Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities and Non convertible debentures of Poonawalla Fincorp Limited (PFL) to 'CRISIL AAA/Stable' from 'CRISIL AA+/Stable . The rating on commercial paper has been reaffirmed at CRISIL A1+.

 

The rating action is driven by the increased strategic importance of PFL to Cyrus Poonawalla Group, whose flagship company is Serum Institute of India Private Limited (SIIPL; rated CRISIL AAA/Stable/CRISIL A1+). This is in line with the group's focus on domestic consumption as a key theme in their growth philosophy. Post the divestment of Poonawalla Housing Finance Limited (PHFL), PFL will play a key role through which this strategy will be implemented in the areas of interest of the group i.e., consumer and MSME (micro, small and medium enterprises) financing through tech driven lending.

 

The rating action also reflects the improvement in the standalone profile of the company marked by steady scale up of the loan book with diversified product offering, healthy capitalization metrics, improving earnings profile and healthy resource profile marked by competitive cost of funds. Post-acquisition of Magma Fincorp Limited (MFL) by the Cyrus Poonawalla Group, the new management of PFL revised its product strategy, targeting good quality, credit-tested, mass-affluent retail consumers, and small businesses in semi-urban/urban locations. Consequently, the company announced its plans to discontinue some of the loan products originated by erstwhile MFL. As on December 31, 2022, the company reported an AUM (assets under management) of Rs 13,929 crore, as against Rs 11,765 crore as on March 31, 2022, and Rs 10,563 crore as on March 31, 2021. Of this, the discontinued portfolio constituted around 8.5% as on December 31, 2022, which is expected to run down in the near term. As per the business update for Q4FY23 given by the company, the AUM has increased further by 16% QoQ and 37% YoY to reach ~Rs 16,120 crore as on March 31, 2023. The total disbursements have gathered momentum in fiscal 2023 towards the new segments and registered a YoY growth of 109% (aggregate ~Rs 15,750 crores for fiscal 2023). The company has also focused on a direct digital origination strategy which contributed to ~81% of disbursements in Q4FY23 (as compared to ~24% in Q4FY22). The asset quality metrics too remain comfortable, with most of the GNPA stemming from the legacy portfolio. As per Q4FY23 business update, the GNPA and NNPA are expected to improve further to less than 1.55% and 0.85% respectively as on March 31, 2023. However, given the change in the portfolio strategy, the loan book lacks seasoning and ability to scale up portfolio whilst maintaining asset quality metrics will remain a key monitorable. CRISIL Ratings also notes that the company has improved its resource profile and funding costs as evidenced by borrowings from the market/ banks at competitive interest rates, post-acquisition by the Cyrus Poonawalla Group.

 

The rating action factors in the stronger support expected from the Cyrus Poonawalla Group demonstrated by articulation of its intention to (i) to maintain majority shareholding in PFL, (ii) provide equity capital to support growth and manage risk, if and when required and (iii) maintain strategic linkages and management oversight so that, among others, PFL conducts its business in a manner such that it honours its stakeholder obligations in a timely manner.

 

CRISIL Ratings believes that PFL will remain of high strategic importance to Cyrus Poonawalla Group, given the majority shareholding in PFL, through Rising Sun Holdings Private Limited (RSHPL); a special purpose vehicle owned and controlled by Mr. Adar Poonawalla. CRISIL Ratings also notes that there is a strong management oversight for the company to conduct its business, with group having prominence on board and Mr. Adar Poonawalla being the chairman of the board, thereby ensuring active involvement in the group-level strategies. Additionally, the brand sharing further enhances the expectation of support to the financial services entity if required.

 

On December 14, 2022, the Board of PFL approved the complete stake sale in Poonawalla Housing Finance Ltd (PHFL) to Perseus SG Pte Limited (an entity affiliated with TPG Global, LLC). The transaction will involve a sale of 24,98,21,117 equity shares held by PFL in PHFL at a valuation of Rs 3,900 crore. Post the consummation of the transaction, TPG Global will hold majority stake in PHFL. The entire proceeds to be received by PFL from the stake sale are expected to be retained by PFL to support its business growth.

Analytical Approach

Currently, CRISIL Ratings evaluates the consolidated credit risk profile of PFL (including subsidiary PHFL) as they have common directors, governance oversight and were expected to have synergistic operations, and be strategically important to the Group’s business growth. Further, the ratings factor in the expectation of need based timely support to PFL and PHFL from Cyrus Poonawalla Group, whose flagship company is Serum Institute of India Private Limited (SIIPL, rated; CRISIL AAA/Stable/CRISIL A1+), given the majority ownership and high strategic importance, the shared brand name and managerial control. Till the transaction, involving stake sale of PFL in PHFL, consummates, CRISIL Ratings will continue to combine the business and financial risk profiles of PFL and PHFL. Once the transaction is completed, the analytical approach would change to the standalone credit risk profile of PFL along with the expectation of support from Cyrus Poonawalla group.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

* Expectation of need based timely financial support from Cyrus Poonawalla Group, whose flagship entity is Serum Institute of India Private Limited

RSHPL is a flagship investment holding company with 99% equity stake held by Mr. Adar Poonawalla, CEO of SIIPL and Chairman and Managing Director of Serum Life Sciences Pvt Ltd (SLS). SIIPL, the flagship company of Poonawalla Group, invested Rs 5,469 crore in RSHPL through compulsorily convertible cumulative preference shares. SIIPL itself is entirely held by Dr. Cyrus S Poonawalla and family members both individually and through trusts whereas SLS is held by RSHPL (33%) and SIIPL (67%). In May 2021, RSHPL infused Rs 3,206 crore as equity in erstwhile Magma Fincorp Limited. As on March 31, 2023, RSHPL holds 62.14% stake in Poonawalla Fincorp Limited and is classified as the sole promoter of PFL. The transaction also resulted in rebranding of Magma Fincorp Limited to Poonawalla Fincorp Limited.

 

The group’s flagship company, SIIPL is among the largest vaccine manufacturers globally by number of doses produced. Its vaccine portfolio includes vaccines for DTP, MMR, Polio, Hib, r-Hepatitis B, Rabies and Rotavirus. It also manufactures Covishield vaccine against Covid-19 in India. CRISIL Ratings notes that over the past 4-5 years, SIIPL has been funding investments in subsidiaries and other companies of the Poonawalla group. SIIPL’s investments are well diversified across sectors including financial services, green energy, real estate, aviation, pharmaceutical packaging, etc. In May 2021, Rising Sun Holdings, owned and controlled by Mr. Adar Poonawalla, funded the acquisition of erstwhile Magma Fincorp Limited.

 

The ratings factor in the strong support by the Cyrus Poonawalla Group demonstrated by articulation of its intention to (i) to maintain majority shareholding in PFL, (ii) maintain strategic linkages and management oversight so that, among others, PFL conducts its business in a manner such that it honours its stakeholder obligations in a timely manner and (iii) provide equity capital to support growth and manage risk, if and when required.

 

CRISIL Ratings believes that PFL will remain of high strategic importance to Cyrus Poonawalla Group, given the majority shareholding in PFL, through RSHPL; a special purpose vehicle owned and controlled by Mr. Adar Poonawalla. CRISIL Ratings also notes that there is a strong management oversight for the company to conduct its business, with group having prominence on board and Mr. Adar Poonawalla being the chairman of the board, thereby ensuring active involvement in the group-level strategies. Additionally, the brand sharing further enhances the expectation of support to the financial services entity if required.

 

* Enhanced financial flexibility with capital infusion, resulting in healthy capitalization and low leverage

The sizeable equity infusion led to a significant increase in the company’s standalone networth to Rs. 6212 crore as on December 31, 2022, as against Rs. 1942 crore as on March 31, 2021. Consequently, the adjusted gearing also dropped significantly to 1.5 times as on December 31, 2022, as against 4.3 times as on March 31, 2021.

 

On December 14, 2022, the board of Poonawalla Fincorp Limited (PFL) approved the complete stake sale in Poonawalla Housing Finance Ltd (PHFL) to Perseus SG Pte Limited (an entity affiliated with TPG Global, LLC). The transaction will involve a sale of 24,98,21,117 equity shares held by PFL in PHFL. Post the consummation of the transaction, TPG Global will hold majority stake in PHFL. The transaction is still in process and would be consummated post receipt of necessary regulatory approvals. As part of the transaction, PFL will receive consideration at a valuation of Rs 3900 crore post the completion of the sale of PHFL, which will further boost the capital position of the company. At a consolidated level, the group reported a networth of Rs 6640 crores with adjusted gearing at 2.1 times as on December 31, 2022. Going forward, as the company scales up its operations, the gearing metrics are expected to increase. Nevertheless, given the large capital expected through the sale of PHFL, the gearing metrics of the company are expected to remain comfortable in the medium term. The gearing metrics are not expected to go beyond 4 times on steady state basis.

 

* Ongoing improvement in resource profile and funding costs

With the change in ownership to the Cyrus Poonawalla group, the company has benefited through access to diversified funding mix covering capital markets and bank loans at lower funding costs. Prior to acquisition, erstwhile Magma Fincorp Limited had higher reliance on public sector bank (PSB) loans and off-book funding and hence, relatively higher cost of funding. With the change in management, the company is broad basing their funding sources including access to capital markets in addition to diversified bank funding by introducing private sector banks, foreign banks and more PSBs. PFL has been now raising money through CPs (commercial paper) on regular basis. PFL also raised NCD (non-convertible debentures) from a diversified set of investors, opening access to the bond market. The company has also been able to reprice their existing loans to lower rates thereby improving gross spreads. Since April 2022 till January 2023, PFL has raised over Rs 12000 crores of funds from diversified sources with weighted average cost of funds under 6.5%. With the equity infusion, and fresh bank sanctions, the company has a healthy liquidity position.

 

* Experienced senior management

The company is governed by board of directors, with Mr. Adar Poonawalla being the Chairman of the board. The board is supported by a revamped strong senior management with relevant and significant experience in retail financing, having previously worked at reputed banks and NBFCs (non-bank financial companies). The senior management team is led by Mr. Abhay Bhutada, Managing Director, PFL, who has over 15 years of diversified experience in the commercial and retail lending domain. He was the Founder, Chairman and Managing Director of TAB Capital Ltd. After creating a digital lending venture of his own and running it successfully for 3 years, he was instrumental in setting up the lending business for Poonawalla Group in the form of Poonawalla Finance Pvt Ltd (PFPL) in the capacity of MD & CEO. After building a successful digital lending business for 2 years in PFPL; the group acquired Magma Fincorp Ltd (now PFL) in May 2021. Mr. Bhutada led a complete revamp of business strategy at PFL. He has focused on implementing a technology led, digital lending at PFL resulting into ramp up in PFL's business over the last 2 years. The digital first origination programme contributed to ~81% of disbursements in Q4FY23 (as compared to ~24% in Q4FY22). The company has strengthened its leadership across functions by onboarding highly experienced key personnel. These senior management personnel have been in the industry for more than two decades each and have extensive experience in their functional areas.

 

Weaknesses

* Comfortable asset quality metrics; Nevertheless, new loan book lacks seasoning

PFL reported gross non-performing assets (GNPA) of 1.7% as on December 31, 2022, as compared to 3.3% as on March 31, 2022 (4.3% as on March 31, 2021) showing an improving trend. The reduction in GNPA, was primarily on account of adopting a more conservative write-off policy, as part of the company’s new strategy and partially on account of improvement in the economic activity post the second wave of the pandemic resulting in consistent improvement in collection efficiency, wherein, the company has been reporting consistent collections across months in the range of 96%-100%. As per Q4FY23 business update, the GNPA and NNPA are expected to improve further to less than 1.55% and 0.85% respectively as on March 31, 2023. Even at a consolidated level, the GNPA showed an improvement to 1.5% as on December 31, 2022, as compared to 2.7% as on March 31, 2022.

 

The improvement was also on account of low NPAs being reported in the new product segments, wherein, the portfolio remained unseasoned. CRISIL Ratings notes that the new portfolio was the primary growth driver for the company with more than 80% of overall disbursements being towards the new product segments.

 

The new management has realigned the product mix of the company with greater focus on better quality, credit-tested, mass-affluent customers in urban and semi-urban geographies, along with discontinuation of some products of erstwhile Magma Fincorp Limited. The product strategy is primarily aimed at minimizing the credit costs in future and focusing on products with digital collections. The company has added digital personal loans, digital loans to professionals, digital business loans, digital consumer loans, loan against property, medical equipment loans and supply chain finance to its product basket and has continued to disburse loans for pre-owned cars (non-commercial). The company is also planning to bring in new products aimed at its target segment of consumer and small businesses. The ability of the company to grow its portfolio, while maintaining comfortable asset quality metrics will remain a key monitorable.

 

Additionally, the company also has a modest restructured portfolio of Rs 172 crore or 1.2% of the total AUM as on December 31, 2022.

 

However, ability to scale up portfolio whilst maintaining asset quality metrics is a key monitorable.

 

* Modest, albeit improving, earnings profile

Post the change in ownership to the Cyrus Poonawalla group, the company has benefitted through access to diversified funding mix at lower funding costs, wherein the company has been able to substantially reduce the cost of borrowing. This, coupled with the revised product focus towards consumer and MSME finance, which carries a higher yield, resulted in the improvement in net-interest margins (NIMs), with the same increasing to 9.3% (annualized) in December 2022, from 7.9% in March 2021.

 

Consequently, the company saw an improvement in its overall earnings profile, wherein, the company has been able to report return on managed assets (RoMA) of 3.6% for the nine months ended December 31, 2022. This is despite the initial investments towards technology and employee benefit (including ESOP charge), which was in-line with its new strategy to become a digitally led consumer and MSME finance entity.

 

The improvement in the earnings profile was also supported by the reducing credit costs, as the company had done aggressive provisioning and write-offs for majority of its legacy book in March 2021, thereby resulting in provision reversals and write-backs in the subsequent years.

 

While the company has shown improvement in its earnings profile, the ability of the company to manage its credit costs, considering new origination, remains to be seen and will remain a key monitorable.

 

* Revised product focus to de-risk asset profile; Performance, a monitorable

The erstwhile Magma Group was primarily into vehicle and housing finance business with portfolio diversified across various product segments, such as commercial vehicle finance (CV), construction equipment (CE), car loans, tractor financing, secured MSME loans and home loans. Post-acquisition, the new management revised its product strategy, targeting good quality, credit-tested, mass-affluent retail consumers, and small businesses in semi-urban/urban locations. Consequently, the company announced its plans to discontinue some of the loan products in their previous form like CV, CE, tractors, and new cars segment. The company had an AUM of Rs 13,929 crore as on December 31, 2022, as against Rs 11,765 crore as on March 31, 2022, and Rs 10,563 crore as on March 31, 2021. Of this, the discontinued portfolio constituted around 8.5% as on December 31, 2022, which is expected to run down in the near term. At a consolidated level, the AUM stood at Rs 19,553 crores as on December 31, 2022, compared to Rs 16,579 crores as on March 31, 2022.

 

As per the new business strategy, the company plans to achieve strong growth by focusing on products consisting of a mix of secured (pre-owned car loans and loan against property) and unsecured products (personal loans, business loans, loans to professionals and consumer loans). The total disbursements have gathered momentum in fiscal 2023 towards the new segments and registered a YoY growth of 109% to ~Rs 15,750 crores for fiscal 2023. The company has also focused on a direct digital origination strategy which contributed to ~81% of disbursements in Q4FY23 (as compared to ~24% in Q4FY22). As part of its new strategy, for its unsecured segment, the company has now moved towards a branch light model and is investing in technology to make the entire process, from origination to collection, digitally enabled. For the secured segment, the company will rationalize its branches as per the new product strategy. Nevertheless, the business performance in these segments as they scale up will remain a key monitorable.

Liquidity: Superior

Liquidity remains comfortable with company having cash and cash equivalents and unutilized CC/WCDL lines of Rs 1408 crore, as on December 31, 2022. Additionally, the company had undrawn term loans of Rs 1760 crore. Against this, the company had repayments (including interest and DA/PTC payouts) of Rs 1392 crore from January 2023-June 2023.  As on December 31, 2022, the ALM (asset liability maturity) profile of the company remained strong with positive cumulative gaps across all the buckets.

Outlook: Stable

The rating factors in the expectation of need based timely support from Cyrus Poonawalla Group, whose flagship company is Serum Institute of India Private Limited (SIIPL; rated CRISIL AAA/Stable/CRISIL A1+’), given the high strategic importance, the shared brand name and management control.

Rating Sensitivity factors

Downward Factors:

• Decline in support from, or strategic importance to, Cyrus Poonawalla Group or material change in the shareholding in PFL or in CRISIL Ratings’ view any downward revision in the credit profile of Cyrus Poonawalla Group

• Any sustained deterioration in asset quality and earnings profile of the company
• Significant jump in gearing beyond 5 times on a sustained basis while scaling up the portfolio

About Poonawalla Fincorp Limited

Incorporated as Magma Leasing Ltd, the company commenced its operations in 1989. The company was renamed to Magma Fincorp Limited in 2008 and Poonawalla Fincorp Limited in 2021 post the acquisition by Rising Sun Holdings Private Limited (an entity owned and controlled by Mr. Adar Poonawalla). The company has a diversified product offering in consumer and MSME finance including personal loans, loans to professionals, business loans, consumer loans, loan against property, pre-owned car loans, supply chain finance, machinery, and medical equipment loans.

Key Financial Indicators (Standalone):

Particulars as on,	Unit	Dec-22*	Mar-22	Mar-21
Total Assets	Rs Cr.	15,127	12,810	10,342
Total income	Rs Cr.	1,429	1,567	1,877
Profit after tax	Rs Cr.	404	293	(578)
GNPA$$	%	1.7	3.3	4.3
NNPA$$	%	0.9	1.3	1.3
Adjusted Gearing$	Times	1.5	1.3	4.3
Return on total managed assets #	%	3.6	2.4	(4.7)
Return on Assets##	%	3.9	2.5	(5.0)

Note: All figures are as per IndAS

*Annualised

# Profit after tax by total assets + securitisation (Assignment)

## Profit after tax by average total assets

$ On-book borrowings plus securitisation divided by reported networth

$$ Company aligned with revised RBI IRACP norms with effect from Sept 30, 2022

 

Key financial indicators (Consolidated):

Particulars as on,	Unit	Dec-22*	Mar-22	Mar-21
Total Assets	Rs Cr.	19,959	16,443	13,212
Total income	Rs Cr.	1,943	2,041	2,352
Profit after tax	Rs Cr.	486	375	(559)
GNPA$$	%	1.5	2.7	3.7
Adjusted Gearing$	Times	2.1	1.9	5.5
Return on total managed assets #	%	3.3	2.3	(3.5)

Note: All figures are as per IndAS

*Annualised

# Profit after tax by total assets + securitisation (Assignment)

$ On-book borrowings plus securitisation divided by reported networth

$$ Company aligned with RBI IRACP norms with effect from Sept 30, 2022

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs. Crs)	Complexity Level	Rating Assigned with Outlook
INE511C07755	Non-convertible debentures	20-Jul-22	7.6%	19-Jul-24	250	Simple	CRISIL AAA/Stable
INE511C07763	Non-convertible debentures	23-Sep-22	Zero Coupon	23-Oct-24	50	Simple	CRISIL AAA/Stable
NA	Commercial Paper	NA	NA	7-365 days	1500	Simple	CRISIL A1+
NA	Non-convertible debentures*	NA	NA	NA	2700	Simple	CRISIL AAA/Stable
NA	Proposed long-term bank facilities	NA	NA	NA	2000	Simple	CRISIL AAA/Stable

*Yet to be issued