Poonawalla Fincorp shares rally 12% today; Motilal Oswal sees 27% further upside

Shares of Poonawalla Fincorp climbed 12 per cent in Monday's trade amid heavy volumes. Brokerage Motilal Oswal Securities called the company a ‘valued’ NBFC franchise in the making while initiating coverage on the stock with a target of Rs 350. The target suggests a 42 per cent upside over Friday's closing price or a 27 per cent further upside over Monday's high of Rs 275.75 apiece.

The stock rose 12 per cent intraday, taking its year-to-date rise to 24 per cent. A total of 3.44 lakh shares changed on the counter against a two-week average of 2.73 lakh shares. Motilal Oswal values the NBFC stock at 2.3 times FY25 book value. Consumer and small business finance – the segments targeted by Poonawalla Fincorp – have a huge market opportunity.

"While we expect the early green shoots of a transformed company to become visible within the next three-to-six months,

Poonawalla Fincorp has laid down a robust foundation for sustainable profitability through initiatives that will lead to lower operating costs (as a % of AUM), higher business volumes and robust asset quality," it said.

The brokerage has modelled in an AUM CAGR of 37 per cent and PAT CAGR of 65 per cent over FY22-FY25E, respectively. It also forecast an RoA of 4.8 per cent and RoE of 12 per cent in FY25E. Poonawalla Fincorp will have more levers from its fee income and operating cost ratios may deliver a further improvement in its RoE profile when it reaches steady-state, Motilal Oswal Securities said.

The brokerage said the recent improvement in credit ratings allowed Poonawalla Fincorp to get most bank loans re-priced at lower rates and enabled the company tap diversified sources of borrowings (including debt capital markets) leading to a marked improvement in liability franchise. Poonawalla Fincorp now has one of the lowest cost of borrowings in the NBFC cohort, Motilal Oswal said.

"We expect recoveries from the legacy written-off portfolio to continue in H2FY23 and even in early FY24. Unlike some of its peers, Poonawalla Fincorp is a pure-play retail franchise. We project net NPA to remain below 1 per cent and model credit costs to be at 0.5/1.2 per cent (including recoveries) during FY24/FY25E," it said.

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