Transcript of conference call for Q1 result of FY25

POONAWALLA FINCORP LIMITED

"Q1 FY2024-25 RESULTS CONFERENCE CALL"

JULY 22, 2024

MANAGEMENT: MR. ARVIND KAPIL - MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER

MR. SUNIL SAMDANI - EXECUTIVE DIRECTOR

MR. HIREN SHAH - HEAD- STRATEGY, BIU AND INVESTOR RELATIONS

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Poonawalla Fincorp Limited

July 22, 2024

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,
• 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 enable us to capitalize on opportunities to drive growth and enhance our market position.

To discuss strategy and way forward and the quarterly financial performance, I have with me our Managing Director and CEO - Mr. Arvind Kapil, our Executive Director - Mr. Sunil Samdani, 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 y'all. Over to you, Sir.

Arvind Kapil:Thanks, Hiren. A very Good morning, everyone, and thank you for joining us on the Earnings Call.

My name is Arvind Kapil, I am 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.

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Poonawalla Fincorp Limited

July 22, 2024

Having said that, first and foremost, I would like to thank, 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 thank them, first of all, for the invaluable experience and growth I have achieved during my tenure with them. I have seen the bank become a very strong institution. It was a great experience wherein I have got the opportunity to launch various industry-first digital and physical products and 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 is also a good time to thank the Board of Poonawalla Fincorp and Mr. Adar Poonawalla for the exciting opportunity I have here.

My endeavour 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 in my limited view, one of the best guys in the industry on Credit, Collection and 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 two Chief Business Officers (CBOs), Vikas Pandey and Veeraraghavan lyer who come in with over 22 to 25 years of experience in retail lending across products, businesses, geographies, cultures, partnerships 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 that 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 you get HR heads who have an ability for AI-first.

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

Above mentioned new management team members have managed various economic 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.

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Poonawalla Fincorp Limited

July 22, 2024

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 am 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 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 am confident that we will build Poonawalla franchise to greater 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 guidance on overall AUMs, probably for the year and for a 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 two minutes here before I step into the precise strategies on the macro environment and correlate it 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 it 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 to ₹20 lakh crores mark, on a very progressive growth engine there as a country. While it is difficult to make short-term predictions, I think there is 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 is still significant headroom for further growth, and this I am talking as an industry.

Specifically, for Poonawalla Fincorp, I think the market share, if we put in the right focus of a strong foundation from now on over the next 1 - 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.

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Poonawalla Fincorp Limited

July 22, 2024

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 to 250 million. 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, 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 to 10 years.

The last 40 days since I have joined, I am in the process of taking over and realized that for scalability, a few things that you immediately pick up when you join. First and foremost, I see the need to strengthen our collection infrastructure and framework in line with our long-term strategy. Because if we have got to run and start talking in the range of around 5x 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 are talking about almost doubling those product range, we are talking about a fairly large company and a long-term perspective.

For the first two quarters, we believe it's important to consolidate the existing businesses by reviewing in-depth processes, risk management, governance and 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. Hence, we are closely monitoring the unseasoned STPL portfolio, which was launched in the quarter 4 of the previous financial year. Going forward, this portfolio will be calibrated, both from 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 is important we are absolutely certain what product mix we are going to build our foundation on.

The team and I are committed to transparency and hence, we have enhanced our disclosures with respect to asset quality and liabilities in our presentations that we have uploaded.

From now on, this one I think is very important for me, and I am reiterating i.e. 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 what I can do with investments, and set foundation;, it shouldn't be too complex to figure out that probably two years later, three years later, what is the sustainable profits that are going to roll in, what is the sustainable distribution investments that are 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 have just joined the quarter already past, but I think we are estimating around 30% to 35% year-on-year growth because the product mix is very important to kind of set the stage right

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Poonawalla Fincorp Limited

July 22, 2024

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 are not built over a day. They are built step-by-step. They are built process-by-process with solid risk management, with the mix of right products, and we want to achieve 5 to 6x of AUM in 5 to 6 years. We are ambitious on this figure, and we are determined to make it happen.

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 projection on 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 mean of profitability from the third year onwards after we set the foundation in the first one and a half 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.

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. 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 strengths. As part of this business model, this gives us huge visibility since remember, it's a point-of-sale business. It is also known industry-wide to create a strong high-yieldingcross-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 have 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, we are keen on 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 at 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.

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Poonawalla Fincorp Limited

July 22, 2024

Now remember, STPL is not prime personal loans, the way I understand it. What we want to strengthen is, can I get the corporate, top 100 to 200 corporates in India? Can we be the preferred choice of these customers? Can I have this quality of families walk into Poonawalla Fincorp and we can become a preferred choice. We have our 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 are building 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 will gradually expand. As a matter of 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 starts 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 businesses, adding to the existing 4 to 5 key businesses, will create a stronger franchise within the next 6 to 8 quarters.

I have already covered the macro indicators. But in India, we believe there is 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, which will add a substantial amount of advantages on the efficiency side. I may be 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 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 be. 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

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Poonawalla Fincorp Limited

July 22, 2024

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 tele-callers to build efficiencies, having segmented approach for a different set of customer segments, AI-powered natural language processors, NLP for customer interactions, omni-channel communication stack. The reason I am specifying all this is because there is 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 real-time on insights, one of the very important areas we will 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 and integrate with partners BIU-based analytics deployment, ability to keep elements of the stack modular, which we all probably know and so rapid changes can be done and it's more agile. Finally, investments in the new management team, which I have already specified is because they are the seasoned people, having seen different economic cycles.

Finally, to quick summarize.

In the first year, we will build 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 we will focus on 35% to 40% for the next 5 years, starting second year. Third year projections of profitability will be closer to an arithmetic mean mirroring close to AUM growth. We aspire to scale AUM by 5x to 6x in 5 to 6 years on a business model, which is, again, predictable, sustainable and of course, productive, our fundamental guiding philosophy for all businesses.

It is very important that these one and a half years investments are upfronted to lay a foundation for us to be a long-term player from now on. All our perspectives will be long term from now on, on the basis of, predictability, sustainability and productivity. This will help us build a retail franchise. Again, I will specify step-by-step,process-by-process with solid risk management and mix of the right products. All these 4 points are extremely important and not just mere words.

I am 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 Q1FY2024-25. Thank you.

Sunil Samdani:Thank you, Arvind, and Good morning, everyone. Let me take you through the quarterly financial and operational highlights.

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Poonawalla Fincorp Limited

July 22, 2024

• The assets under management stood at ₹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 ₹676 crores for Q1FY25, 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 ₹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 13bps quarter-on-quarter.
• Despite the high interest rate scenario, we have 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 ₹5,200 crores as of 30th of June 2024.
• The total borrowings at the end of the quarter was ₹17,121 crores, of 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 75bps year-on-year and 49bps quarter-on-quarter, while net NPA is at 0.32%, down 44bps year-on-year and 27bps quarter-on-quarter. However, it is pertinent to note that we have stopped co-lending which also include some elements of FLDG commitments during Q4FY24 and we 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 ₹390 crores. The profit after tax at ₹292 crores was up 46% year-on-year, however, down 12% quarter-on-quarter, mainly on account of onetime tax benefit of ₹41 crores, which we had got in Q4FY24.
• Our capital adequacy continues to be well above the regulatory requirements with CRAR standing at 31.57%, of which Tier 1 capital is at 30.09%.

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Poonawalla Fincorp Limited

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