How India’s vaccine king injected new life into Poonawalla Fincorp

Even if you don’t follow business and finance, and do not read any of the leading pink papers, chances are you have heard of the husband-and-wife duo Adar and Natasha Poonawalla.

The Poonawallas are known in popular discourse more for their race horses, opulent lifestyles, fashion statement, television appearances and for being on the Page 3 circuit. But it was only in 2020, in the wake of the Covid-19 pandemic that people at large found out that they also owned the Serum Institute of India (SII).

Pune-based SII, part of the Cyrus Poonawalla Group, is the world’s biggest vaccine manufacturing company. It made and supplied the AstraZeneca vaccine ‘Covishield’ to more than a billion Indians and millions across the world.

What literally followed were supernormal profits and a massive capacity expansion at the SII, with the company looking to set up facilities outside India.

But that is not why we are talking about them.

In February 2021, Adar Poonawalla acquired a 60% controlling stake in a non-banking finance company called Magma Fincorp. The Rs 3,206 crore deal that not only gave him control over the private lender but also over its affordable housing and insurance verticals.

The new deal

Poonawalla bought the stake through an investment firm called Rising Sun Holdings Pvt Ltd from Sanjay Chamria, the vice-chairman and managing director at Magma Fincorp and its chairman Mayank Poddar.

Previously, in June 2018, private equity firm KKR & Co had exited Magma Fincorp. Other large PE investors in the company included True North, ChrysCapital and International Finance Corporation, an arm of the World Bank Group.

As part of the deal, Magma Fincorp raised Rs 3,456 crore in total from the sale of 45.8 crore preference shares to RSHPL and 3.57 crore shares to Poddar and Chamria. Following the deal, the existing financial services business of Poonawalla Finance was consolidated with Magma Fincorp, and the latter was rebranded as Poonawalla Fincorp.

Poonawalla bought the stake at Rs 70 per share. A little over a year and a half on, Poonawalla Fincorp is trading at Rs 302 per share—a rise of 331% in absolute terms.

Clearly, India’s vaccine king has hit another gold mine.

The transformation

This stupendous rise in the price of the counter has not been without good reason. For the year through March 2022, the NBFC swung to a profit after tax of Rs 375 crore from a loss of Rs 559 crore. Disbursements surged to Rs 9,494 crore in FY22 from Rs 3,680 crore in FY21 and Rs 6,428 crore in the pre-pandemic year of FY20.

Last month, the NBFC reported a 118% year-on-year rise in net profit for the first quarter of the current fiscal year. At Rs 141 crore, this rise was due to improvement in Net Interest Margin by 155 basis points, the company said.

The non-deposit-taking NBFC said it focused on consumer and MSME finance, and reported total assets under management of Rs 17,600 crore. This is a 6.5% growth from the previous quarter.

Disbursements under the company’s Direct, Digital and Partnership model (DPP) almost doubled from 17.5% in Q4 FY22 to 34.1% of the total disbursement in the first quarter of FY23.

The NBFC has also worked on its product portfolio. Poonawalla Fincorp today offers a diverse product range. This includes personal loans, pre-owned car finance, loans against property, professional loans, small business loans, loans for medical equipment, and newly-launched loans for machinery and supply chain finance products. Further, it will launch EMI cards, credit cards, consumer finance, and merchant cash advances over a 12- to 18-month period.

The focus on retail segments of consumer and MSME finance has continued and the company has consolidated its leadership in pre-owned car finance and loans to professionals.

Also, quarterly disbursements across product lines of business loans, personal loans, loan to professionals, pre-owned cars and loan against property were the highest in Q1 FY23.

This, coupled with consistent increase in lending via the direct, digital and partnership (DDP) model of origination, has further strengthened and diversified the company’s distribution.

This performance has left analysts impressed. A Mumbai-based brokerage, for instance, thinks the stock can go up to Rs 400 and expects to company to grow its AUM at a compound annual rate of 36% over FY22 to FY25.

Credit rating firms CRISIL and CARE Ratings are also optimistic about the NBFC. CRISIL said in a report late last year that, prior to the acquisition, the erstwhile Magma Fincorp had higher reliance on PSU bank loans and off-book funding and hence, had a high cost of funding.

With the change in management, the group is broad-basing its funding sources including access to capital markets in addition to diversified bank funding by introducing private sector and foreign banks, CRISIL said. It also said that the NBFC repriced its existing loans to lower rates and had a healthy liquidity position.

Earlier this month, CARE Ratings said the NBFC’s average cost of borrowings was around 8.6% for FY22 and around 7.4% for Q4 FY22. The borrowing cost has declined over the last four quarters since acquisition, CARE said.

The new strategy

The NBFC has also tweaked its strategy under the new owners. The erstwhile Magma Group was primarily into commercial vehicle finance (CV), construction equipment (CE), car loans, tractor financing, secured SME loans and home loans. The new owners revised its product strategy, targeting good quality, credit-tested, mass-affluent retail consumers and small businesses in semi-urban/urban locations. Consequently, the group announced its plans to discontinue some loan products in their previous form like CV, CE, tractors and new cars segment.

CARE said in a report that Poonawalla Fincorp plans to triple its AUM by FY25 with a focused product approach consisting of a mix of unsecured (digital personal loans, digital loans to professionals, digital business loans) and secured (pre-owned car loan, digital SME loan again property, affordable home loans, affordable loan again property, and machinery and medical equipment) loans.

The NBFC plans to achieve operating efficiencies through increasing use of technology, fintech partnerships and rationalizing branches, especially for unsecured loans. It will continue to focus on affordable housing loans (around 30% of existing consolidated AUM) in its subsidiary Poonawalla Housing Finance Ltd and the pre-owned car loans (around 13% of existing consolidated AUM) from its existing portfolio as a part of the new product suite.

The NBFC, for its part, says the turnaround in its fortunes has been on account of the fact that it has managed to transform itself into a more agile and a new-age retail financier from the traditional non-bank lender Magma was.

The company’s managing director Abhay Bhutada said the targets set by Poonawalla Fincorp at the time of the acquisition were to reduce the cost of funds, bring down NPAs by 2025 and improve asset quality. The company managed to achieve the targets within the first year of operations under the new management, Bhutada said.

For example, the cost of funds fell to 6.9% in the June quarter of 2022 from the 12-14% range during Magma’s period. The non-performing assets (NPA) fell 0.95% in the first quarter of FY23 and the asset quality improved. The net interest margins stood at 9.5% in the June quarter, while return on assets was up 150 basis points at 2.4%.

At the time of the acquisition, the company’s AUM was at Rs 15,006 crore, gross NPAs were 6.9% and net NPA were 4.5%. At present, the AUM has gone up to Rs 22,000 crore.

Going forward, Poonawalla Fincorp will be raising around Rs 5,000 crore to Rs 6,000 crore for growth plans. It recently raised Rs 650 crore via commercial paper and non-convertible debentures. The NBFC was aiming to be among the top three players in the retail loan segment and was in line to disburse around Rs 12,000 crore in retail loans this fiscal year and grow at a CAGR of 25-30%.

Meanwhile, Poonawalla Housing Finance with an AUM of Rs 5,282 crore would remain focused on the affordable housing segment with an average ticket size of Rs 30 lakh. There are also plans to float the unit’s IPO in 2025.

The pandemic seems to have (thankfully) subsided, at least for now. As its impact withers, the demand for Covid vaccines, too, has gone down.

While SII will look for newer avenues to utilise its capacities, Poonawalla seems to have hit a jackpot in the lending space with the NBFC. All he needs to make sure is to maintain good asset quality and not let a mountain of bad loans take his business down.