Poonawalla Fincorp is focusing on maintaining profitability as its asset quality has considerably improved since acquisition of erstwhile Magma Fincorp two years ago. The non-banking financial company (NBFC) will launch equated monthly instalment (EMI) cards, co-branded cards and other digital loan offerings.
“We will maintain a return on assets of above 4%. We are reducing operating expenditure and focusing on short-term loans to increase the overall internal rate of return,” managing director Abhay Bhutada said. “We will launch co-branded credit card after two quarters and EMI card / online consumer loans in the next six months.”
The return on assets for the Pune-based NBFC rose 172 basis points to 4.4% in FY23.
In the post-Q4 earnings conference call, Bhutada attributed the improvement in the lender’s return on assets to its focus on low-risk prime and sub-prime customers, low operating expenditure and competitive pricing strategy. While gross non-performing assets are relatively higher in the legacy Magma Fincorp loan book, it is much lower in the new book.
Overall, the gross asset ratio improved to 1.4% as on March 31 from 8.2% as on December 31, 2020, which is prior to the acquisition. The net interest margin improved to 11.3% as on March 31 from 8.5% as on December 31, 2020.
Analysts attribute this improvement in the asset quality and margins to the shift in the strategy after Poonawalla group company Rising Sun Holdings acquired a 60% stake in the erstwhile Magma Fincorp in 2021. “When we acquired Magma, we had envisaged the challenges that we would face related to product, people, culture, technology and geography. Our strategic planning and execution helped us address these to a large extent,” Bhutada said.
While it wrote off a substantial portion of delinquencies and overdue of the erstwhile entity, Ponnawalla Fincorp also tightened the loan underwriting processes with a firm focus on existing customers. It realigned its target geography to metros and urban areas from rural and semi-urban. It also invested significantly in technology, data and digital to build a “best-in-class customer focused brand.”
“Our move from legacy systems to state-of-the-art, cloud-based systems has provided scalability, quality and dependability, helping us scale business volumes seamlessly,” Bhutada said. “As a part of our business strategy to be leaner and agile, the aspect of geography played a critical part wherein we focused on the top 100 branches.”
Brokerage Anand Rathi noted Poonawalla Fincorp has perhaps seen “one of the fastest turnarounds in the BFSI sector.” The lender’s stock has jumped around 143% in the last two years, while its market capitalisation has risen to Rs 26,629 crore from Rs 10,912 crore in June 2021. Analysts are betting on the lender’s earnings to improve as bad loans ease further and operating costs fall.
Additionally, the sale of subsidiary Poonawalla Housing Finance is expected to bolster the parent’s capital.