Poonawalla Fincorp: Where Credibility Hit Credit

Kolkata-based Poonawalla Fincorp’s problems do not seem to have an end in sight. The company’s recently appointed Managing Director, Abhay Bhutada, and several others have been accused of insider trading.

Bhutada immediately resigned from his position after the issue came to the fore. But this isn’t the only problem the company faces.

Poonawalla Fincorp began its operations as Magma Leasing Private Limited in 1988, led by Sanjay Chamria and Mayank Poddar. After the takeover, only Chamria is a member of the board and now serves as the Executive Vice-Chairman at the company.

The company entered the lending business with a special focus on vehicles and construction equipment. In order to expand, the company used a merger and acquisition strategy to expand its footprint.

For instance, in 2000, Magma acquired Consortium Finance to expand its footprint in the north. In 2007, Shrachi Infrastructure Finance merged with Magma, which allowed Magma to access the western market.

Further, in 2012, Magma acquired General Electric’s India home loan financing business, GE Money Housing.

Despite the acquisitions, the company’s assets-under-management (AUM) has grown at a snail’s pace. It stood at around Rs 9,377 crore a year back, which has increased to only Rs 14,000 crore over the last decade.

The slow rate of growth has been disappointing for investors, who bought into Magma at the beginning of the decade. Its investor list included marquee names such as Chryscapital, Kohlberg Kravis and Roberts, True North and others.

KKR, for instance, bought into Magma in 2011, followed by Chryscapital in 2013. Both investors exited Magma with moderate returns.

The company had also been struggling with raising funds at a low cost. Its small size has limited its ability to raise loans at low rates, which has forced it to operate in segments with higher credit risk.

It was a vicious cycle, as its weak borrower profile did not allow it to borrow at low rates. Its peers also had stronger parentage, which ensured lower cost loans.

A report by HDFC Securities highlighted this issue. “Due to the lack of strong parentage, MFL had to pay a higher cost on its borrowing compared to some of its peers. Consequently, the company charged higher interest rates and missed out on customers with better credit profiles who could get cheaper loans elsewhere. Asset quality also suffered, as is evident in the high NPA (non-performing asset) levels,” said the report.

Even the company’s QIP in 2017 saw a subscription of 1.7 times, whereas other QIPs and IPOs by financial firms in the same year saw higher returns. The company’s gross NPA levels reached almost 10 per cent, implying a stressed loan book.

The Poonawallas, who own Serum Institute, have been looking to deploy extra cash into other businesses. Serum Institute is the largest vaccine manufacturer in the world and is said to command a valuation of $12 billion.

The acquisition of Magma allowed Poonawallas to expand their business empire and provided Magma with the funds it desperately needed. A Poonawalla Group company, Rising Sun Holdings, acquired a 60 per cent stake in the NBFC for Rs 3,456 crore.

The Poonwallas had previously entered the financial space through Poonwalla Finance.

Poonawalla Fincorp will be discontinuing products such as auto leases, used commercial vehicles, tractors and used commercial equipment. The company is actively avoiding the commercial financing sector, which usually carries a higher credit risk.

Rather, the focus will shift to consumer loans, personal loans, SME loans, and over time, to credit cards, medical equipment loans, machinery loans, digital lending and other products.

With the strong backing of Serum Institute, which has a high credit rating, Poonawalla Fincorp is likely to see a lower cost of funding.

The company will also be focusing on tying up with corporate clients apart from retail clients.

“We are working on building another pillar of sales and distribution through our strategic alliances and corporate tie-up, which will benefit us in our cost of acquisition and from the next two quarters, we will do a lot of additional alliances and corporates tie-ups, which are underway right now,” said the ex-MD Abhay Bhutada during a conference call with investors.

However, with the MD’s resignation, the process of rebuilding the company might take more time. The company is also a late entrant to the consumer lending ecosystem, which is quite crowded with players ranging from traditional banks to digital lending companies — creating a niche can be quite tough in a crowded segment.

Whether the Poonawallas can recreate their success in the financing space remains to be seen.