With asset quality in good shape and AUM growth on track, Poonawalla Fincorp to focus on profitability: Abhay Bhutada

Abhay Bhutada

Poonawalla Fincorp posted a great set of numbers for the current quarter, doubling its profit on a year-on-year basis. In a recent conversation with Moneycontrol after declaring its results for Q4FY23, managing director Abhay Bhutada said the company was well-positioned for sustained performance in the future.

This optimism, he said, stems from a combination of factors, including efficient borrowing costs, reduced operating expenses, controlled credit costs and a streamlined branch model. Thanks to its tech-led model, the company should be able to maintain its asset quality and growth momentum. The priority going forward will be on profitability.

Edited excerpts of the conversation with Abhay Bhutada:

Your profits have almost more than doubled on a year-on-year basis, and the quarterly NIM also has recorded an improvement of 87 basis points at 11.3 percent for the quarter. What explains this and what can be expected in FY24?

Our profitability growth can be attributed to two key factors. Firstly, the new book we have generated is performing really well. This new book has a remarkable track record, with a 90-plus delinquency rate of less than 0.5 percent. The GNPA is higher primarily due to the legacy book. Secondly, early indicators strongly suggest positive outcomes, considering our focus on a different customer segment. Our strategy involves maintaining a healthy mix of secured and unsecured loans, with a 40:60 ratio. Going forward, we anticipate sustaining a NIM of around 10 percent on a steady-state basis. In line with our long-term guidance, we are confident of consistently delivering a ROA ranging from 4 percent to 4.5 percent on a steady-state basis.

Let’s talk about your cost of funds. How do you see the trajectory going forward?  

In Q4FY 2022, the company's cost of funds was 7.5 percent. In Q4FY 2023, it stands at 7.9 percent despite the RBI repo rate hike of 250 bps, there was only a marginal increase of 40 basis points in our cost of funds. As a result, the impact has been minimal. However, we anticipate an additional increase of 15 to 20 basis points in the Q1 of current financial year and with the recent CRISIL rating Upgrade to AAA we can expect borrowing costs to optimize further from Q2 of the current financial year. Recently, we have started capital market borrowing mostly short-term commercial paper at a low rate as compared with bank loans so which will further reduce the cost of funds. We are still carrying legacy borrowing of approximately Rs 1,000 crore at around 10 percent and we are trying to prepay the maximum in the next quarter. So, excluding our legacy borrowing cost, our cost of funds is amongst the lowest in the NBFC sector.

I also wanted to understand about your AUM — 37 percent uptick year-on-year, 15.9 percent sequentially. What kind of growth rate are you targeting over FY24?

We have given guidance of 35-40 percent AUM growth. Our base is very low and AUM is at Rs 16,143 crore as of March 2023. So considering the capital, low leverage and huge market opportunity in the segment we operate, we will be able to maintain AUM growth of 35-40 percent.

We need the right combination of asset quality, growth and profitability. There is no worry on AUM growth and asset quality front for the next 4-5 years. Now, our focus will be on superior profitability.

There has been reduction in opex over last two quarters. Can you tell us the expected opex range for FY 24 and thereafter?

Last year, our opex was at 6 percent due to product launches, IT costs and higher ESOP costs. Now we have consolidated branches and manpower and due to the reduction in ESOP charge, you can expect opex to AUM around 4 percent level in FY24 and around 3 percent level from FY25 onwards.

Your asset quality looks good as of now. Can we expect further improvement in FY24 and what is the guidance going forward?

Yes, you can expect further improvement in asset quality in the current financial year.

We have provided long-term guidance in the range of 1.3-1.8 percent for GNPA and 0.5 - 0.9 percent for net NPA.

Where do you see the company in about three years?

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 disbursements and AUM while the headcount continues to reduce. This is truly reflective of the real digital, tech-led model that we are creating. The scalability of the business that we have seen over the last year uniquely positions us for much stronger growth going forward. The productivity improvements and control of manpower costs are also reflected in our operating costs, which will continue to decline. As I said, we are 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 loan franchise. Picture abhi baaki hai!