Poonawalla Fincorp Ltd

NSE:POONAWALLA

Earnings Call Analysis

Poonawalla Fincorp Reports Strong Growth and Strategic Initiatives

Poonawalla Fincorp reported a significant 52% year-on-year growth in assets under management, reaching INR 26,972 crores. Their net interest income rose by 42% year-on-year to INR 676 crores. The company maintained a healthy asset quality, with gross NPA improving to 0.67% and net NPA to 0.32%. Looking ahead, they project an annual 30-35% AUM growth in the first year and 35-40% over the next five years. Investments in technology and strategic expansion into consumer durables and shopkeeper loans are key future growth drivers. The new management team is focused on building a sustainable and predictable business model.

Earnings Summary: Strong Growth in AUM

Poonawalla Fincorp demonstrated robust growth in assets under management (AUM), which reached INR 26,972 crores, marking a year-on-year increase of 52% and an 8% rise from the previous quarter. The diversification of AUM contributions includes MSME finance at 35%, personal and consumer finance at 28%, and loans against property and pre-owned cars at 17% and 14%, respectively. This balance supports the company's efforts to maintain a resilient financial profile.

Financial Performance: Revenue and Profit Growth

The company's net interest income, encompassing fees and other income, stood at INR 676 crores for Q1 FY '25, showing an impressive growth of 42% year-on-year and 5% quarter-on-quarter. The pre-provisioning operating profit rose 47% year-over-year to INR 432 crores, benefiting from enhanced operational efficiency. Profit before tax increased by 46% compared to the previous year, while profit after tax surged to INR 292 crores, up 46% year-on-year but down 12% quarter-on-quarter, affected by a one-time tax benefit recorded in the prior quarter.

Cost Management and Asset Quality

Despite a challenging high-interest-rate environment, the company managed to keep the cost of borrowings stable at approximately 8.16%, as evidenced by a slight increase in the debt-equity ratio from 1.9 to 2.1. Notably, Poonawalla Fincorp has maintained strong asset quality, with gross NPAs decreasing to 0.67%, a 75 basis points improvement year-on-year, and a 49 basis points reduction from the prior quarter.

Investment Focus and Technology Initiatives

The management emphasized a long-term vision for growth, aiming for an AUM increase of 30% to 35% in the first year and targeting 35% to 40% growth in subsequent years, aspiring to scale AUM by 5 to 6 times over the next 5 to 6 years. Significant technology investments and enhancements in both the digital and physical infrastructure are planned, which are vital for driving operational efficiency and improving customer engagement. The company will focus on advancing its technology stack using AI and has already seen 40% of new origination achieved through automated processing.

Future Strategy and Risk Management

As part of their strategy for sustainable growth, Poonawalla Fincorp intends to enhance its risk management frameworks to ensure stronger control over unsecured lending. CEO Arvind Kapil, coming from a robust background at HDFC Bank, outlined plans to closely review and optimize product offerings while maintaining a flexible approach to adapting the business model as necessary.

Market Positioning and Customer Focus

Targeting significant market segments with underpenetrated customers in India, the company plans to leverage its existing strength in personal and consumer finance to expand its customer base. Using a mix of secure and unsecured offerings, Poonawalla Fincorp aims to establish itself as a preferred choice for financial services in the Indian market.

Conclusion: Growth Prospects Amid Challenges

Overall, Poonawalla Fincorp is poised for promising growth with an ambitious roadmap that emphasizes long-term sustainability and operational scalability. While macroeconomic factors pose challenges, the company's comprehensive strategy and management focus seem geared toward solidifying its position in the financial services sector, aiming for predictable and sustainable profitability in the years ahead.

Earnings Call Transcript 2025-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to Poonawalla Fincorp Limited Q1 FY '24/'25 Earnings Conference Call. [Operator Instructions] Please note that this conference is being reported.

I now hand the conference over to Mr. Hiren Shah, Head of IR, Strategy and BIU. Thank you, and over to you, sir.

[Hiren Shah, executive]

Thank you, Steve. A very good day to all of you, and welcome to the quarter 1 FY '24/'25 Earnings Call. At the onset, I would like to welcome on board our new Managing Director and CEO, Mr. Arvind Kapil, who has joined us on 10th June 2024, has an impressive 25-plus years of experience in banking. Mr. Kapil needs no introduction. He is a stalwart in the financial services industry in India, who brings with him wealth of knowledge and expertise in consumer banking space.

He has introduced groundbreaking innovation such as industry first and second personal loans alongside digital loan against security digital loan against mutual funds and digital auto loans.

Mr. Kapil has done his Advanced Management Program from Harvard Business School, Master's Program in Management from Global Enterprises jointly from IIM Bangalore, UCLA Anderson and SDA Bocconi and City University. Also, he has done Master's in Management Studies from Bharati Vidyapeeth Institute of Management Studies and Research and a Bachelor's of Engineering from K. J. Somaiya College of Engineering, Mumbai.

His expertise will envelop to capitalize on opportunities to drive growth and enhance our market position. To discuss strategy and way forward and the open financial performance, I have with me our Managing Director and CEO, Mr. Arvind Kapil; our Executive Director, Mr. Sunil Samdani; and other senior management officials; and myself, Hiren Shah, Head of Strategy, BIU and Investor Relations.

Now let me hand over the call to Mr. Kapil to discuss the future strategy and way forward in detail with you all. Over to you, sir.

[Arvind Kapil, executive]

Thanks, Hiren. A very good morning, everyone, and thank you for joining us on the earnings call. My name is Arvind Kapil, I'm the new MD and CEO of Poonawalla Fincorp. I am in the process of taking over. The result this time are based on past assumptions. Having said that, first and foremost, I would like to thank, I think, the outgoing MD, also express my gratitude to our employees, our customers, our esteemed investors and partners for their trust and support in the organization.

Let me begin by introducing myself. I worked with HDFC Bank for over 25 years and I thanked them, first of all, for the invaluable experience and growth I've achieved during my tenure with them. I've seen the bank become a very strong institution. It was a great experience wherein I've got the opportunity to launch various industry-first digital and physical products that I owe a big gratitude to both Managing Directors Mr. Puri and Mr. Jagdishan.

Before moving to Poonawalla Fincorp, I was handling close to 7.5 lakh crores of advances. At the outset, it's also a good time to thank the Board of Poonawalla Fincorp and Mr. Adar Poonawalla for the exciting opportunity I have here.

My endeavor is to make Poonawalla Fincorp a preferred choice of customers for their financial needs. It can be done step by step and process by process with the right foundation and building blocks and with a long-term perspective.

Let me now take this opportunity to introduce our new management team members to you and the depth that we are creating.

Starting with Shriram Iyer, who's one of -- in my limited view one of the best guys in the industry on credit collection analytics. He comes with an experience of over 25 years in credit and processes, which adds immense strength to Poonawalla Fincorp in terms of capabilities on risk, credit collection plus attracting and retaining the right talent, which is an extremely important aspect as we build on the foundation from here on.

Added to that, we now have 2 chief business officers, CBOs, Vikas Pandey and Veeraraghavan lyer who come in with over 22, 25 years of experience in retail lending across products, businesses, geographies, cultures, partnership and experience of scale.

They have in-depth knowledge of building quality portfolio and their strength lies in the ability to cross-sell. And we all know that as we start building -- start setting the building blocks and start attracting cohorts of customers, we will have to build our skill sets for better efficiencies in the cross-sell of the model so as the efficiency goes up.

We also have a new Chief Human Resource Officer, Harsh Kumar, who comes from another bank with over 25 years of experience. He comes with strong tech skills and a mindset especially to add value even in our AI-first initiative. Very rarely do get HR heads who have an ability for AI-first.

We have recently appointed seasoned professionals to the job of Head of Compliance, Head of Internal Audit and Chief Risk Officer.

Above mentioned new management team members have managed various economics and financial cycles, thus having the strength to create sustainable, predictable and productive businesses.

They have in-depth knowledge of identifying businesses and scaling it up, which is the value I believe they bring to Poonawalla Fincorp from now on.

We are glad to have a combined team of seasoned bankers and existing talented resources in the company for optimized utilization and creating a combined massive expertise from here on. I'm excited about that.

I see this depth adding requisite strategic direction in terms of the right product mix, which I think is very important for us to create the right balance of risk and governance, and most importantly building a culture of collaboration, integrity and excellence in an uncompromised way.

Our franchise has built strong experiences in distribution, and underwriting across these 4 segments. It is my prerogative to now build the organization for scale and get it, get the foundation ready for long-term 5 to 10 years as a clear line of focus from hereon.

As I look back at my own career, this is exactly the time I took over HDFC bank retail assets portfolio probably 12 years back and scaled it to where it is today. I'm confident that we will build Poonawalla franchise to great heights with the management team, the combined strength that we have in place now on.

As part of the best practices followed by various established large companies in the industry, from now on, we will follow a prudent measure to share indicative guidances on overall AUMs, probably for the year and for a 5-year perspective -- 5- to 6-year perspective so that we have an idea on what are our building blocks, what are the businesses that we are talking, what is the kind of scale we are talking because then the scale accordingly desires the right kind of strategies in the first 1 or 2 years.

Let me take another 2 minutes here before I step into the precise strategies on the macro environment and correlated to the retail credit especially from our perspective, maybe.

India obviously continues to hold its momentum in growth terms even as the global economy has shown mixed signals. India recorded highest ever GST collection and is exciting for us to be part of the economy that's showing this kind of trajectory right now.

You can see the UPI transactions are clearly soaring one way up, probably INR 20 lakh crore market on a very progressive growth engine there as a country.

While it is difficult to make short-term predictions, I think there's enough confidence that India will continue to outperform the global economy at large.

Driven by growth in consumption expenditure, especially digital consumption, increasing multiplier benefits from CapEx and the government focus on exports and capacity building in key sectors, all these indicators are positive for retail lending in the country, as we typically see high correlation between GDP and the growth in health of retail lending.

Therefore, despite the high double-digit growth of retail lending over the past decade, there's still significant headroom for further growth, and this I'm talking as an industry.

Specifically for Poonawalla Fincorp, I think the market share, if we put the right focus of a strong foundation from now on over the next 1 year, 1.5 years, Poonawalla Fincorp, in my limited view, should see market share growing year-on-year for 5 to 10 years. And we could be in a very sweet spot in my limited view.

The numbers at a macro level also clearly show that penetration potential remains material. For example, individuals having one or more lending products is estimated at 230 million to 250 million. So the total number of individuals in the age of, say, 18 to 60, that can be lent to are in the range of almost 400 million, 450 million so having income over and above the cost of necessities, and that's important for us.

With elections behind us, we are optimistic about the economic stability with continued growth. Having said that, now let me take you through my strategy over the next 5, 10 years. The last 40 days since I've joined, I'm in the process of taking over and realize that for scalability, a few things that you immediately pick up when you join is it's important that, first and foremost, I see the need to strengthen our collection and infrastructure framework in line with our long-term strategy.

Because if we've got to run and start taking in the range of around 5 to 6x the book size on a 5 to 6 years period, and we are talking about a growth of probably instead of 4 to 5 relevant products, you're talking about almost doubling those product range. We're talking about a fairly large company and a large long-term perspective.

For the first 2 quarters, we believe it's important to consolidate the existing businesses by reviewing in-depth processes, risk management governance portfolio.

Risk management in any finance business and especially the pedigree with which I have had an experience to work with is going to be a key focus area. And hence, we're closely monitoring the unseasoned STP portfolio, which was launched in the quarter 4 of the previous financial year. Going forward, this portfolio will be calibrated, both the credit policy as well as collection standpoint.

Our idea is that every existing business, we will calibrate both on credit and collections and build strength. It could take a quarter or 2, but that's fine. It's important we are absolutely certain what product mix we're going to build our foundation on.

The team and I are committed to transparency. And hence, we have enhanced our disclosure with respect to asset quality and liabilities in our presentations that we've uploaded. From now on -- this one is, I think, very important for me. And I'm reiterating this one is from now on our fundamental guiding philosophy for all businesses. And these are not just words, they mean a lot to me. It has to be predictable, it has to be sustainable and has to be productive.

So we plan to create a predictable, sustainable model. So when I choose a business, I need to be sure I can with investments and foundation set, it shouldn't be too complex to figure out that probably 2 years later, 3 years later, what's the sustainable profits that are going to roll in, what is the sustainable distribution investments they're going to roll in, and it should get far more easier to build building blocks thereafter.

So we plan to create this model starting with the first year AUM growth. My limited estimate shows -- we've just joined the quarter already past, but I think we're estimating around 30% to 35% year-on-year growth because the product mix is very important to kind of set the stage right for the first year and maintaining a ballpark AUM growth, I feel of 35 to 40 over the next 5 years.

I believe this will help us build a retail business, the way retail businesses are built. They're not built over a day. They've built step by step. They've built process by process with solid risk management, with the mix of right products, and we want to achieve 5 to 6x in 5 to 6 years. We are ambitious on this figure, and we are determined to make it happen.

We want to create -- this is another important aspect in my mind, I thought it's time probably we share that thinking. I want to create an arithmetic mean on projection of probably even profitability. I don't understand the stock market. We are like engineers on the building blocks of business. We understand businesses. This much I can tell you.

But I would rather have an arithmetic means of profitability from the third year onwards after we set the foundation in the first 1.5 years.

Mirroring close to the AUM projections, the idea is to create, again, predictable, sustainable business for years to come. We want to make it a stronger institution with definite. A quick sense of the 4 businesses that I have in my mind to venture in with high focus in addition to the existing plans of consolidation and growth, let me begin the first one.

Quick sense, consumer durables. One of the fundamentals to scale consumer finance business is to have a large customer base, which could be running much faster than the growth rates of the customer that normally the company ran.

So consumer durable opens many doors for us of the middle class India. This will help us in a large funnel of credible customers to lay a foundation for solid work on digital and analytics thereafter. This is one of the important fundamental strength. As part of this business model, this gives us huge visibility since remember, it's a point-of-sale business.

It's also known industry-wide to create a strong high-yielding cross-sell model from the second year onwards.

The basic concept remains very simple. High repeat loan cross-sell is the best way to enhance and sustain healthy margins. But to do that, you've got to launch products where your customer acquisition goes at a substantially accelerated rate and we actually become a much larger franchise on the customer base.

In the second year itself -- probably end of second year, we expect substantial strength from this business.

Coming to the next business, a quick sense. We're keen on a shopkeeper loans. We believe that this business happens at the point of the kirana store, and we all know that kirana stores have been in existence for a long time.

And it's not that you actually need a customer-facing outlet to meet them. You can actually have your teams right in the city and operating out of a fairly hygienic and nice place, but the point of contact can be to the kirana stores and you can start engaging with them. It needs teams across geographies to capitalize. In this product as well, we would evaluate by the way, both physical and even digital options.

Now coming down to the next one, which is strengthening of personal loan prime. Now remember, STP is not prime personal loans, the way I understand it. What we want to strengthen is, can I get the corporate -- top 100, 200 corporate India? Can we be the preferred choice of these customers? Can I have these quality of families walk into Poonawalla Fincorp and we can become a preferred choice.

We have a strength of digital. We have a management depth, which will create policies and digital, which would add a lot of strength there. We are agile. We're building in agile technologies and AI. We believe it's a good time for us to walk on this area, both physically and digitally for prime customers. This also will help enhance our quality of customer intake of better quality.

The next business is used commercial vehicles. We will start building it by incubating it for the first 8 months and we'll gradually expand. As a matter fact, a lot of these businesses, we will incubate for 4 to 8 months and gradually build the building blocks to test the processes and technology before we fully launch them.

All the above new businesses will have a bias to healthy margins and healthy portfolio quality. On distribution, almost all of them, we will use physical and digital distribution to the extent the law of land allows.

Please note, that our investments to this business will be biased to the first 4 quarters. And that's very important so that like I shared with you, not only the AUM start lifting to a different quantum, also the businesses start generating the revenue lines as we proceed forward.

This also includes investments in collections and technology for laying the foundation, including the new management team. All these incremental business add to the existing 4 to 5 key business to create a stronger franchise within the next 6 to 8 quarters.

A quick sense, I've already covered the macro indicators. But I think in India, we believe there's a huge opportunity for credit growth and substantial base of 250 million, plus new to credit and of course, underpenetrated customers.

In my own experience, we find that the cohorts take multiple loans on the cross-sell of these products, once the loyalty sets in, will add a substantial amount of advantages on the efficiency side. I'm maybe repeating a point here, but I think that's an important area for us to remember, that's the strength that we want to very deliberately add.

Having a large customer base across different segments also obviously becomes a huge strength. That's the foundation required for our sustained growth over 5 to 10 years book growth and, of course, predictable, sustainable franchise, for profit generation in my limited understanding in an arithmetic mean form.

Winning across these products and strengthening the existing ones will require investments in multiple capabilities. Let me summarize them quickly.

Investments in collections, which I have already covered, is an imperative one for a stronger franchise that we want to do. Key differentiator between a successful and not so successful customer finance business is the collection efficiency.

Approximately 3% to 4% improvement in resolution rates from my experience eventually leads to 15% to 20% difference in accumulated net credit losses.

So in the collection strategies, we want analytics-driven treatment strategy. We want to focus on embedded digital payment channels to give you guys a feel, having a modern digital interface between the field agents and the telecallers to build efficiencies, having segmented approach for a different set of customer segments, [ AI-powered ] natural language processors and LP for customer interactions, omnichannel communication stack. The reason I'm specifying all this is because the need for all these to be strengthened.

AI, artificial intelligence, will be another very important strategic investments for us. whether it's personalized targeting to credit and fraud models, whether it's building a robust data pipeline, which is near realtime on insights, one of the very important areas we'll have to invest in because this will be the strength for our digital on the go.

Keeping a strong governance to ensure compliance and privacy norms, investment in talent, platform and machine learning that can improve the number of models and efficiency. These are just to give you guys a flavor of the things that I personally will be involved in.

On the tech stack, to differentiate based on AI and personalized targeting, probably ability to streamline, integrate with partners BIU-based analytics deployment, ability to keep elements of the stack modular, which we all probably know and so that is rapid changes can be done and it's more agile.

Finally, investments in the new management team, which I've already specified is because they are the seasoned people, having seen different economic cycles.

Finally, to quick summarize. In the first year, we built the foundation with higher investments in collections, technology, launching the new businesses. We expect AUM growth of 30% to 35% in the first year, and second year, we'll focus on 35% to 40% for the next 5 years, starting second year.

Third year projections of profitability will be closed on arithmetic mean mirroring close to AUM growth. We aspire to scale AUM by 5 to 6x in 5, 6 years on a business model, which is, again, predictable, sustainable and of course, productive, our fundamental guiding philosophy for all businesses.

It's very important that these 1.5 years investments are upfronted to lay a foundation for us to be a long-term player for now on. All our perspectives will be long term from now on, on the basis of predictability and sustainability and productivity.

This will help us build a retail franchise. Again, I will specify step-by-step, process-by-process solid risk management and mix of the right products. All these 4 points are extremely important and not just mere works.

I'm excited to begin this journey at Poonawalla Fincorp. I would like to now hand it over to Sunil Samdani to take you through the update on the quarter 1 financial year '25. Thank you.

[Sunil Samdani, executive]

Thank you, Arvind, and good morning, everyone. Let me take you through the quarterly financials and operational highlights. The assets under management stood at INR 26,972 crores, reflecting a growth of 52% year-on-year and an 8% quarter-on-quarter.

In terms of AUM mix, the MSME finance contribution is at 35%, followed by personal and consumer finance at 28%. Loan against property and pre-owned cars at 17% and 14%, respectively.

We continue to maintain a balanced secured to unsecured mix of 49% to 51%.

Our net interest income, including the fees and other income stood at INR 676 crores for Q1 of FY '25, which is up 42% year-on-year and 5% quarter-on-quarter.

While our cost of borrowings remained flat quarter-on-quarter at about 8.16%, the debt-equity ratio went up from 1.9 to 2.1x quarter-on-quarter. This resulted in increase in interest expense.

We continue to grow our pre-provisioning operating profit at a healthy rate, up by 47% year-on-year and 6% quarter-on-quarter at INR 432 crores. This was driven by productivity improvements on the back of technology enhancements, bringing in higher level of operational efficiency and the same is also reflected in our OpEx to AUM ratio, which stands at 3.86%, down 13 bps quarter-on-quarter.

Despite the high interest rate scenario, we've been successful in keeping our cost of borrowings at similar levels quarter-on-quarter through a dynamic treasury management with one eye on cost of borrowings and the other one on liquidity and the asset liability management.

Talking further about liquidity, we remain comfortable with positive cumulative mismatch across all buckets and a surplus liquidity of about INR 5,200 crores as of 30th of June 2024.

The total borrowings at the end of the quarter was INR 17,121 crores, which approximately 70% of them are on variable rates, whereas fixed rate borrowings are relatively shorter tenure. This places us well to take advantage of lower interest rate environment envisaged in the future.

We continue to maintain a healthy asset quality, the gross NPA further improving to 0.67%, down 75 bps year-on-year and 49 bps quarter-on-quarter, while net NPA is at 0.32%, down 44 bps year-on-year and 27 bps quarter-on-quarter.

However, it is pertinent to note that we have stopped co-lending which also include some elements of FLDG commitments during Q4 of FY '24 and I have started booking self-originated business. This book is unseasoned and needs to be monitored.

We focus on continuously improving our risk framework. As Arvind earlier mentioned, we will also be investing into building a robust collection framework with manpower technology to ensure strong gatekeeping throughout credit life cycles of a customer with us.

Coming to profitability, the profit before tax for the quarter was up 46% year-on-year and about 1% quarter-on-quarter at INR 390 crores. The profit after tax at INR 292 crores was up 46% year-on-year, however, down 12% quarter-on-quarter, mainly on account of onetime tax benefit of INR 41 crores, which we had got in Q4 of FY '24.

Our capital adequacy continues to be well above the regulatory requirements with CRAR (sic) [ CAR ] standing at 31.57% of which Tier 1 capital is at 30.09%.

With respect to technology and digital capabilities, our technology stack today is a major enabler to business with end-to-end customer onboarding without human intervention. 40% of our new origination is through Phase 2 processing. And even for the origination of the remaining business, there is a significant use of technology, which is instrumental in improving our productivity.

The key initiatives for Q1 includes the complete UI/UX revamp of the web and mobile app, the implementation of enterprise data lake platform, the contextual communication in web and mobile app. As mentioned by Arvind earlier, we will continue to further invest and strengthen our technology and digital track primarily focusing on AI.

In line with our vision to be the most trusted financial services brand, customer service is pivotal to our operations, and it continues to get disproportionate mind share of our management. As per our latest customer satisfaction survey, the Net Promoter Score or the NPS as it called which is a leading indicator of customer brand loyalty, is at all-time high of about 72% across all movements truth. That is sales, onboarding, service and exit.

Customer insights and identified opportunities of process improvements are being addressed and as part of continuous improvements. Our CRM has been customized to provide a 360-degree view of customer interactions across all touch points to all key functions, whether sales, operations, customer service and collections. This ensures consistency, continuity and the focused customer interactions.

Adoption of IVR and bot have further improved our turnaround time, resulting in increased operational efficiencies and customer delight. In our continuous endeavor to increase digital collections, we have introduced QR code and virtual account numbers, which has further brought down the cash collections.

On the people front, during Q4 of FY '24, we were certified as a Great Place to Work. I'm delighted to share that we've been recognized among the Best Place to Work in the NBFC sector in 2024 by GPTW.

Thank you, and I would like to open the floor for question-and-answer sessions.

[Operator]

[Operator Instructions] The first question is from the line of Abhijit Tibrewal from Motilal Oswal.

[Abhijit Tibrewal, analyst]

Arvind sir, I had one question for you, I mean you come from HDFC Bank close to 25 years, and they've always kind of prided themselves on distribution focus, collection focus and something similar we are looking to do here as well. So I mean 40 days into the organization, while you acknowledged a couple of times that you're still taking a transfer, trying to pick things up. What are the weaknesses that we identified during this last 40 days, which is where we are now talking about strengthening the distribution, strengthening collections, the entire senior management team, right, have seen a recheck where you have had your colleagues from HDFC Bank joining you now. So I mean what are those areas that you've identified where the organization was weak and where we need to strengthen now?

Why I'm asking this is, I mean, after we acquired Magma, we were running down or closing down branches, reducing the strength of collection personally, and now we are doing this to opposite. We're talking about expanding distribution. We are talking about strengthening collections, again, which is I would acknowledge a good team, a very good thing. So if you could just throw some light on that?

[Arvind Kapil, executive]

Sure. I think, first of all, an excellent question, I must confess. But I think you've touched on multiple things. Let me make an effort. If I missed something, you could repeat it, and I could cover it, okay? I just jot it down.

First and foremost, I would not like to look at it as a weakness when I mentioned about collections. My collections, infrastructure, technology, AI is focused as [ Arjun's eye ] on building a 5- to 10-year franchise. I think when you want to make it as a machine, which probably, let me take you back in history, if you remember HDFC Bank at Aditya's time, for 20 years, that's the pedigree with which I have come. Those are my learning grounds. So it's -- I've seen a very high sustainable profit for many years. I've seen that happening because they were planned well in advance. The foundations were run well in advance. A lot of homework was done in much initial years in a thorough ground way.

Also, I think a new management -- the reason I started with the new management team is, it's different having capabilities and it's very different having a seasoned management team combined with an existing brilliant team that there was here. So I think all of us are building it as a long-term franchise.

When you build a long-term franchise. I'm very clear, it's not an experiment for us. We come with that kind of scale. We are very clear on what should be the next building steps. These are not something which are new for us. So I think from existing strengths, we are going to build step by step.

Now a very precise answer to your question, if you noticed, I've also put it on -- in my sheet already. I think there's one business STP that we want to closely review and closely measure. I think it's an interesting business. But I think we want to -- for a quarter or 2, both on credit and collections, I've asked my team to review it more closely. I think that could be just a minor area where we need to tighten ourselves and work on it closely with credit and collections.

But overall, I think most of my comments should be viewed in the context of 5- to 10-year building blocks of a larger organization. And that's what I specified. It's a long term in nature. And there are multiple small, small strengths I see at Poonawalla Fincorp today. And those strengths, I'm going to calibrate, and over the first 2 quarters, like I specified, we want to consolidate. And that's what it's going to be. As a matter of fact, we're going to go into each strength that they have. We want to optimize those trends and add that digital fragrance.

On your physical distribution, if you notice, there are 2 or 3 businesses have added consumer durable because it kind of really accelerates my customer franchise and starts building a solid entry into is the fastest surest way to enter into a large customer base of middle-class India. And that's really the foundation for a prosperous India for the next 5 years or 10 years. So I want to accelerate that as an investment because you are well aware that investment in the first 2 years actually multiplies your returns in a more consistent manner and a much more [ bullwhip ] effect. That's exactly our aim to do it because you're creating a compounding energy by creating the building blocks now instead of trying to play it very safe.

And because this whole management team is fully well versed, it's not an experiment for us. We are very clear on what we want to do. And we are very clear on the risk management philosophy we want to live with. We are in a lending business where we will lend where we can manage risk. Wherever we think we don't have expertise to manage risk, we will accordingly fine-tune the product mix and build what we can sustain. Because at the end of the day, we are responsible to all stakeholders. We have our own reputation very clearly on the line, and we truly respect that ourselves. So I hope I gave you a sense.

If building blocks of the branches, I wouldn't like to look at it previous versus now, this management depth is substantial experience. We've seen all these trends. If you remember, I have personally launched cutting-edge digital products, which have worked. But despite that, I fully respect the physical infrastructure, which can make business sense because it's in India, we're talking about, which probably has multiple demographics, multiple lines of opportunity in business, and I'm not going to leave any opportunity, where I see margins because we are in a business.

My aim end result is to make business with healthy margins and which stays sustainable for many years post I'm gone. I'm very clear on that, and that's what I'm here for. For me, reputation of mine comes first, management team, Poonawalla Fincorp needs to become a preferred choice for customers, and our credibility will come first. So I hope I give you a quick sense of my point, yes.

[Abhijit Tibrewal, analyst]

Yes, this is very, very reassuring. Just one follow-up there. While you talked about, I mean, building distribution, if you can also throw some color on how we are looking to ramp up our physical presence? And another thing, sir, that you spoke about in your opening remarks was predictability, so I mean, if I just look at our, I mean, margins today or NII to be more precise, I mean, this quarter, despite cost of borrowings not going up, they were stable Q-o-Q, this is probably, I would say, in the last maybe 7, 8 quarters, the smallest Q-o-Q growth that we saw. So just kind of trying to understand how do we bring more predictability in our earnings given that you yourself spoke about that STP is 1 product, short-term loans is 1 product that maybe we might be doing a little less or closely monitor it? So that is the second question.

[Arvind Kapil, executive]

I think we, first of all, fundamentally, I'll explain to you the fundamental concerns that I understand, which will throw some light into what the thinking is. And then I'll hand over to Sunil and our CFO, Miranka to probably add value to your precise question.

First, let's understand if you have 3, 4 businesses and you -- in that, if you're trying to play with one business contributing bulk to your ROA, I think the first step, which I see is that I think it's very important we launch tried tested, stable, sensible margin-oriented businesses between digital and physical, and that's what I covered in my starting speech. So you're almost doubling ballpark. Your range of businesses in the first. So you might land up putting more investments in the first 4 quarters on multiple things to get gear up for it because you are well aware, finance businesses without a strong collections is not the way normally. And a strong collection has huge value in terms of the way you proceed ahead also both ways.

And whether it's technology, whether our ability to connect dots, whether it's AI, whether these businesses, I don't want to delay in launching this because we are well experts in these businesses. So it's not something new for us. And so I think what the stats will be -- Sunil, you want to give a...

[Sunil Samdani, executive]

Yes. So specifically to your point, referring quarter-on-quarter, right, you are aware that Q4 was the first quarter where we started onboarding customers outside the co-lending arrangements, right, which essentially means -- and the basic difference between when we pay customer on our book outside co-lending is we look at long term. The average tenor of our customers that we onboard today is more than 1 year in a small ticket personal loan, which in a co-lending arrangement used to be shorter tenor as well, right? It could be 3 months, 2 months, 6 months as well. So when you have a longer tenor portfolio build, while it helps bringing in stability in the book, the amortization of the fees also happens for a longer tenor, right? And so while the peak percentages are fixed as a percentage of distribute -- disbursements, the amortization of which also impacts our NIMs, and that essentially is the slight difference that you see quarter-on-quarter.

[Abhijit Tibrewal, analyst]

Got it, sir. Understood. This is useful and later during the call, if you could just address that given that we will be in investment mode over the next both quarters. And I think during your opening remarks, Arvind sir, you said that from third year onwards, the profit growth should start mirroring the AUM growth. So I mean how should we look at profitability over the next couple of years?

[Arvind Kapil, executive]

So you should see -- I mean, I'm expecting that thereafter, you will see a much more predictable and sustainable. That's the reason I use these words. And you should have an arithmetic mean my friend, otherwise, I mean as a CEO, I and you have to be on the same page, how do I give you these returns until I'm very clear it can come.

[Operator]

The next question is from the line of Avinash from Emkay Global.

[Avinash Singh, analyst]

Just a couple of questions, the first one...

[Operator]

We are unable to hear you properly.

[Arvind Kapil, executive]

I'm sorry, I just can't hear you.

[Avinash Singh, analyst]

Can you hear me now? Two questions. The first one, of course, you have kind of an even elaborate explanation, but again, I'm coming on the backdrop that the product shape that you offer or like plant, it is still relatively limited and it's kind of a [indiscernible] growth. And this is coming in the backdrop where I think the RBI governor exaggeratedly kind of trying to flag that, I mean exorbitant growth particularly in the retail unsecured, so in this kind of a backdrop, the 35%, 40% sustainable growth for the next 5, 6 years, and probably as of the size right now given the [indiscernible] stage ready, but I'm just speaking on the point of view that right now, you do not have a mortgage or a new vehicle loans, these are typically the kind of anchors product for the prime retail customers. So in this regulatory backdrop, RBI is a fixed kind of focus towards having a moderate growth in this segment and in overall retail unsecured and all. So how, I mean you see this?

And the second one would be more of a legacy and not really for you. Last year, we had taken the kind of around INR 900 crores, INR 1,000 crore provision [indiscernible]. Now how that can utilize and how that will be running down because what happens here is that the credit cost that comes in these quarterly numbers will be kind of impressive, but the kind of a write-off that comes into [indiscernible] totally out of in nearly 4% of income. So if I mean some -- if you could provide some color on that, what has happened with you stake especially provision that was created and where sort of [indiscernible] extends coming between the write-off and all this?

[Arvind Kapil, executive]

All right. So we could gather some bit of your question. Let me make an effort in the first part, and I'll request Sunil and Miranka to chip in on the second part.

Okay. On the risk management, like I said, the risk management has to be looked at holistically across all products to assess this and the entire organization. So over the next quarter -- the quarter we've entered, I'm going to put in a lot of time in that. If you look at consumer durable, it's considered as a secured product. If you look at commercial vehicle, if you think sustainable business models, which are sustainable even from a healthy margin perspective, keeping the mind of the way we have built the foundation so far.

If you look at even loans against property, which I didn't cover here, but we probably right now only barely operate 35 locations. So aim is to probably go to the 3x the geographical expansion immediately. And further details as after 60 days, probably I'll be in a better position to give you more insights on how we're going to build that.

And that's the reason you see the first 4 quarters -- yes, on the governance in RBI, I think when they talk about risk management, it's -- my understanding is it's equally important to enrich and move up the ladder on the quality of risk of unsecured as well. It's not just about as simplistic as unsecured and secured. Unsecured become literally secured. There are a lot of unsecured businesses like, for example, I mentioned 100 and 200 India's corporate, which probably are the most educated, the best paid employees of this country, and those customers we don't have today in Poonawalla Fincorp.

I'm going to target those customers digitally and physically. And imagine these customers will be one of the best profiles of the customers from there on because there will be a younger crowd and they will be the growing India from hereon. And this is the India that makes money on the salary side. So apparently, it's still cold unsecured. But as we start calibrating, so the first team is even in unsecured and secured, I think it's important to lift the quality of risk management in unsecured with very significant steps. That's what we are doing, sir.

Now over to your second question with me, Sunil and Miranka, both of you can quickly give him a sense on where we stand on that.

[Sunil Samdani, executive]

So on the legacy book and the discontinued book, we still have about INR 350 crores, which is outstanding. And in addition to that, there is a [ DA ] book which we had acquired that's about INR [ 70-odd ] crores.

[Avinash Singh, analyst]

And that the connect between the write-offs that [indiscernible] report and where are we with this INR 900-odd crores -- INR 980 crore provision that we had created from this acquired as legacy book when we had sort of a sold housing finance, and we have sort of used this INR 980 crores kind of a buffer, where that stands today?

[Sanjay Miranka, executive]

Yes. So typically, about 80% of our write-off pertains to this book that we are talking about.

[Avinash Singh, analyst]

And what is the status of that...

[Operator]

Avinash, your audio is not clear. Could you please fall back in the question queue?

The next question is from the line of Nischint from Kotak Institutional Equities.

[Nischint Chawathe, analyst]

Thanks for taking my question. Actualy, I have 3. First one is on the STPL book. Have you seen any red flags in your STPL book? And how are you dealing with it? The second one is slightly more long term in terms of how do you really look at the business composition whether it's going to be secured versus unsecured you have particular number in mind or let's say, high ROE, low ROE business mix that you have in mind?

And the third one is slightly more short term is on the cost of funds, where we have seen almost stable cost of funds on a sequential basis. So if you could give some guidance on that? And more importantly, what proportion of the 66% of bank loans are linked to EBLR or repo.

[Arvind Kapil, executive]

Okay. Again, I'll take the first two and request my colleagues to take and give you guys some insight. Quickly on STPL right now, the reason I singled it out was because I think I clearly see in the 35, 40 days a sense I have, and we need to -- to be honest with you, I need to deep dive more on it, to be more precise, okay? It could be early stages. But I do have a sense that I think we need to tweak some credit policies, and we need to beef up our collections abilities. And we, as I speak to you, we have Shriram who joined in a week later than me and within the first 20 days itself, we've seen some promising results already. So I think my perspective on that is that if we can make it a strong viable business, it will be a strength we add. But I think the reason I single it out is because you will see me talk the way I see things and the way we build businesses in fair transparency. So I think the idea is that over the next 1 quarter itself, we should see significant strengths emerging out of it and that's the aim.

We might also evaluate at all times showing businesses in our balance sheet with STP with much more details as we go along.

As far as risk management, I think you mentioned to me if I got your question right, what's my perspective on risk management in more detail. Like I alluded to it a little while back, the easiest thing is to say is secure and unsecured whereas if you realize that if the unsecured also has various categories of risk tolerance. And I think that's a very important criteria because I have seen with our past experience on an extremely large scale. And in that time also, there was regulatory advisers to probably review. And over years, we have seen that certain quality of unsecured business is actually surprisingly show much lower risk than even some of the secured businesses.

So I think I -- my priority will be risk management of a solid order which we can manage both with credit as well as with collections and build a book which we all can be proud of. I'm very clear on this. I am not here for short-term gains at all. I'm here to build something which I can look back and feel good about. I think that should give you a sense of where we come from and what I want to do. But there will be some bit of calibration, some bit of work required is 30, 40 days. I can't have a perfect finger on the point yet, yes.

[Nischint Chawathe, analyst]

With regards to your [indiscernible] on unsecured, right?

[Arvind Kapil, executive]

Sorry. I missed your questioning. Sorry.

[Nischint Chawathe, analyst]

Sorry. No red flags or concerns on the unsecured MSME.

[Arvind Kapil, executive]

Right now, these are not concerns. These are more observations to make it better. And remember one thing, this book is unseasoned, that's why I singled it out, not because it's showing concerning flags. See when you have a 20%, 25% of the business, which is probably when the co-lending stopped and they started probably Jan or Feb, 4, 5 months ago, I think it was important in the earnings call to probably make a mention of it. That's about it. There's nothing else that we have visibility of right now, which we'll go deep dive and check.

[Sanjay Miranka, executive]

Regarding your question on the cost of borrowing. So while off-late, okay, there has been increase in MCLR by multiple banks, but we envisaged that cost of borrowing broadly will be in a similar range in future quarters.

And in regards to, okay, external benchmark-linked portion, it is about 20% of the total borrowing, which is linked to external benchmark.

[Sunil Samdani, executive]

So between MCLR and EBR, about 70% of our liabilities are variable linked and 30% is fixed rate. And the fixed rate also, what we see is largely capital markets, which means they are shorter tenor loan. So on the whole, we are well placed given that we envisage a low interest rate scenario going forward. So we are well placed to take advantage of that situation.

[Arvind Kapil, executive]

Also, I think I covered it, but just because you alluded to that, I think we have increased our disclosure with respect to asset quality and liability. I'm just mentioning it. Thank you.

[Operator]

The next question is from the line of Kunal Shah from Citi Group.

[Kunal Shah, analyst]

So a couple of questions. Firstly, in terms of the investments which you alluded to and maybe the leaderships tendering. So any further capability buildup, which you think you would be doing at the senior management level, which we should expect in the near term? And overall OpEx to assets, how should one look at it because that would have played as a lever, but now you would be in an investment phase again? So how would OpEx to assets pan out here?

[Arvind Kapil, executive]

I think conceptually, getting a good management team also finds revenue streams. You can -- that's what I have learned from my experience. So -- but the timing could be quarter here, quarter there. But I think what's more important in this earning call is our direction of long term. And imagine if I don't invest, let's say, I mean, hypothetically, I'm quoting a figure, just to get a driver point.

We don't invest in collection, let's say, INR 60 crores or INR 70 crores or INR 80 crores, whatever is the right figure. I mean when we come to that figure.

Now you can either show an 8% increase in profit or you can show an 8% increase in investment. When you put these collections, you can have the risk appetite of something my seasoned credit guys can take it from here. You can launch these core businesses. You can create a 5, 10 years of visibility of profitability mirroring close to your AUM projected. I think that's the line of thinking, sir, which is more important right now.

I mean if I have a 2-year perspective or 3-year perspective, one could think totally different. And this is what we don't have. I'm not looking at it from a 2-year perspective. I'm looking at it sitting with you guys in the third year, fourth year, fifth year and you guys hopefully having a smile on your face the way I am to serve it. So thank you so much.

[Kunal Shah, analyst]

Yes. And secondly, when we look at it in terms of slightly pull back on the growth to, say, 30%, 35% from the current run rate. And this quarter, we actually saw a very sharp buildup on personal and consumers almost going up 30-odd percent quarter-on-quarter. So which are the segments wherein you will see the pulled back on the growth side from the existing businesses. And when we look at the personal and consumers over here or say, MSME and compared to what you have articulated with respect to shopkeeper loans, how different were they maybe in the earlier business model and how different would it be now, yes?

[Arvind Kapil, executive]

Sure. No, I think STP I have asked my team to not accelerate further right now until I get a full 100% control of it, okay? So I think the plan may have been to accelerate at a much positive rate. I want to get a total fix on that. And I think we will. But I need to do that. And the other businesses that we are launching on the shopkeeper loans is a very high-margin business. It's -- I mean the entire India is at your disposal. We can be the best-in-class in that. And I love that business. We've done that in the past. It's not a surprise for us. We've run this business. I started the business, by the way, in the bank, so it's something we are well experienced with.

We have Raghavan Iyer as a Chief Business Officer, who ran it personally with his team, and there's a fair amount of experience.

There's a difference in having a variant of business loan and having this because this one is like the Kirana store of the generation and family businesses have been there for last 40 years or 50 years, you find different families are running it. And it has a very different collection perspective or different -- a very different risk perspective with my limited understanding. So every -- just the way every salary segment doesn't have the same risk because it comes under the category of unsecured, and Infosys employee for that matter and HDFC bank employee is well educated. The risk metrics is very different. Similarly, you have a very different risk metrics of a Kirana store versus probably a trading business, maybe. And of course, it also has various other factors in terms of entire seasoning and multiple criteria. So credit rating is there.

I think broadly, our aim is to build it step by step and process by process. While these look like worked, that's how retail businesses get built, and that's the way I've seen it, and that's the way we will build it, sir.

[Kunal Shah, analyst]

And Arvind, just the earlier question with respect to the senior management in terms of the capability build up any changes anticipated, any levels which needs to be filled up or maybe changed or something how you're looking at.

[Arvind Kapil, executive]

I was expecting you to ask me that I have changed everything almost. So point is that if we've actually got a combined strength, the fantastic strength of existing management at Poonawalla, which is I think is absolutely respectable. And we've added a few strengths of the bank. And I think combined, it's going to be 1 solid team with 1 jersey color, which is walk in the market and build it step by step my friend.

[Operator]

Thank you. Ladies and gentlemen, due to time constraint, that was the last question for today's conference call.

I would now like to hand the conference over to Mr. Hiren Shah for closing comments.

[Hiren Shah, executive]

Thanks, Steve. Thank you, everyone, for joining this earnings call with us. For any further queries or communications, please write to us at investor.relations@ poonawallafincorp.com. Thank you.

[Operator]

On behalf of Poonawalla Fincorp Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.