Poonawalla Fincorp Ltd

NSE:POONAWALLA

Earnings Call Analysis

Record Disbursements Drive Robust Growth

The company recorded their highest ever quarterly disbursement of INR 8,731 crores, marking a 159% increase year-over-year and 12% quarterly growth. Assets under management (AUM) grew by 58% year-over-year to INR 21,946 crores, with a secured to unsecured book ratio at 52% to 48%. The focus remains on growing the secured book, aiming for a 50-50 mix in the medium to long term. OpEx to AUM ratio improved significantly, and the company boasts a capital adequacy of 38.2%. Net Profit After Tax (PAT) rose 76% year-over-year to INR 265 crores. The company introduced app-driven personal loan products, with plans to launch co-branded credit cards and new products in the current and following quarter.

A Snapshot of Strong Performance and Macroeconomic Context

Amid a robust macroeconomic backdrop, with India's real GDP growth recorded at 7.6% year-on-year (Y-o-Y) and inflation stable at 5.5%, the company has executed an impressive performance. The Reserve Bank of India anticipates a slowdown, projecting GDP growth around 7% for FY '24, yet such an economic vigour signifies immense potential for credit demand, particularly from the MSME and consumer segments. The company has capitalized on these conditions, achieving their highest-ever quarterly disbursement, as well as record growth in both Assets Under Management (AUM) and Profit After Tax (PAT).

Operational Excellence and Financial Metrics

The company's operational milestones include a significant 159% Y-o-Y and 12% quarter-on-quarter increase in quarterly disbursement, totaling INR 8,731 crores. AUM surged by 58% Y-o-Y and 9% quarter-on-quarter, reaching INR 21,946 crores. Importantly, asset quality is touted as 'best-in-class' with Gross Non-Performing Assets (NPA) at 1.33% and Net NPA at 0.7%, reflecting considerable Y-o-Y and quarter-on-quarter improvements. Meanwhile, Net Interest Margin (NIM) remained robust at 11.02%, and the company effectively contained the Operating Expense (OpEx) to AUM ratio at 4%, enhancing profitability with operational efficiencies.

Strategic Investments in Digital Transformation

Foreseeing a digital consumer lending market expected to exceed $720 billion by 2030, the company has doubled down on its omnichannel approach, elevating its digital presence through web, app, and WhatsApp complementarity. This strategic digital foray not only bolsters customer engagement across product lifecycles but also presents vast cross-sell and upsell opportunities. The second phase of the company's digital transformation is well underway, featuring high-impact deliverables like a personalized app and WhatsApp-based customer service—asserting a competitive edge in the rapidly advancing digital landscape.

Robust Liquidity and Managed Borrowing Costs

Despite rising rates over recent quarters, the company has adeptly managed to maintain its cost of borrowing at a stable 7.99% through prudent liability management. With approximately one-third of the AUM eligible for priority sector lending, the company has leveraged this to minimize the effects of rising interest rates, ensuring comfortable liquidity with a Liquidity Coverage Ratio (LCR) of 127%, well above the regulatory minimum. Furthermore, the company has retained healthy NIMs in line with their guidance of over 10% despite market contractions.

Looking Ahead with Vision 2025 and Beyond

Positioned confidently for the future, the company is weaving ESG principles into its business processes and preparing for investments that will secure growth for the next 3 to 5 years, as delineated in Vision 2025. Their adherence to strategic, organic distribution, increased market penetration, and imminent launch of a co-branded credit card positions them well. As they lay the groundwork for the future, the engagement with the next phase of digitization and product innovation is expected to underpin sustained expansion.

Earnings Call Transcript 2024-Q3

[Operator]

Ladies and gentlemen, good day, and welcome to the Poonawalla Fincorp Q3 FY '23-'24 Results Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand over the conference to Mr. Hiren Shah. Thank you, and over to you, sir.

[Hiren Shah, executive]

Thank you, Manav. Good evening, everyone, and thanks for joining this conference call. It is our pleasure to welcome you all to discuss Poonawalla Fincorp's business and financial performance for the quarter ending December 31, 2023. To discuss all this in detail, I've got with me our Managing Director, Mr. Abhay Bhutada; our Executive Director, Mr. Sunil Samdani; other senior management officials; and myself, Hiren Shah, Head of Strategy, BIU and Investor Relations.

Now I would like to request our Managing Director, Mr. Abhay Bhutada, to brief you all about the company's operational and financial performance along with development for the quarter ending December 31, 2023. Over to you, sir.

[Abhay Bhutada, executive]

Thank you, Hiren. Good evening, everyone. I welcome you all to today's earnings call and hope you are doing great. As I give a snapshot of our performance and highlights for the quarter gone by, I will first start with a quick macroeconomic update. In Q2 FY '24, our real GDP growth was at 7.6% Y-o-Y, which was better than expected. The Reserve Bank of India has projected a sequential slowdown in the GDP growth in the remaining 2 quarters and expects the overall FY '24 GDP to come around 7%.

This needs to be looked at with the backdrop of the fact, the economy grew by 7.2% in the last fiscal and the government had estimated a growth of 6.5% for the current fiscal. However, higher than anticipated growth in the first 2 quarters of the fiscal has given more confidence in economic prospects implying that the economy is doing well.

At the same time, the CPI inflation stood at 5.5% approximate, while the interest rates continued to remain firm over the last 2 quarters. While global growth is expected to be slow, India GDP growth is expected to be around 7% in FY '24 and around 6.5% in FY '25.

India stands out on GDP growth outlook, driven by renewed CapEx cycle, well-capitalized banking system, robust credit growth, upturn in real estate sector, robust domestic consumption, and growing exports.

India has been the fastest-growing large economy globally over the last 2 years. This represents an opportunity for us as we expect this to get translated into steady credit demand from both MSME as well as consumer segment.

Our efforts to build a strong and sustainable organization position us best to leverage this opportunity, and in the process, enable the dreams of our customers. The opportunity is further amplified with favorable demographics, increased focus of the government on digitization, growing disposable income level with a mass middle income population, ever-growing high income population, government push for infrastructure, and growing aspirations of all the Indians.

Now coming to our performance, as we enter the last quarter of FY '24, I must say, the previous 3 quarters have been phenomenal for us not just in terms of what we have achieved so far, but also as to how we have made ourselves future-ready.

The mix of now with the balance of next will ensure that we will continue to be a thought leader with extraordinary execution capabilities. I'm happy to share that we have recorded the highest ever quarterly disbursement, strong growth in AUM, along with best-in-class asset quality, resulting into highest-ever quarterly PAT. Again, quarter after quarter, we are achieving the highest ever numbers.

Now let me take you through the key financial numbers for the quarter. We reported our highest ever quarterly disbursement of INR 8,731 crores, up 159% Y-o-Y and 12% quarter-on-quarter.

During the last quarter, we started scaling up instant personal loans through our cutting-edge mobile app, a step forward in shaping the financial landscape. Talking of assets under management, we stood at INR 21,946 crores, reflecting a growth of 58% Y-o-Y and 9% quarter-on-quarter.

As regards to the composition of our total AUM, MSME constitutes about 42% of our book, followed by loan against property 17%, personal and consumer finance 16%, pre-owned car contributes 14%. The secured to unsecured book stood at 52% secured, 48% unsecured. The secured book is growing at a steady rate as disbursement in LAP, POC and MSME continue to grow.

With longer tenure LAP book, we expect our secured book to continue to grow. Our guidance on the secured to unsecured mix will be 50% in each of the items medium to long term. With the change in risk weight as guided by the regulator, we remain adequately capitalized with the capital adequacy of 38.2% as of Q3 FY '24.

On the tenure mix of our book, the short tenure loan, up to 12 months, stood at 22% of the book, fairly in line with guidance of 20% to 25%. Similarly, the medium- to long-term loans of more than 12 months are at 78%. Again, this is in line with guidance of 75% to 80%.

The ideal tenure mix is helping us to improve our profitability, while also keeping the AUM growth in place. We continue to be a national player with presence across 19 states, having a branch network of 103 branches. The portfolio continues to grow across all our products, and we have a well-diversified geographic distribution with no large market concentration.

Our portfolio is also well diversified across both MSME and consumer segment. Asset quality continues to be the best in class and in line with our guidance. Gross NPA stands at 1.33%, down 36 bps Y-o-Y and 3 bps quarter-on-quarter, while net NPA is at 0.7%, down 19 bps Y-o-Y and 2 bps quarter-on-quarter.

As we build a portfolio with higher resilience, the asset qualities are reflective of our approach of having the right of selection. Our PCR stood at -- provision coverage ratio stood at 47.3%.

We continue to optimize our cost of borrowing further and it stood flat at 7.99% for quarter 3 FY '24 as against 7.98% in Q2 FY '24. We have been able to manage our cost of borrowing well despite of tight liquidity condition and hardening of rates.

Our NIM stood healthy at 11.02% during the quarter. This is in line with our guidance of steady-state NIM of 10% as we continue to focus on high credit quality customers. Our operating efficiencies continue to improve further. The OpEx to AUM ratio stood at 4%, an improvement of 206 bps year-on-year, 18 bps quarter-on-quarter.

The reduction in OpEx ratio signifies the productivity enhancement that have been achieved. As we grow, these ratios should continue to optimize further. The interplay of all the above is reflected in superior profitability.

The operating profit for the quarter of INR 350 crores, which is up by 125% Y-o-Y, 4% quarter-on-quarter. Profit after tax for the quarter stood at INR 265 crores, which is up by 76% year-on-year and 15% quarter-on-quarter basis, excluding the impact of exceptional items. Our return on asset was at 5.3% for Q3 FY '24, which is up 84 bps year-on-year and up by 34 bps quarter-on-quarter.

Moving on to the business strategy. It's well carved out and aligned with our stated vision of 2025, articulated at the time of acquisition, along with the strategic road map of consolidate, grow, and lead.

The clarity of strategy and its execution is one of the biggest differentiators for us. We have remained true to it and it's now bearing fruit of the same. Our strategic focus has been on our chosen segments of consumer and MSME, prime bureau tested customers having lower credit risk, our PTCS model, that is optimum pricing, best turnaround time, convenience and excellence in customer service, building a branch-lite digital-driven model, going deep in urban and semi-urban market, focus on risk-adjusted return delivery and not just spreads, leveraging technology for operational efficiencies, understanding the ever-evolving customer behavior, being fair and trustworthy.

India's overall credit is growing at a pace of 10% to 12% CAGR with consumer and MSME growing at 20%. The credit demand is led by robust economic growth, increasing per capita income, rising smartphone/Internet access, higher employment, ability of large segment of the population still underserved/unserved. As per TransUnion Bureau, more than 160 million Indians are credit underserved, whereas around 50% of India's population, 700 million, is credit unserved, with no credit history.

A CIBIL report highlights that out of 220 million credit eligible retail customers, only 33% are being serviced by bank. The same is evident from credit card penetration. There are approximately 66 million outstanding credit cards versus 892 million outstanding debit cards. Owing to the rapid adoption of digital platform and devices among the younger population in the country, fintech/NBFC lending to young borrowers has surged by 100x between 2020 -- between 2015 and 2021.

The Indian digital consumer lending market is projected to surpass $720 billion by 2030, representing nearly 55% of India's total $1.3 trillion digital lending market opportunity. Thus, there is an ample growth opportunity for India's financial sector in the near foreseeable future.

As per the bureau records, the retail loan book has almost doubled in the last 5 years with growth led by unsecured loans. Digital platforms have been active in catering to consumption needs through personal and consumer loans. High focus on consumption lending empowered them to scale faster. Now with the regulatory changes, there is a large opportunity for lenders who have the capital and technology available, right risk management capability and fair customer practices to address and serve this segment.

One must note that prime and above-prime customer constituted 33% of the digital platform disbursement as per the bureau record. We, in our small ticket personal loan segment, follow a stringent approach and only lend to customers who are within our risk acceptance criteria. Our risk acceptance includes ticket size more than INR 50,000, bureau score more than 700, fully digitally verified KYC, along with mandatory Aadhaar linked to mobile.

Given the adoption of technology in the small loan segment, the digital penetration is likely to go up in the higher ticket size segment as well. In the digital tale of data and technological advancement, interconnected system and platform, widespread use of Aadhaar, PAN, GST, open API automation, the digital contribution across segment will continue to increase, and we believe our distribution must be aligned to the same. We are building a distribution system that addresses the same and this is aligned to it.

We continue to be invested across all sales and distribution channels. We look at the efficiencies in terms of cost of acquisition to be the core determinant of our channel mix. We now have omnichannel presence across web, app, WhatsApp, contact center, branch as well as all the DSA channels. This omnichannel presence helps us to use the right delivery channel for each of the products, thereby having a multidimensional play.

Our web presence has increased multifold and now it's getting complemented by both app and WhatsApp. The digital channels have shown high effectiveness for unsecured loans. We are now working on leveraging this channel for secured products as well. We have been able to increase our digital business contribution in pre-owned cars to more than 10%.

We are now focusing on building the same across all other products like secured products, including LAP. With app gaining traction, we will have higher direct engagement with our customers across the loan life cycle. This would help us penetrate deeper into the digital lending ecosystem, drive active engagement, meet not only their borrowing needs, but also other financial product requirements going forward, thereby providing significant opportunities to cross-sell and upsell.

Organic distribution is something that is strategic to us, and this is in line with what we scaled up our mobile application distribution in Q3, and customers are actively engaging for both loans as well as service through this channel.

The sales productivity is the biggest efficiency measure, and we track it very closely. For the last 6 months, it has increased significantly through various intervention on technology, process, people and product aspect. We have created attractive incentives and career growth plan for high performers and refine our products to ensure self-effectiveness without compromising on the risk. We are pushing the bar here continuously and it's reflected in the transformation metrics getting better by creating enabler for employees to deliver the same.

On our existing products, we continue to increase our market penetration. We clocked the highest quarterly run rate in our LAP business during this quarter. We have crossed INR 350 crore monthly run rate in LAP. We also achieved our highest ever monthly numbers in pre-owned car business as well as in business loans. We are a significant player in the POC market and now estimate our wallet share on a monthly disbursement to be between 4% to 5%.

Our direct small ticket personal loan product, driven through app, continues to gain momentum. Last quarter, we also received approval for co-branded credit card launch. This will be a complementary product for our existing product basket as it helps us to engage with the customer in their day-to-day transaction. With the increased penetration of digital payment, co-branded credit card will make us an active participant in the payment ecosystem. It also provides a sizable opportunity to market another product to our existing and ever-increasing customer base, enhancing our cross-sell opportunity.

We expect the co-branded credit card to go live this quarter. On the upcoming products, we have some exciting products lined up for the current and the next quarter, like drop-line flexi loan product EMI cards. Another significant milestone that we have achieved in the last quarter was that we completed Phase 2 of our digital transformation. As you must be aware, we have clearly laid out Phase 2 of our digital transformation, and we have worked tirelessly towards the same, and we now see the deliveries coming in.

With the back-end infrastructure ready and the solution implementation underway, we will see these capabilities getting leveraged now. Phase 2 of the transformation has already delivered 2 high impact items of PFL app and WhatsApp journey for the customer service and thus establishing our omnichannel presence.

Over the next 3 to 4 weeks, we will see the enhanced personalization and customization features go live on the app along with enhanced customer journeys. As they say, digital transformation is a journey and not a destination.

We remain committed to continuous improvement and innovation to be quick adaptive amidst the rapid digital reception, enabling us to stay ahead in the game. Despite of so much onetime expenses on the digital transformation, if you see on the OpEx side, there is a decrease on a year-on-year basis. The numbers on AUM growth, cost of borrowing reduction, drastic asset quality improvement, productivity enhancement, profitability improvement, brand consolidation, digitization and technology leveraging reflect the successful interplay of various elements of our strategy, thereby making this transformation a reality.

I'm also happy to note that as a foundational step, we have embedded the principles of ESG as a part of our business process. A Board level committee has been set up to provide necessary oversight and guidance. As we enter the last leg of our Vision 2025, we are well positioned and confident of delivering on the same. It's also time for us to start thinking beyond 2025, and we've already started working on the same.

Next 12 months will see us investing in the initiatives. We believe it will help us maintain our growth and make us ready for next 3 to 5 years and beyond. I firmly believe we have built a strong foundation and the next 3 years should see us fully capitalizing on it.

Now I will request our Executive Director, Mr. Sunil Samdani, to take you through the financial and operational aspects of the business. Thank you.

[Sunil Samdani, executive]

Thank you, Abhay, and good evening, everyone. Let me take you through the financial and operational updates. Starting with liabilities. We've seen hardening of rates over the last 2 to 3 quarters. Even then, we've been able to keep our cost of borrowing at almost the same level as previous quarter, currently at 7.99%.

This, we've been able to do it through an effective liability management strategy. If you look at our cost of borrowing movement over the last 3 quarters, the same has come down from 8.04% in Q1 of FY '24 to sub-8% in Q2 and Q3 of FY '24.

This is despite the tight liquidity condition and the higher interest rate in the system. At PFL, since approximately 1/3 of our AUM is eligible for the priority sector lending, we will leverage this to minimize the impact of the rising interest rates, and we continue to be amongst the lowest cost fundraiser in the industry.

Coming to liquidity, we remain comfortable on the ALM side with positive cumulative mismatch across all buckets and carry a surplus liquidity of INR 2,973 crores as of 31st of December 2023. The LCR stood at 127% as on 31st December against the regulatory requirement of 85%.

On the margin side, if we talk about NIM, we continue to maintain the healthy NIMs of 11.02% in Q3 of FY '24. While on quarter-on-quarter basis, there has been a contraction in NIM from 11.42% to 11.02%, it is still in line with our guidance, the stated guidance of more than 10%. This contraction can be attributed to 3 factors: first, we continue to focus on a better credit risk segment through credit tested high bureau score customers.

To cater to this low-risk segment, the risk-based pricing needs to commensurate with the same, thereby resulting in lower yields and contraction of NIM. As can be seen, there is a reduction in the share of shorter tenor book as the focus is more on income-generating assets and on the consumer side, higher income segment customer. Our play is not driven only by the spreads, but also by the risk-adjusted returns, which gets reflected in our RoA numbers.

Secondly, as we see the rundown in our legacy book and the write-off of our legacy book, which is historically high yielding, we will see the contraction in the overall yields of our portfolio. This will also contribute to the lower NIM. However, it is pertinent to note, as we see the recovery in this written-off portfolio, the benefit of that gets reflected in the lower credit cost.

And lastly, as we make our mix more efficient from the perspective of secured to unsecured, we've increased that from 45% in Q2 of FY '24 to 52% secured in Q3 of FY '24. We are confident that while NIMs may contract marginally, but the better risk-adjusted returns, we will continue to deliver the RoA guidance numbers.

Now coming to operating leverage, we continue to focus on building operating efficiencies across the functions, and the same is reflected in our OpEx to AUM ratio, which stands at 4% in Q3 of FY '24. The same was 4.18% in Q2 and 4.38% in Q1 of FY '24. And if we compare it with the previous year same quarter, it stood at 6.06%. This 4% OpEx to AUM as on Q3 of FY '24, it is pertinent to note that it also includes the ESOP charge, which would be around 0.44%.

Our journey has been exemplary with increased productivity across the organization. Our ability to scale our business without a linear increase in employee count powered by high-impact technology interventions had made it possible. The focus on digitization of processes, along with use of robotic process automation in operations has helped us make the process faster, error-free and scalable.

On the customer service side, our relentless focus on providing best-in-class experience has resulted us in offering state-of-art customer service through WhatsApp channel. Now we address more than 70% of our customer service request through this channel, which is not only digital and instantaneous, but also self-service channel, thereby making it cost effective.

Continuing on our DIY philosophy, our app also provides yet another self-service channel to all our customers. WhatsApp as a channel has been a great success for us in customer service and we are now leveraging the same for building an alternate distribution channel in some interesting ways.

We have pioneered in providing credit reports to our customers through WhatsApp. We've seen traction there purely through organic channels, and we're also seeing active upsell happening for these customers. This has been a test product for us, and we see this becoming an important part of our distribution strategy. We are also actively using WhatsApp for lead generation, and we'll be starting a full loan journey over the next 2 to 3 weeks.

With this, we will be the first player fully operational on WhatsApp lending, covering engagement through credit report, lead generation, full loan journey, and customer service. A complete self-service channel with unparalleled reach ensures that we are present where our customers want us to be. This understanding of customer behavior is critical element for our distribution strategy.

Talking about collections. We've built a robust collections infrastructure across all our locations over the last couple of years, in line with our new portfolio that we have built. We now have a strong hybrid model of collections with a large in-house calling, supervisory and the management team of more than 400 employees.

The feet on street is well manned with external manpower and multiple partners to ensure no dependencies. The model provides us with complete control on daily rigor being exercised on feed through effective review system controlled via technology. This has helped us not just being effective, but also remain efficient.

Last but not the least, on the people front, we have made steady progress on our people agenda. I'm delighted to share that our efforts to build a healthy workplace with the right culture has started giving results. We participated in Great Place to Work survey and have been certified as a Great Place to Work.

This fuels us for the journey ahead, and we make the people-centric future-ready organization.

Thank you, everyone, and we can now start the question-and-answer session.

[Operator]

[Operator Instructions] The first question is from the line of Sameer Bhise from JM Financials.

[Sameer Bhise, analyst]

Congrats on a strong set of numbers. Just wanted to ask about the growth rates. I mean we are currently running well above our long-term guidance. Versus the 35% to 40% AUM growth, we are running upwards of 50%. So how do you think it over the medium term? And where should we see some bit of moderation and where we should see continued momentum?

[Abhay Bhutada, executive]

Yes. Thank you, Sameer. So our assets under management stood at INR 21,946 crores as on 31st December, reflecting a growth of almost 58% Y-o-Y. The growth has come from the gain in market share of existing products focusing on organic distribution. For the last 2 quarters, we have become a significant player in all the product segments that we operate, as was stated in Vision 2025.

Today, we have a 4% to 5% market share overall in preowned car, business loan, as well as in loan against property products on incremental disbursement basis. If we were to look at only top 100 markets where we operate, this is a significant number and align to our philosophy of going deep in markets rather than spreading out such thing. The focus on the markets and this clinical execution has helped us to grow here.

We'll strive to maintain -- remain in line with our long-term guidance of 35% to 40% on a yearly basis. Though our base is low, but considering the overall thought process of traditional lender, rating agency, and the ecosystem, I think we'll stick to 35% to 40%. We can grow much higher, but now we'll increase our margin. And I think we have predicted this, we need to control the growth. If you listen to 2 years back, Q1 of last financial year, we already predicted that we need to control the growth because considering the segment which we are targeting is very unique, no one has targeted this segment.

Like always we mention in our PPT also, that's a combination of that, NBFC as well as fintech. So the user experience which we are giving, the kind of rate, fair practice, 0 prepayment, I think there is enough opportunity available. But again, coming back to your question, we will stick to 35% to 40% growth and 7% to 8% quarter-on-quarter going further. But we'll focus more on the increasing profitability, increasing margin, reducing OpEx.

[Sameer Bhise, analyst]

Also secondly, on margins, we are tracking above our guidance, though they have come off on a sequential basis. Do you think you'll be able to meet that 10% margin guidance despite a 50-50 secured, unsecured mix going ahead?

[Abhay Bhutada, executive]

So Sameer, you're right. Considering that secured, unsecured, our original guidance was 50-50, considering that only, since last 4 quarters, we are giving guidance of 10%. But because of the short-term loan and unsecured loans, we were getting enough margin. So currently, NIM is at 11.03%, which is much above, 1% higher than the guidance of 10%.

The rationale for the steady-state margin of 10% is threefold. The first being that we focus on our better credit-risk segment through credit-tested high bureau score customer, where the risk-based pricing needs to be commensurate with the same and thereby resulting in lower yield. Our play is not to be driven by spread, but the risk-adjusted return, which gets reflected in our RoA number.

Secondly, the NIM contraction is because of the rundown of the legacy book and write-off of the legacy book, because the entire write-off amount is used, especially on the legacy side, that gets adjusted in ECL and NCL and that's not getting added into revenue. So that is the major reason. Actually, in this quarter also, if you see in real sense, there is no -- sequentially also, there is no reduction in the NIM. But because of the higher write-off of the legacy book and run down, the entire amount, as per accounting standard, it gets adjusted in ECL, NCL not gets added into the revenue.

And overall if you see, the portfolio of that yield was higher, because that was agri, CV, CE, tractor, entire cash collection. Lastly, the change in the mix of the portfolio of secured to unsecured, the secured to unsecured from 45% to 55% in Q1 FY '24, now it is 52% secured and 48% unsecured. So in the medium term, while NIMs may contract marginally, but with a better risk-adjusted return, I think we will continue to deliver. We are confident of delivering NIM above 10%, and again, we are confident on the RoA guidance -- delivering RoA guidance numbers as well.

[Operator]

We will have our next question from the line of Kaitav Shah from Anand Rathi.

[Kaitav Shah, analyst]

Sir, first of all, congratulations on good set of numbers. I have a couple of questions. Number one was on the app launch, if you can explain 2 things; what is the current usage and how do you manage credit risk in your app? Can you explain a bit here?

[Abhay Bhutada, executive]

Thank you, Kaitav. So we launched our app last quarter, and we are seeing good traction on our app. See, we have been growing on app downloads steadily, and now we have downloads of more than 2,000. The rate of increase of download is growing at a rate of 1.5x on a monthly basis. This is why promoting the app organically and not doing any burn to drive the download.

We see very healthy daily active user metrics of about, let us say, 13% to 14%, which is one of the best for any lending first app. Also, our uninstall rate is less than 15%. We are continuously refining our app journey and adding more and more features to drive the engagement. The typical maturity, if you see, curve for any app is anywhere between 9 to 12 months, and we see our app is on the right track. And risk management in the app lending is based on the right customer selection. We follow a consent-based architecture and leverage consented device data through the app for better customer understanding.

If you see, we use our propriety scorecard since day 1 to risk time the customer, we are providing a risk-based pricing and multiple loan offer to the customer. We ensure that identity checks, including KYC, are done online, and we insist on Aadhaar checks also. As a risk strategy, we only focus on credit-tested customers and with a bureau score of 700 and above for entire personal loan and other loan products as well.

[Kaitav Shah, analyst]

Okay. Okay. Got it. Sir, can you talk more about the co-branding with IndusInd and how that's likely to pan out over the next 6 months? Is it like in place, not in place?

[Abhay Bhutada, executive]

So last quarter we have also received this co-brand card approval. Now the integration is under process. A few things are pending at the co-brand, which is IndusInd Bank's end in terms of IT integration and a few other things, I think we'll be able to launch this in the month of March. And this will be a complementary product or existing product basket, because this will help us to engage with the customer in the day-to-day transaction. And overall, with the increased penetration of this digital payment co-branded card, it will again help us actively participate in the payment ecosystem. So we see a sizable opportunity here in the segment which we operate.

Here also, we'll target only to the preapproved set of customers, and we can do a lot of cross-selling here once we launch this. So we'll launch in March month. We don't want to be in a hurry because the segment, again, which we are launching, the joining fee will be 0. The annual fee will be 0. There will be 2 variants to start with. So it's unique proposition, whatever we did in the past, if you see any of the products, we are not launching anything which is available in the market. If you compare with any other NBFC co-brand card, this will be much, much more beneficial if you talk about the customer-centric approach.

[Kaitav Shah, analyst]

Okay. Got it. In terms of understanding, what is the organic percentage for acquisition? I mean, in your disbursements, how much is acquired organically today and what is the target there? I got the secured and unsecured bit. Given that all your other channels have started firing or are about to launch, what is it that you see over a 2-year period?

[Abhay Bhutada, executive]

Correct. So I think over a 2-year period, 100% will be organic. Right now, that was our strategy initially to do the co-lending, and then we stopped from 15th September onboarding of the new customer. Now digital, we have done almost 3,600. On the cross-sell, on the direct side, we did almost INR 470 crores, DSA was almost INR 1,733 crores, then the remaining partnerships, so total almost we did INR 8,731 crores.

Right now if you see, overall organic is almost 80% plus, and with the guidance of 35% to 40% AUM growth instead of 58% to 60%, that's why I'm saying 2 years down the line, it will be 100% organic. But initially we tested the customer and we onboarded the customer and we have given them from short-term to medium-term and long-term loan and we have started cross-selling. So now everything is in place. We have gone digital across all the products. So we never thought we'll be able to reach 80% plus at such a short span of time.

[Kaitav Shah, analyst]

Got it. Got it. Sir, just 1 final question, with your secured book at 50%, 60%, and with our scaling now in size, does the model of sourcing you think still remain the same more for fintech, or we will see more branches coming into play?

[Abhay Bhutada, executive]

I think if you see -- see, we focus on top 100 markets, and we are increasing our market share in these markets. And the guidance is only 35% to 40% considering the low base. We believe that overall, there is enough headroom to grow there. The segment which we are targeting still, as I said, they are getting user experience, they are getting practical approach and cash flow-based lending approach like NBFC, and fair practice, 0 prepayment, and rates like a bank.

So mix of secured to unsecured is not changing drastically to call for any physical distribution change. Even on the POC side, LAP side, we've started from call center, and digitally also and including the cross-selling, we are targeting entire these products also digitally. So we don't require any additional branches unless we cross INR 50,000 crore loan book. And the current manpower also, if you see, we are one of the best in the industry in terms of productivity.

We have crossed almost INR 10 crore AUM per employee. And with this current employee base and with the current branch infrastructure, I think till INR 50,000 crore, we don't see any challenge. And as and when required, we can always grow the branches, we can grow the manpower. Step by step we will increase the branches, but I don't think -- so for next 2, 3 years, there is no need.

[Kaitav Shah, analyst]

Got it. Perfect. Just 1 final question if I may. If you can talk about the competitive intensity right now in the lending space -- consumption lending space? How is that looking post the risk weight changes?

[Abhay Bhutada, executive]

I think this is much more beneficial to Poonawalla. If you see, our leverage is 1.5x, and the capital adequacy is 38%. Very few players are offering. If you see the Slide #9, we have actually demonstrated this very well in terms of each of the parameters, either in terms of loan amount, flexibility, collateral-free loan, quick turnaround time, 100% digital process, no hidden charges, low interest rate, 0 prepayment charges, flexible tenure, and minimum document.

So it's a combination of so many parameters. So what we -- I call it as ethical lending with a unique product proportioning and customer-centric approach. So I think there is a huge opportunity for a player like us, who has a capital risk management practice, entire digital is in place, I don't see any challenge. And right now, we discussed multiple times in the investor call in the past also, we are not in a competition with any of the NBFC. As of now, we are competing with only top 3 private banks. Because in terms of distribution, technology, and in all the other parameters now, I think we are at top par with either top 3 banks or top 3 NBFCs.

But in terms of fair practice, in terms of rate of interest, in terms of unique product proportion, I think there is no competition, because it will take time to copy this business model. It requires a mindset, ethical lending mindset, to target this kind of segment. And we further get right to select in this kind of a market.

[indiscernible] capital challenges, so it's an opportunity for us. A lot of other NBFCs with a leverage of above 4x, they're reducing their unsecured loan. And despite of sale of housing, we are able to maintain 50-50 secured and unsecured. So I think whatever circular we have got from the RBI, we are welcoming all the suggestions, and whatever tightening norms are there. I think last quarter also somebody asked a similar question much, much before this RBI circular, and we said the same thing.

I think Poonawalla Fincorp will be the more beneficial as compared with any other player in the market for any tightening of the norm, because from day 1, I think we are completely aligned on all this circular, and we are following most of the norms like a bank only. So there is no impact of any of the circular till date on the Poonawalla Fincorp.

[Operator]

We will have our next question from the line of Renish from ICICI.

[Renish Bhuva, analyst]

Congrats for the good set of numbers. Just 2 questions. One, again, sorry to circling back to the RBI circular. But if we look at the RBI commentary, whether it is on the risk weight side on the NBFC lending for banks or whether it is a commentary on the unsecured loan growth side. So on these 2 observations, is there any implication on Poonawalla either in terms of higher cost of borrowing or moderation in growth?

[Abhay Bhutada, executive]

See, just now a few points I've explained to Kaitav also. RBI has shown concern around unsecured lending for consumption purposes and specifically in certain ticket sizes. See the regulator wants this to be rational and product practices to be followed.

In this backdrop, the risk weight on these asset classes were increased, and there has been tightening of credit to institutions solely focused on this segment. We have a very well-diversified product base. We don't have any large concentration. If you look at very closely, we are hardly having any leverage, and with a debt equity of 1.5%, capital adequacy of 38% against the regulatory requirement of 15%, we have a healthy portfolio mix where secure constitutes 52%, unsecured constitutes 48%, and we'll be able to maintain 50-50 as per our guidance.

So in unsecured side, we have a good balance of MSME. Unsecured does not mean which is forming largest component of our book. The impact on our capital [ adequacy ] of the higher risk weight was 220 bps for us, and we are sufficiently capitalized. So as we move, we will continue to grow across segments while exercising due caution.

And we don't see any cost of borrowing impact also, reason being we are CRISIL AAA and leverage is 1.5x, lowest in the NBFC segment. So if you see in quarter-on-quarter basis also, hardly there is 1 bps impact. Still there is a legacy borrowing left around INR 300 crore, INR 400 crore, which is at a much higher rate. So technically speaking, there is almost a decrease in the borrowing cost or flat. So we don't see any challenge there as well.

[Renish Bhuva, analyst]

Got it, sir. Got it. And secondly, I'm referring to Slide #15 of the PPT, when we have disclosed the legacy book data as on December '20. Can you just throw some light, like say, as on December '23, how much of the legacy book is still there on the balance sheet? And in terms of the 1.3%, 1.4% gross NPA, how much of debt is still coming from the legacy book?

[Abhay Bhutada, executive]

So see, basically, if you see the legacy book now, we have mentioned the AUM breakup also. So on the AUM side, DA and the legacy book, now it is only left -- see the Slide #24, discontinued, Legacy plus DA, is INR 1,822 crore, which is 8% of the total book.

Out of that, DA was the acquired book and legacy now is less than INR 200 crore. Maximum we have either written off or we have provided -- that is one. Secondly, if you see the NPA. Net NPA of the new book is just 0.23 and the remaining NPA of the legacy discontinued book is 4.88%. So on the GS3 side, on the co-lending side, partnership side, the GNPA 90-plus is 1.76%, net NPA is 0.93%.

However, we are not incurring any losses here because of the -- it is backed by FLDG. In case of new origination, the GNPA is 0.42% and net NPA is 0.23%. The new book is performing well. We've almost completed 3 years the post-acquisition.

Then if we talk about the discontinued plus this legacy and acquired book, there, GS3 is 9.04% and net NPA is 4.88%. That's why, because of this 9% of GS3, net NPA of 4.88%, you see the total comes to GS3 1.33% GNPA and net NPA 0.70%.

Otherwise, let us talk about new book which we originated, it is 0.42% and 0.23% against, we have given the credit cost guidance of anything between 0.8% to 1.2%. So because of our strong risk mechanism, risk culture in the organization, the new book is performing better than our expectation.

[Renish Bhuva, analyst]

Got it. Got it. And then just last question, you touched upon the operating leverage part, but if you can just explain us where do you see this 4% cost to assets settling at over, let's say, the next couple of years?

[Abhay Bhutada, executive]

So see, currently, it is around 4% in Q3 FY '24, which was 4.18% in the last quarter and 4.38% in Q1 of FY '24. If you see the similar period Q3 FY '23, it was almost 6.06%. This 4% also includes the ESOP cost of almost INR 22 crores -- 0.45%.

So basically, if you see, 0.45% is the ESOP cost. So already, we are at 3.5% without ESOP. So considering this, next financial year you can expect, on a yearly basis, on the OpEx to AUM, it will be less than 3.5%. And this is despite of onetime costs, so many consolidation costs, a lot of digital and the IT costs. So I think we have achieved better than our expectation.

[Operator]

We will have our next question from the line of Sameer Bhise.

[Sameer Bhise, analyst]

Just 2 quick questions. We have seen strengthening of the Board with new induction. Do you think there are any more changes possible from an executive side? And secondly, can you comment on the credit cost outlook? Yes, that's all from my side.

[Abhay Bhutada, executive]

Yes, Sameer. So on the management side, last quarter, we have inducted Executive Director, Mr. Sunil Samdani. And since we are growing, it's an ongoing process. We will recruit additional senior people as and when required, and we will strengthen our Board, who will help us sell through our next phase of growth. On the credit cost side, I think we have always guided anything between 0.8% to 1.2% on a steady state basis.

[Operator]

We will have our next question from the line of Mayuresh Joshi from William O’Neil.

[Mayuresh Joshi, analyst]

Very good set of numbers for the quarter gone by. My first question was that, as you put on Slide 27, and as you mentioned in your commentary, you've become a meaningful player in the pre-owned car market. So how do you see this part of the business growing further? And other products, specifically the digital-led product innovation that you are pointing to, how is that looking, sir?

[Abhay Bhutada, executive]

See, overall growth for us has come significantly from the gain in market share of existing all the products. But over the last 2 quarters, we have become a significant player in the product segment that we operate, like, for example, in pre-owned market also, our now share is almost 5% on an incremental disbursement basis.

Even the same share, we are in business loan and loan against property. We have crossed INR 225 crore in pre-owned on a monthly number; business loan, we have crossed more than INR 250 crore on a monthly number; loan against property, we crossed INR 350 crore. Loan against property, we operate out of 100 only at 40 branches; business loan, around out of 160, 70 branches; pre-owned car, around 60, 70 branches.

So there is still enough room available, road map clear cut we can see, we will take a major market share in the top 100 branches, and that's why we are confident that the segment which we are operating, there is a huge demand. And within 100 branches itself, we'll try to increase major market share across these 3, 4 products.

And again, on the consumer side also, now we have completed the digital transformation. You will see next 2 years, the huge transformation on the consumer finance side also because of the -- we will increase the market share there as well.

[Mayuresh Joshi, analyst]

That was very helpful, sir. Just adding on to the point on the transformation bit that you just put forth. The transformation in the past 2 years has been absolutely superb, nothing short of a miracle. Can you just explain investors in brief. I mean, I would just like to understand how did you do such a quick turnaround for such a good amount of transformation that happened?

[Abhay Bhutada, executive]

I think main is, I will say, the strategy. I think that Poonawalla Finance was a listed NBFC of the group. So we learnt most of the things there in Poonawalla Finance in the existing NBFC, all the unsecured products, personal loan, professional loan, and business loan. And post COVID, we have come out with a different skill set altogether.

We recruited -- if you see our all senior team, those who are with us, they all come from the existing Poonawalla Finance, wherein the equity was more than INR 900 crore, and we wanted to scale up at a pan-India level. And then we got this Magma opportunity. And then because of the collection infra and so many other reasons, we acquired this.

So considering that, if you see, we have very strong strategies in place. Again, unique proposition, which is a combination of the, as I said, fintech-backed NBFC. And because of this unique business model, technology, system, process, risk management, risk culture, people, and the speed of execution and the innovation and the vision of the management. These are the so many reasons I think we have never expected even at our level that we will be able to transform so quickly.

Now 80% of our total time we have given to resolve the existing consolidation, legacy issues, legacy manpower, because we acquired that entity, which was into cash collection, CV, CE, tractor, we have completely transformed. Now I think we are absolutely on the track, and you will see a fantastic growth, superior profitability, and good asset quality going further.

[Mayuresh Joshi, analyst]

Thank you for throwing light on that, and I think the numbers are showing that. Just one last question, sir, from my side. On the Digital First initiative that Poonawalla has incorporated over the last few quarters, the transformation on the digital front is yielding results. Would you like to throw some color in terms of the robotic interfaces, the STPs, and the multiple self-service channels, because I think this is 1 example that you gave where Poonawalla probably stands out compared to the rest of the NBFC banks?

[Abhay Bhutada, executive]

See, basically, if you see on all the parameters, it's a differentiated business model, and branch-lite model as well as nonconventional. So we have well defined all the risk policies, digital-led and branch-led model that differentiates from all the conventional model. And again, this model is resulting into lower operating expenses. At the same time, it is enhancing our operational efficiency also.

We have invested hugely on the web platform, on the app platform, WhatsApp platform. These are all giving results. On the technology and the innovation side, I think from day 1, we have gone digital across all products on the e side, e-NACH, e-KYC, e-disbursement, e-collection. We are using BRE since day 1. We are using algorithm-based lending, risk-based pricing. We are using data analytics is one of the best in the industry supported by AI and ML. And again, unique product proposition also. So these are helping us.

And again, if you see, again, it requires mindset. All fintechs are giving superior technology, but are they able to provide the better rate to the customer? Or are they able to leverage balance sheet properly? Are they getting lower cost of fund? So I think we are -- rather than the technology, we are getting this lower OpEx and the lower cost of fund, which is resulting into the segment which we are targeting lower credit cost, and that is the result of one of the best return on assets in the industry.

[Operator]

Ladies and gentlemen, that was the last question for today. I would now like to hand over the conference to Mr. Hiren Shah for closing comments. Over to you, sir.

[Hiren Shah, executive]

Thank you, everyone, for joining this earnings call with us. For any further queries or communication, please write to us at [e-mail]. Thank you.

[Operator]

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