Poonawalla Fincorp rating – Reduce: Instability at top level could cap re-rating

Downgraded to ‘Reduce’ from ‘Buy’ with TP cut to Rs 214 from Rs 333.

Vijay Deshwal has stepped down as the CEO of Poonawalla Fincorp (Poonawalla) and ceased to be a key managerial staff with effect from 4th Mar’22. He has decided to take up a strategic role within the Cyrus Poonawalla Group. Abhay Bhutada, Managing Director, will continue to be responsible for both operational and strategic matters of the organization supported by a strong management team.

When business transformation is underway with realignment of product and geographic strategy with focus on healthy IRR, RaRoC, granularity and cross-sell opportunities, stability at senior management is key driving factor to giving confidence. The CEO stepping down would derail that confidence. It seems Chief Technology Officer Gaurav Sharma, too has exited and Kandarp Kant (CTO of erstwhile Poonawalla Finance) has taken charge. Besides, there seems to be change in Head – HR with Manish Kumar being replaced by Smita Mitra.

We expected that an RoA profile of> 3%, coupled with AUM growth of 25% / 35% for FY23 / FY24 and gained confidence on management execution capabilities, can rerate the stock to 3.5x FY24E book. However, the latest developments at senior management level could cap rerating in the interim at 2.25x book. We downgrade the stock to Reduce from Buy with a revised TP of Rs 214 (earlier: Rs 333).

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