Poonawalla Fincorp : Transcript of conference call for Q4 result of FY23

"Poonawalla Fincorp Limited

Q4 FY 2022-23 Results Conference Call"

April 26, 2023

MANAGEMENT: MR. ABHAY BHUTADA - MANAGING DIRECTOR -

POONAWALLA FINCORP LIMITED

MR. HIREN SHAH - HEAD, INVESTOR RELATIONS -

POONAWALLA FINCORP LIMITED

Page 1 of 23

	Poonawalla Fincorp Limited
	April 26, 2023
Moderator:	Ladies and gentlemen, good day and welcome to the Poonawalla Fincorp Limited (Poonawalla
	Fincorp) Q4 FY 2022-23 Results Conference Call. As a reminder, all participants' lines will be
	in a 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 this conference is
	being recorded. If you wish to ask a question any time during the conference, please press star
	one on your touch-tone phone to join the question queue.
	I now hand the conference over to Mr. Hiren Shah, Head of Investor Relations. Thank you and
	over to you, sir.
Hiren Shah:	Thank you, Vikram. 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 and the year ending March'23. To discuss all this in detail, I have with me our
	Managing Director, Mr. Abhay Bhutada, other senior management officials and myself, Hiren
	Shah. Now I would like to request our Managing Director, Mr. Abhay Bhutada, to brief you all
	about our company's operational and financial performance along with the development for the
	quarter and the year ending March'23. Over to you, sir.
Abhay Bhutada:	Thank you, Hiren. Good evening, everyone. I welcome you all to the Q4FY23 Earnings
	Conference Call of Poonawalla Fincorp and trust you are all doing good. This is the first full
	year under new management post-acquisition by Poonawalla Group. During the year, we
	successfully transformed the organization in line with our Vision 2025. The transition has been
	nothing short of a spectacular performance, as we hit the right chords on business, technology,
	people and processes. The same is reflected in the way the business has shaped up, resulting in
	consistent growth across the metrics of disbursement, AUM, asset quality, profitability and
	return on assets.
	Our financial strength and efforts in transforming the organization have been well recognized as
	we have recently received long-term credit rating upgrade to AAA from CRISIL and earlier we
	received from CARE. During the year, we started the value unlocking process of our housing
	finance subsidiary and the same is expected to conclude soon, subject to regulatory approval.
	This year's robust performance has ensured that we are on a strong footing and ready to leap
	forward to the next level of growth journey. Coming to the quarter gone by, I'm happy to share
	that we are right on track, in line with guidance we have given in the previous quarters. We have
	recorded the highest ever quarterly disbursement, strong growth in AUM with best-in-class asset
	quality resulting in the highest ever PAT and highest ever ROA in Q4 FY23.
	Let me take you through the key standalone financial numbers for this quarter and the financial
	year ended 31st March 2023. Our AUM has grown by 37% YoY, 16% QoQ to ₹ 16,143 crore.
	Focused AUM stood at ₹ 15,198 crore up 73% YoY and 19% QoQ, which is now 94% of our
	total AUM. We continued to wind-down our discontinued book and its AUM now stand at ₹ 945
	crore, this is total AUM. On-book AUM is ₹ 640 crore down 68% YoY and 21% QoQ and we
	are expecting maximum book will get run down over a period of next one to two quarters.
	Page 2 of 23

Poonawalla Fincorp Limited

April 26, 2023

On the composition of our total AUM, Business Loans including LTP is the highest at 28% followed by Pre-Owned Car which is at 17%, Personal Loan and LAP 16% each and Supply Chain Finance at 7%. With this, we are constantly focusing on to maintain a secured unsecured ratio of secured 40% and unsecured 60%. We are focusing mainly on the prime customer segment with Bureau score of 700 plus having credit tested history. Considering the huge database available, we decided to stop new-to-credit customers two quarters back. Secured to unsecured ratio of the total AUM as of now stood at 49 to 51 as of March 2023.

Our AUM is well diversified geographically across MSME and consumer segment with multi- scoring channel. During the last quarter, we reported our highest ever disbursement of ₹ 6,371 crore, which was up 151% YoY and 89% QoQ. Entire disbursement was organically sourced and has grown over 3x on YoY basis. We stopped buying acquisition of any other portfolio three quarters back. Disbursement under Direct Digital Program constituted 81% of the total disbursement in Q4 as compared to 66% in the previous quarter. Direct Digital Program ecosystem has accelerated the disbursement and expanded the customer base, lowering the cost of customer acquisition compared to traditional distribution model.

Our Gross NPA is at 1.44% down 185 bps YoY and 25 bps QoQ. Similarly, Net NPA is at 0.78% down 52 bps YoY and 11 bps QoQ. The provision coverage ratio stood at 46.2%. Our restructured book now stands at ₹ 122 crore only, which is 0.8% of our total AUM out of which 51% is in 0 bucket. The excellent asset quality is driven by our chosen customer segment, high credit bureau score portfolio, superior collection infrastructure, close monitoring of early warning signals coupled with proactive credit policy changes.

Our cost of borrowing was at 7.9% for Q4FY23 primarily due to recent 250 bps rate hike by the RBI in multiple tranches. Despite the growth in the cost of borrowing our net interest margin has improved to 11.3% during the quarter, which is up 87 bps YoY and 59 bps QoQ. For the full year, NIM stands at 10.7% as compared to 9.8% in FY22. Going forward, we expect on a steady state basis, we will be able to maintain NIM level of about 10% as per our existing guidance also. The cost to income ratio has come down sharply by 861 bps from 56.7% in Q3FY23 to 48.1% Q4FY23, which includes higher ESOP cost.

Operating profit for the quarter stood at ₹ 212 crore, which is up 84% YoY, 36% QoQ. For FY23 operating profit was ₹ 612 crore, which is up 35% on Y-o-Y basis. Our return on asset was at 5% for Q4FY23 up 178 bps Y-o-Y and 53 bps QoQ. For FY23 ROA was at 4.4% as compared to 2.7% for FY22. Profit after tax for the quarter stood at ₹ 181 crore, which is up by 103% YoY and 20% QoQ basis. For the FY23. PAT stood at ₹ 585 crore reflecting an impressive 100% growth as compared to FY22. Shareholders' funds grew by 12% during the year ₹ 6,425 crore. Capital adequacy ratio stood at 39% as on 31st March 2023, which is much above the regulatory requirement.

Now let me take you through our business strategy and the way forward.

As mentioned earlier, recently CRISIL upgraded our long-term rating to AAA, which is a revalidation of our business strategy and execution capability aimed towards building a strong

Page 3 of 23

Poonawalla Fincorp Limited

April 26, 2023

consumer and MSME lending franchise. This puts us in the ivy league of AAA rated NBFCs and should further accelerate our growth journey as India's most trusted, profitable, and leading Fintech NBFC. Our business model leverages our strength of low cost of funds and low operating costs. The low cost of funds is primarily driven by our strong credit rating and brand lineage with our low operating costs is driven by our successful transition of the organization in terms of technology, digital along with change in the customer segment and the product offerings.

Given our deep technology inclination, we have been able to create a truly digital organization where the benefits of technology are visible, with increased manpower productivity per employee. We achieved 151% increase in disbursement while reducing the headcount by 53% over last one year. This inverse equation clearly classifies us as India's most profitable and leading fintech NBFC at scale in terms of our digital capabilities. However, unlike fintech who target high risk customers due to their high cost of funds, Poonawalla Fincorp target low risk customers complemented by its low cost of funds. This means while we give user experience of a Fintech, we focus mainly on prime and super prime customers, which makes us stand out from any other NBFC.

This low-risk segment play aided by with low Opex, helps us get better risk adjusted return as the competitive pricing offered gets reflected in the lower credit cost. This positions us uniquely by being a lender of choice for the customer, which offers user experience, agility of a Fintech, the customer understanding and practical approach like an NBFCand the fair pricing and transparency of a Bank. This model has further strengthened with our business strategy, which focuses on risk mitigation as a starting point. Our focus on segments defined, credit tested customers, digital data collection, rule based underwriting and graded approach to loan exposure is all aimed at getting better risk adjusted return.

The strategy further clearly defines the optimal mix of secured and unsecured portfolio is at 40 is to 60 along with a tenure mix of short-term versus medium & long-term loans is at 20%-25% is to 75% to 80%. This is not only a move towards addressing a growing market but also focusing on the right risk segment and further leveraging it for cost of capital advantage and a driver of higher profitability. All this can be seen at work, in our Q4FY23 results with consistent business growth, best-in-class asset quality and finally resulting in highest ever ROA of 5%.

We are confident that as we further execute our strategy the way we have been doing it over the last six quarters, we will continue to deliver a superior ROA going further. In the last quarter, we have given guidance of manpower and branch consolidation as we focus on a tech led and branch-lite model. There has been a significant reduction in our manpower from 5,184 as of March 2022 to 2,452 as of March 2023. The group structure at the top has been done away with as our housing finance business gets carved out as a separate entity, subject to the regulatory approval.

Also, we have consolidated our business in the top 100 branches to increase our digital business penetration across all our product lines. This makes us future-ready to deliver on our stated guidance of AUM growth of 35% to 40% and profit growth of 30%-35%. We continue to grow

Page 4 of 23

Poonawalla Fincorp Limited

April 26, 2023

and diversify ourselves across all product lines. In Q4FY23, we have made steady progress as we scaled up our supply chain finance business as well. This business line helps us to penetrate deeper into the MSME ecosystem as we tap the downstream and upstream financing for various corporates and to add another dimension by offering short term financing.

We continue to build a well-diversified book across various product lines, tenures, and segments to manage our risk better. Short tenure book now constitutes 20% of our total book and this is in line with our guidance provided of approximate 20%-25% earlier. This also helps in our liability strategy, as we further optimize our borrowing mix. Short tenure loans are also driving customer acquisition for the future. The credit underwriting parameter have been optimized based on learning from the short-term loan thereby helping maintain best in class asset quality.

At the same time, we will maintain secured unsecured ratio of 40:60. The new book built over the last 20 months continue to perform well as we continue to leverage the experience of having done these products earlier within our group. We have benchmarked our performance against the industry data through the credit bureau and I am happy to share that we have one of the best performing portfolio in the industry as per the bureau data.

This external validation further enhances our confidence in growing along with a healthy asset quality. We continue to increase our digital agenda across product line as well as customer life cycle. We have completed about 50% of the digitization agenda as discussed and as we move ahead, we have a digital journey now fully available across all the unsecured product lines. We have also done digitization across customer service. In customer service we have moved 94% of the service request coming through a faceless channel and branches are getting limited to only 6% that too because of the legacy balance book.

Out of 94% of the service request, 79% of them are being serviced completely digitally. This is in line with the trend that we had anticipated and further strengthen our belief in our strategy. We are leveraging WhatsApp for giving a complete "do it yourself" journey and the results have been very promising. We now intend to take WhatsApp ahead across the entire life cycle for our customers. As an organization with an employee-centric culture, we have been building a strong team for the future and driving productivity across the organization.

The productivity improvement is well reflected in our increasing disbursement and AUM while the headcount continues to reduce. This is truly reflective of the real digital tech-led model that we are creating and focusing since day one. The scalability of the business that we have seen over the last two years uniquely positioned us for a much stronger growth going forward. The productivity improvements and control in manpower cost is also seen clearly in the reduction of operating cost over a period of last two quarters and going forward, it will further reduce.

With strong roots created over the last two years and exemplary execution capability, we are now confident that we will continue to deliver across the business metrics of growth, profitability, and asset quality. We continue our relentless focus on building a strong technology- led and innovation-driven retail franchise.

Page 5 of 23