This NBFC Is Given A ‘Buy’ By HDFC Securities For 19% Gains In 2 Quarters
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1. Poonawalla Fincorp:
The NBFC company is a small cap scrip and since the reconstitution and capital infusion has strengthened its standing with focus on consumer and small business segments. NPAs position shall be improved going forward as risk monitoring as well as collection efficiency would come as help.
CARE has upgraded bank facilities
CARE has raised in value the long term bank facilities rating from to ‘CARE AA+; Stable’ from ‘CARE AA- (under credit watch with developing implications)’ and reaffirmed the short-term rating at ‘CARE A1+’ following the infusion of capital, induction of professional management, revised product focus towards better quality borrowers, and reduction in cost of funds.
Wholly owned subsidiary seeks to unlock value by launching an IPO in 2025
The company’s HFC Poonawala Housing Finance discounting the valuation of the peer group company plans to come up with an IPO in 2025 and also increase its AUM to beyond Rs. 10000 crore.
Valuation:
“We feel Magma will achieve enhanced operating metrics and return profile in the medium term due to strong corporate group backing, >57% CAR (post infusion) v/s 20.3% in Q1FY21, improved credit rating outlook, and business competitiveness. The new promoters in addition to increasing the business in select areas in PFL may also look to unlock value in the subsidiaries at a future date. We expect a 22% CAGR growth in advances over FY21-FY23. Calculated NIM is expected to expand by 70bps to 9.1%, driven by lower cost of funds. RoA is expected to improve to 3% by FY23E. Though PFL faces challenge of growing its AUM despite a large book being discontinued, we think things can fall into place given the chance to the new promoters to prove themselves with new products, people and processes in place. Investors can buy the stock in the band of Rs 176-179 and add on dips to Rs 157-160 band (1.95x FY23E ABV) for a base case fair value of Rs 199 (2.45x FY23E ABV) and bull case fair value of Rs 215 (2.65x FY23E ABV) in the next two quarters”, said the brokerage in its report.
Other key notes:
Phased execution strategy: The new management has laid out its vision for 2025. It aims to (1) be amongst the top-3 NBFCs for consumer and small/medium business finance and the most trusted financial service provider; (2) scale-up the current AUMs almost 3x with accelerated growth and calibrated underwriting approach, followed by value unlocking through IPOs of subsidiaries; (3) reduce cost of funds by ~200-250bps; (4) bring down net NPAs to below 1% and ((5) value unlocking through PHFL IPO. It has divided its strategy into smaller parts to be progressively achieved over the next 3 years, said the report.
New product launch for expediting growth:
While the company discontinued several of its products owing to their non-feasibility, many are in the pipeline such as loan against property, personal Poonawalla Fincorp Ltd. 6 loan, loan to professionals, co-branded credit card, machine loans and equipment loans, making a healthy mix of secured and unsecured businesses.
Aggressive re-pricing of debt:
The management is in negotiations with lenders and aggressively repricing its existing debt and raising incremental funds at industry best rates of interest. The incremental cost of borrowing for the company was below 7% in Q1FY22. The management intends to bring down the cost of borrowing by 200-250bps over the next few years. Lower costs would enable the company to lend at competitive rates and also to improve its profitability and improve its AUM.
| Stock | Last trading price as on September 7 | Target | Potential Upside |
|---|---|---|---|
| Poonawalla Fincorp | Rs. 180 | Rs. 215 | 19% |
Disclaimer:
Note the stock is taken from the brokerage report and should not be construed as an investment advice.
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