Why analysts are concerned about Poonawalla’s plan to sell housing finance arm

Poonawalla Fincorp, formerly Magma Fincorp, decided last week to sell its mortgage finance arm to PE firm TPG for Rs 3,900 crore ($473 million). The company, which was taken over by vaccine king Adar Poonawalla a couple of years ago, has been a trailblazer in the stock market, having risen over 20-fold since the lows of mid-2020 as investors were looking at a potential success story like Bajaj Finance.

However, with the announcement of sale of Poonawalla Housing Finance Ltd, the stock has been battered. To be sure, the stock has slid at the same time as a slow correction creeping in the wider market that hit a new high early this month.

But the immediate trigger for a selloff is coming from some concerns about the divestment decision.

Poonawalla Housing Finance is one of the several players in the affordable housing finance segment with 153 branches spread across 20 states. As of September 30, it had assets under management of over Rs 5,600 crore. This comprises affordable home loans (64%) and loans against property (36%), with an average ticket size of around Rs 10 lakh, to self-employed and salaried borrowers.

Its customer base has grown almost four-fold in the last four years given the low mortgage debt penetration, young demographics, and family nuclearization.

Poonawalla said the value unlocking of the housing finance subsidiary was one of the stated objectives in its Vision 2025 statement.

With rapid growth in the digital ecosystem, the management believes that the company will continue to build a robust retail franchise in consumer and MSME financing.

The firm has given guidance on the way forward with high AUM growth, maintaining asset quality and cost rationalization besides exploration of deep investments in technology and analytics through both, the organic and inorganic routes.

But there are some concerns. As of September 30, close to a third of its loan portfolio was in housing finance with the rest spread across unsecured loans (around 27%), pre-owned car loans (12%) with auto leasing, loan against property, some legacy loan book and other acquired loans comprising the rest. Post the run down of legacy commercial vehicle loans by mid-2023, its overall portfolio is expected to tilt towards unsecured loans.

The affordable housing finance business was restrictive in terms of cross-selling opportunities for the technology-led consumer products. But it provided stability and longevity to the overall portfolio.

Analysts are concerned about the shorter duration of the portfolio, after the divestment of the housing finance business. The post-sale loan book becomes vulnerable to a higher degree of churn, given its relatively lower duration compared to home loans. This would imply a much higher disbursement rate than is being envisaged. So even though the firm is adequately capitalized, it would face a risk of the impact of prolonged high interest rates on the consumer loans segment.