Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank facilities and debt instruments of Poonawalla Fincorp Limited (PFL).

 

CRISIL Ratings has also withdrawn its rating on non convertible debentures of Rs.250 crore on redemption and at company’s request. CRISIL Ratings has received requisite documentation for withdrawal. The withdrawal is in line with CRISIL Ratings’ policy for withdrawal of ratings.

 

The ratings continue to be driven by the strategic importance to, and expectation of support from, Rising Sun Holdings Private Limited (RSHPL; which holds 62.09% stake in PFL, as on June 30, 2024), a special purpose vehicle (SPV) of the Cyrus Poonawalla promoter group owned and controlled by Mr Adar Poonawalla. The promoter’s flagship company is Serum Institute of India Private Limited (SIIPL; rated CRISIL AAA/Stable/CRISIL A1+). SIIPL had infused about Rs 6,663 crore in RSHPL in the form of compulsorily convertible cumulative preference shares (CCCPS) upto fiscal 2023. This capital was used to infuse funds in various businesses of the group including PFL, wherein RSHPL invested Rs 3,206 crore. The foray into financial services business through PFL is in line with the group's focus on domestic consumption as a key theme in their growth philosophy. 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 also factors in the expectation of continued support demonstrated by articulation of RSHPL’s intention to (i) maintain majority shareholding in PFL and retain management control, (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 honors its stakeholder obligations in a timely manner.

 

CRISIL Ratings believes that PFL will remain of high strategic importance to RSHPL, given the majority shareholding in PFL. CRISIL Ratings also notes that there is a strong management oversight for the company to conduct its business, with Mr. Adar Poonawalla being the chairman of the board, thereby ensuring active involvement in the group-level strategies. Additionally, PFL’s shared brand name with the promoter further enhances the expectation of support to the financial services entity if required.

 

The ratings also factor in the steady scale up of the loan book with diversified product offerings, healthy capitalization, diversified resource profile with competitive cost of borrowings and experienced senior management. CRISIL Ratings also takes note of the recent management changes at PFL with Mr. Arvind Kapil stepping in as the new Managing Director and CEO. Several other industry experts have also assumed leadership roles within the company. The new management team brings extensive experience to the table. The strengths are partially offset by the lack of seasoning of the recent portfolio and demonstration of sustainability of the earnings profile.

Analytical Approach

CRISIL ratings has evaluated the standalone credit risk profile of PFL. Further, the ratings factor in the continued expectation of need based timely support to PFL from RSHPL, a SPV of the Cyrus Poonawalla promoter group, owned and controlled by Mr Adar Poonawalla, given the majority ownership and high strategic importance, the shared brand name with promoter and managerial control. The promoter’s flagship company, SIIPL, infused about Rs 6,663 crore in RSHPL in the form of CCCPS till fiscal 2023. This capital was used to infuse funds in various businesses of the group including PFL, wherein RSHPL invested Rs 3,206 crore.

Key Rating Drivers & Detailed Description

Strengths:

Expectation of need based timely financial support from RSHPL

RSHPL is a key investment holding company with 99.99% equity stake held by Mr. Adar Poonawalla, CEO of SIIPL and Chairman and Managing Director of Serum Life Sciences Pvt Ltd (SLS). SIIPL invested Rs 6,663 crore in RSHPL through CCCPS till fiscal 2023. 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. The transaction also resulted in rebranding of Magma Fincorp Limited to PFL. As on June 30, 2024, RSHPL holds 62.09% stake in PFL.

 

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.

 

The ratings continues to factor in the expectation of support demonstrated by articulation of RSHPL’s intention to (i) maintain majority shareholding in PFL and retain management control, (ii) maintain strategic linkages and management oversight so that, among others, PFL conducts its business in a manner such that it honors 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 RSHPL, a SPV owned and controlled by Mr. Adar Poonawalla, given the majority shareholding in PFL. CRISIL Ratings also notes that there is a strong management oversight for the company to conduct its business, with Mr. Adar Poonawalla being the chairman of the board, thereby ensuring active involvement in the group-level strategies. Additionally, PFL’s shared brand name with the promoter further enhances the expectation of support to the financial services entity if required.

 

Healthy capitalization

The sizeable equity infusion and sale of Poonawalla Housing Finance Limited led to a significant increase in the company’s networth and stood at Rs. 8,370 as on June 30, 2024 as against Rs. 8,116 crore as on March 31, 2024, and Rs. 6,425 crore as on March 31, 2023. Consequently, the gearing is 2.1 times as on June 30, 2024 as against 1.9 times as on March 31, 2024 and 1.7 times as on March 31, 2023. The capitalization metrics is expected to continue to remain healthy driven by accruals and gearing metrics are not expected to go beyond 5 times on a steady state basis.

 

Diversified resource profile and competitive funding costs

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 at relatively higher cost. 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 now increased raising money through CPs (commercial paper) as well. PFL also raised NCD (non-convertible debentures) from a diversified set of investors, opening access to the bond market. During fiscal 2024, PFL has raised ~Rs 33,380 crore (Gross) of funds from diversified sources with weighted average cost of borrowings of 7.74%.

 

Experienced senior management

The company is governed by experienced 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 now led by Mr. Arvind Kapil taking over as the new Managing Director & CEO. The company has also further 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; new loan book, however, lacks seasoning

PFL reported gross non-performing assets (GNPA) of 0.67% as on June 30, 2024 as against 1.16% as on March 31, 2024, and 1.44% as on March 31, 2023. 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 consistent improvement in collection efficiency, wherein, the company has been reporting consistent collections across months in the range of 96%-100%. The improvement was also on account of low NPAs being reported given the portfolio remained unseasoned.

 

The company has realigned the product mix with greater focus on better quality, credit-tested, 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 plans on focusing on newer segments such as consumer durable loans, PL Prime loans, shopkeeper loans and used commercial vehicle financing over the medium term. Given limited portfolio seasoning, performance of asset quality across asset classes including newer segments will remain a key monitorable.

 

Sustainability of earning profile to be monitored

The company saw an improvement in its overall earnings profile with return on average managed assets (RoMA) of 4.3% (annualized) in the quarter ended June 2024 and 4.6% (excluding one-offs) in fiscal 2024 as against 3.7% (excluding one-offs) in fiscal 2023. 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 recoveries in the subsequent years.

 

PFL reported healthy AUM growth of 55% in fiscal 2024 to reach at Rs 25,003 crore as on March 31, 2024. It grew further at an annualized growth rate of 32% to reach Rs 26,972 crore as on June 30, 2024. Amidst growing loan book, with the change in product strategy and overall strengthening of risk management systems, investments towards technology and other operating expenses are expected to increase in near to medium term. This is expected to have a bearing on the company’s profitability. Thus, while the company has shown improvement in its earnings profile, the ability of the company to manage its operating expenses and credit costs remains to be seen and will remain a key monitorable.

Liquidity: Superior

Liquidity remains comfortable, as on June 30, 2024, the company had cash and cash equivalents and unutilized CC/WCDL lines of Rs 5,192 crore. Against this, the company had repayments (including interest) of Rs 4,870 crore for the next 3 months. As on June 30, 2024, 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 RSHPL, a SPV of the Cyrus Poonawalla promoter group, whose flagship company is SIIPL.

Rating Sensitivity Factors

Downward Factors:

• Decline in support from, or strategic importance to, RSHPL (a special purpose vehicle of the Cyrus Poonawalla group, whose flagship company is SIIPL) or material change in shareholding in PFL, or in CRISIL Ratings’ view any downward revision in the credit profile of RSHPL.
• 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. The company also plans to foray into consumer durable loans, PL prime Loans, shopkeeper loans and used commercial vehicles financing in near term.

Key Financial Indicators (Standalone):

Particulars as on,	Unit	Jun-24	Mar-24	Mar-23	Mar-22
Total Assets	Rs Cr.	26,328	24,036	18,022	12,810
Total income	Rs Cr.	996	3,152	2,010	1,567
Profit after tax	Rs Cr.	292	2,056	585	293
GNPA	%	0.7	1.2	1.4	3.3
NNPA	%	0.3	0.6	0.8	1.3
Gearing	Times	2.1	1.9	1.7	1.2
Return on average managed assets#	%	4.3*	9.2^	3.7	2.4
Return on Assets##	%	4.6*	9.8^	3.8	2.5

*Annualised

^Includes exception items

#Profit after tax by average assets + managed book

##Profit after tax by average total assets

Any other information

Note on perpetual debt instrument

The rating on perpetual bonds remains sensitive to the capital buffer maintained by PFL, over regulatory capital requirements, and rating transition on these instruments could potentially be sharper than those on other debt instruments and bank facilities.