and other products since we will continue to serve already on-boarded customers only. We will continue with only secured co-lending in two- wheeler and machinery loan going forward, that too with very selected players that ratio will be almost negligible, but we have completely stopped fresh on-boarding of customer via co- lending since we are able to onboard lot of customers through our app and web journey. This will mean that more customers will engage with us directly across the full loan life cycle. This will help us to penetrate deeper into the digital lending ecosystem, drive engagement by bringing us closer to our customers, meet not only their borrowing needs but also their wellness, investment, and other financial products requirements going forward. A direct engagement will also enable us to provide differentiated user experience throughout the customer life cycle and significant opportunities to cross-sell. This coupled with superior

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    products, transparent terms and conditions shall create customer delight in true sense with increased efficiencies and further enhance our profitability.

    Our focus here will be on ticket size upwards of ₹ 50,000, since we have done AUM of only

    • 4 crore below ₹ 50,000 ticket size, so we are targeting ticket size above ₹ 50,000. As of date, our average ticket size is more than ₹ 80,000. I wish to share certain key information pertaining to digital consumer lending.

    A total opportunity of $720 billion by 2030; currently it is at $190 billion plus. Consumer lending market to grow at 22% CAGR from 2023 to 2030. Further, digital customers expect effective, transparent, prompt customer care services, attractive interest rates, no hidden charges, no false promises. Poonawalla Fincorp ticks the boxes in all the above parameters and its motto has been full transparency with no hidden charges.

    This quarter we have also received approval for co-branded credit card launch. This will be a complimentary product to our existing product basket as it helps us to engage with customers in their day-to-day transactions. With the increased penetration of digital payment, co-branded credit cards will make us an active participant in the payment ecosystem. It also provides a sizable opportunity to market yet another product to our existing and ever- increasing customer base, enhancing our cross-sell opportunity. The card will have a unique customer value proposition and will come in three different variants based on the customer category. The prime card will be a lifetime free card in line with our no hidden charges' philosophy and will offer attractive features for driving the customer's usage.

    During this quarter, we have created onetime provision of ₹ 1,298 crore largely on the standard advances, this will act as a contingency buffer against the legacy or discontinued loan portfolio, which includes DA existing book of ₹ 910 crore and contingency buffer of ₹ 388 crore against the new book, though the new book is performing well.

    Q3 also marks the beginning of festivities, and I would like to offer my warm wishes to all of you. We expect the festive season to bring in even more cheers in H2 and we are all geared up for the same as we remain focused on delivering consistent superlative performances.

    I will also take this opportunity to welcome Mr. Sunil Samdani who joined us as the whole- time director. We look forward to leveraging his deep expertise in our growth journey and wish him all the best and long rewarding career with Poonawalla Fincorp.

    Now, I will give you a quick walk through of differentiation and the transformation journey so far. I think the last two and half years have been both exciting and fulfilling. I would start

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    with the differentiation piece first, as we have transitioned from old Magma from being any other NBFC to being a well differentiated player.

    You can refer to page 10 of the investor deck. In this crowded NBFC market, we have been able to create a niche for ourselves with strong differentiation. When we acquired Magma in 2021, we took some tough decisions which were quite revolutionary. These decisions included decisions like changing the product basket, changing the customer segment, discontinuation and consolidation of branches, re-skilling the manpower and reducing the headcount with focus on productivity. The reason we were able to take these decisions was because we had a well thought out strategy and most importantly, we were willing to walk the tough path. We knew that this would require an extraordinary effort from us to pull it off and we did just the same thing. We remained focused and put our heads down, kept working on the same and the results are there to be seen.

    While the industry has been trying to replicate what we have done, however we have looked at real metrics, none comes anywhere close to what we have been able to do. We pioneered building a truly digital play NBFC. Today amongst NBFCs who aspire or claim to be a digital play, we have not seen anyone who have productivity and efficiency like us, who have moved to a lean branch structure, who remained focused on being a retail lender and have transformed themselves with adoption of technology resulting in manpower reduction. I think the reason we have been able to do it is because we have a deep-rooted entrepreneurial mindset across the organization.

    We have made great strides as a digital first technology led NBFC. This is because we have a digital mindset and do things in a way with technology as an enabler. We were aware that transitioning the entire functioning across the company after such an acquisition would require an overhaul. By remaining true to our vision and digital outlook, we have been able to do it successfully. This is something which we see as a challenge with a lot of our peers, who are caught between legacy and digital.

    Our strategy is well carved out and we articulated our vision 2025 at the time of acquisition with a strategy of "consolidate, grow and lead". The clarity of strategy and execution of the same is one of the biggest differentiators for us. We are the only NBFC who targets prime bank customers as we want to build a portfolio which carries less risk and will be resilient in case of any downturns. Our focus is not on spreads but on ROA delivery. While the spreads may come down over a period, however adjusted for risk, the returns will continue to be as per our guidance.

    In today's context, the lending business is not just about giving loans but also understanding the ever-evolving customer behavior. This change does not just have an impact on the product

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    offering but also on the experience that you provide for the offering and how the organization, people, process, presence are aligned. We work closely on this and have kept it as our focal point in deciding or designing the products, processes, people, and presence. From manpower alignment to technology intervention, from product offering to process design, we have aligned it all to customers' needs.

    Finally, we have a strong fundamental, which enables us to deliver all this. One of the rare

    1. rated NBFC, with strong capitalization and now backed with an excellent track record of consistent performance of more than 10 quarters, our strong base of performing portfolio, which is well diversified, makes us a strong player for a sustained superlative performance for future.

    You can move to page 11 of the investor deck. We would want to reiterate on the model, which is a digital first and a branch-lite model and focuses on building efficiencies. Leveraging technology and innovation is at the core here, coupled with certain product differentiators, which are very relevant as they bring customer centricity to the core.

    As we know there has been a lot of focus from the regulator on the fair practices to be followed, including the charges being levied to the customer, not just at the onboarding but also during the loan lifecycle post disbursement. We have always upheld customers' interest and deal with full transparency. We do not levy any hidden charges to the customers and have been the first ones to offer a zero-prepayment option to the customers. This provides not just flexibility for our customers but also helps us build a strong bond with our customers.

    Our brand lineage and strong leadership team has helped us to execute the model with full prowess.

    Now moving to page 12, which focuses on the customer segment differentiation. At the onset, the dimensions are part of the strategy. Our customer segment differentiation is an extension of our strategy of focusing on the low-risk segment.

    Coming to the product segment, we are focused on consumer and MSME, however we do not focus on commercial use assets as a conscious choice. We have seen that these portfolios could provide higher yield but when adjusted for risk, the returns are not in line with what we want, hence have consciously stayed away from them. Some of our peers have been operating in the segment and clearly have shown a lot of cyclicity in these portfolios. Also, we believe that the core of the organization or the DNA of the organization required for this portfolio is very different. With ample open spaces in our chosen segment and our inherent strength, this segment is not a value accretive segment for us at the current stage.

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    Moving on to the markets, we are focused on Urban and Semi-Urban market as we see lot of market opportunity to be exploited there for next 4-5 years. We would want to expand the wallet share there, further better our efficiencies and leverage them for superior profitability through economies of scale. While the rural market offers higher yields, the risk adjusted return has been little muted for the last few quarters. At the current point in time as we grow at 35 to 40% Y-o-Y on our AUM, we would continue to go deep into markets where we operate rather than spreading ourselves thin.

    Further looking at the credit profile of the customer, we do not give loan to new to credit, we operate in 700 plus score segment. This helps us ensure we have a portfolio with higher resilience. While the customer bureau score is a good determining factor in risk, we have further coupled it with ticket size as well. Higher ticket sizes within the product lines we have chosen clearly to perform better. In line with this, if you see we operate in the top quartile of ticket size across all our product lines.

    To ensure we operate in this top quartile segment, the assessment methodology is tuned to it with customers coming through the door, post income verification-based underwriting. We do not encourage surrogate programs, as we want to limit the risk and have better profile customers, who will have higher resilience in case of any downturn. Further to eliminate fraud risk for income validation and verification purpose, we collect income related documents in a digital way. This close loops our income assessment and its fraud mitigation in our processes. That is why now we have become the lender of choice, and we get the choice of rejection for on boarding the customers.

    Finally, as we follow this approach of picking up customers meeting our criteria, we top it up with a sweetener of most competitive pricing offer to customers meeting our risk acceptance criteria, giving us the choice of selection.

    To sum it up, for a customer to be onboarded, the customer needs to go through this tiered approach for a given product of market, bureau, ticket size, income and then if found meeting our risk acceptance criteria, we will give an offer at most competitive pricing in the entire sector.

    Moving to page 13, this has helped us build a strong engine which is helping us scale up continuously in a sustainable manner in terms of asset quality, operational efficiencies, and better customer experience. The superior RoA numbers are a testament of the same.

    Unsecured loans have been a discussion point across the industry so quickly touch upon that here, which is covered under page 16. Like any product in short-term personal loan, there is a segment which gets primarily serviced through a particular lender type. If we look at the

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    funnel that exists, you can broadly look at the segment bifurcated by ticket size. The segments are up to ₹ 25,000, next bucket is up to ₹ 50,000, and last is more than ₹ 50,000. Typically, if you look at this from the risk funnel perspective as we move up in terms of ticket size, the risk tends to reduce. The bureau data shows a clear differentiation between the ticket size of less than ₹ 25,000, above ₹ 25,000 and above ₹ 50,000. The glaring difference is more than 5x in 30 plus delinquency and 8x in 90 plus as reflected in the bureau data. This calls for prudence to be exercised in terms of on boarding these customers. Typically, small tickets are used as a customer acquisition engine by Fintechs and then as the ticket size moves up, NBFC and mid-size banks come into play. As a part of our risk strategy, we focus on the higher ticket size segment from day one and we price the risk accordingly. Our loan book of below ₹ 50,000 is less than ₹ 4 crore. Our philosophy of looking for risk adjusted returns rather than IRR can be seen in the play. Our average ticket size here is above ₹ 80,000, which means that the expected losses on this portfolio are to be in line with what we see on above ₹ 25,000 segment. Trust this would be helpful to understand how our segment is different in

    the small ticket personal loan market.

    Now take your attention to page 15 of the deck, which provides some metrics of our

    transformation journey. These metrics are reflective of the organization that we are building,

    with focus on digital first technology led play. The numbers on AUM growth, cost of

    borrowing reduction, drastic asset quality improvement, productivity enhancement,

    profitability improvement, branch consolidation, manpower consolidation, digital tech led

    model and technology leveraging reflects the efforts taken by the entire team to make this

    transformation a reality.

    Thank you everyone and now we can start the question-and-answer session.

    Moderator:

    Thank you very much. We will now begin the question-and-answer session. Our first question

    is from the line of Sameer Bhise from JM Financial please go ahead.

    Sameer Bhise:

    Hi, thank you for the opportunity and congrats on the strong set of numbers. I have a few

    questions. So firstly, on the provisions, last quarter the discontinued i.e., the Legacy book and

    the DA book was roughly ₹ 1,750 crore and as per this quarter disclosure the entire book

    which is clubbed under Legacy and DA is roughly ₹ 2,200 crore, so what explains this ₹ 500

    crore gap? Is it from some of the continued legacy products is that a fair assessment.

    Abhay Bhutada:

    Yes, thank you Sameer, so you are right. See what we did this time is that we have

    differentiated continued legacy also in a discontinued because underwriting parameters were

    different so what you can see on page 24 investor deck asset under management,

    discontinued, legacy and DA book this includes the discontinued legacy, continued legacy

    and the old acquired DA book and the newly acquired initial DA book. So, this comes to

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    ₹2,215 crore and since last six quarters we have not acquired through the direct assignment or any of the portfolio from any bank or NBFC, so this is completely discontinued and out of this ₹ 2,215 crore, we have created a provision of around ₹ 910 crore and remaining ₹ 388 crore you can see this is a contingency buffer against the new book. Though the new book is performing well, we have created a contingency buffer against the one-time housing profit.

    Sameer Bhise: Which is also reflected in slower growth in LAP and the pre-owned car products on a sequential basis?

    Abhay Bhutada: Actually, the growth is higher. If you see AUM of last quarter and this quarter, we have mentioned in the note also, the DA book that we had earlier classified in the respective continued product of loan against property, business loan, SME loan and pre-owned car loan, now we have completely declassified from the business loan book, SME book, the pre-owned car and the LAP into the discontinued legacy plus DA book., So there is more than 20% growth or 25% minimum growth across all the product categories. We have completely done the reclassification between continued book and discontinued book.

    Sameer Bhise: Would you be able to share the stage one stage two numbers on a sequential basis on the entire AUM.

    Abhay Bhutada: Sure. If you see last quarter including stage 1 and 2, the number was ₹ 122 crore, which was 0.71% across entire loan book; now it is ₹ 1,395 crore, which is almost 7% on the book. As I mentioned we have created enough buffer against the discontinued book as well as on the new book. So, from 0.71% to ₹ 1,395 crore, though there are hardly any roll-forward in stage two, stage three bucket in last quarter or during the current quarter since the new book is performing better than the expectation, but we have increased the buffer on stage one and two against the discontinued and continued book as well.

    Sameer Bhise: But this entire portfolio against which the provision is created is classified as stage two.

    Abhay Bhutada: Stage-1 and 2, so basically if you see the breakup of ₹ 1,395 crore against stage-1 is ₹ 1,252 crore, stage-2 is ₹ 143 crore, so stage 1 and 2, this comes to ₹ 1,395 crore, stage-1 is 6.71%, stage-2 is 23%, and Stage-3 is around 47% so stage 3 is ₹ 125 crore. So, this is the total ECL of ₹ 1,520 crore. So, there was no need for the majority of the provision in stage 3. This is more like contingency only against stage 1 and 2 and majority towards the standard asset advances towards stage 1.

    Sameer Bhise: How would you look at the recoveries from these provisions created?

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