JM Financial Institutional Securities gives 'buy' call to Poonawalla Fincorp, shares up 5%

Mumbai, Aug 26 JM Financial Institutional Securities Ltd. has given a 'buy' call on Poonawalla Fincorp (PFL) with a target price of Rs 400.

At 1.25 p.m. on Friday, shares of Poonawalla Fincorp were at Rs 302.25, up 5.22 per cent.

"Poonawalla Fincorp (erstwhile Magma Fincorp) has undergone a metamorphosis of sorts after significant capital infusion by the Poonawalla group (62% stake) in early-CY21. The backing of a respected, longstanding, non-levered promoter group has enabled the company to reduce its cost of borrowings significantly and thus focus on the credit-tested, high quality customer base while also making strong long-term investments in technology, presence and talent. All this, with clear visibility of a strong RaRoC," said JM Financial Institutional Securities Ltd. in a report.

"Having strengthened the foundation over the last year or so, we expect PFL to enter a strong acceleration phase of customer acquisition and offer digital-first products. We expect PFL to deliver an AUM-CAGR of 36 per cent over FY22-25E and achieve a mix of 60:40 between secured:unsecured loans over this period. Asset quality is likely to remain strong given the focus on credit-tested customers, past experience of digital lending, and sharp focus on risk. Near-term RoEs appear suppressed given high capitalisation levels (47 per cent Tier 1, as of FY22) and we expect expansion ahead as operating leverage kicks in to drive RoA of 3.4 per cent RoE of 15.4 per cent) in FY25E.

"We believe with its strong growth runway (size 1/6th-1/10th of relevant NBFC peers) and strong liabilities advantage, PFL will trade at premium valuations. We value the stock at 4x Sep'24e P/BV to arrive at our TP of Rs 400 (38 per cent upside)," said the report.

"PFL has shifted its customer base from largely rural/ semi-urban to urban affluent with focus on digitalisation. Digital onboarding using digital KYC, digital mandates, e-mandates, eapplications, e-contracts, and disbursements have enabled smooth onboarding and superior experience for customers. Resultantly, turnaround time has reduced and customer acquisition cost has declined. End-to-end digital processes have enabled faster new product launches, simplified process and made offerings transparent. Additionally, the financier has actively invested in data mining capabilities, which will propel cross-sell. Going ahead, we believe PFL is well-positioned to deliver sustainable and profitable growth," it said while explaining the investment argument.