Spandana Sphoorty Financial Limited An enthusing performance Viewpoint
Spandana Sphoorty Financial Limited (SSFL) posted strong results for Sector: Banks & Finance Q2FY2020 with net interest income (NII; calc) rising to Rs. 259 crore, Result Update up by 53.8% y-o-y, and PBT increasing by 68.6% y-o-y to Rs. 191 crore. Healthy rise in NII was aided by strong 37% y-o-y growth in gross loan Change portfolio and 240 BPS y-o-y expansion in net interest margin (NIM) to 18.6%. SSFL has invested significantly in network and manpower, View: Positive which are crucial for future growth. However, due to its strong operating performance, cost-to-income (C/I) declined to 20.3%, down 460 BPS CMP: Rs. 1,117 y-o-y. During H1FY2020, there was an impact of the markdown on Upside potential: 18-20% á DTA as well as write-off of old AP portfolio of Rs. 317.6 crore, and a consequent reversal of DTA of Rs. 115.4 crore and lapse of entire MAT á Upgrade No change â Downgrade credit due to exercise of lower tax rate. Thus, an impact of Rs. 192.8 crore on the P&L for H1FY2020 (Rs. 110.9 crore in Q2FY2020) due to DTA markdown resulted in reported PAT declining by 37.9% y-o-y to Rs. Company details 45.7 crore. Asset quality was stable with GNPA/NNPA at 0.77%/0.09%, which we believe is attractive. During the quarter, due to the floods etc. Market cap: Rs. 7,171 cr events in certain states, collection efficiency was impacted. However, management expected it to normalise in the next 2-3 quarters. Since 52-week high/low: Rs. 1211/690 AP crisis, the company has done well to manage risks in a better way for sustainable growth. Therefore, well-dispersed district-level exposure NSE volume: (No of reduces impact from region-specific events (no district has >1.9% of AUM, 2.7 lakh shares) no state has >19% of AUM). SSIFL is well capitalised (CRAR of 51%, low leverage of 1.3x), which allows for a clear growth runway. We believe BSE code: 542759 asset-quality performance and leverage levels are positive levers to improve its ratings, crucial for margins. We maintain our Positive view NSE code: SPANDANA on the stock and expect 18-20% upside potential. Key positives Sharekhan code: SPANDANA Strong capital position (CRAR of 51%) enabling the company to maintain Free float: (No of healthy growth momentum. 2.4 cr shares) Improvement in operating parameters such as NIM and cost-to-income ratio are positive, with leverage headroom to help improve return ratios. Shareholding (%) Key negatives Promoters 62.7 During the quarter, due to the floods etc. events in certain states, collection efficiency was impacted. FII 8.3 Our Call DII 20.3 SSFL currently trades at ~2.2x its FY2021E book value, which we believe is reasonable considering its capital position, growth potential and steady Others 8.7 improvement in key operating parameters over the past two years. Management has indicated for ~40% loan growth over the next three to four years and expect sustainable NIM going ahead. The company has Price chart a strong management, an efficient (and de-risked) business model with levers available for generating better returns. Thus, we maintain our 1200 Positive view on the stock with an upside potential of 18-20%. 1100 1000 Key Risks 900 A credit ratings downgrade would impact borrowing costs and constrain 800 access to capital and debt markets, which may adversely affect NIM and 700 results of operations.
600 Aug-19 Sep-19 Oct-19 Valuation Rs cr Particulars FY18 FY19 FY20E FY21E Price performance Net interest income (Rs cr) 345.2 655.0 949.8 1,377.2 Net profit (Rs cr) 187.9 311.9 506.0 659.5 (%) 1m 3m 6m 12m EPS (Rs) 29.3 48.6 78.8 102.8 Absolute 15.2 - - - PE (x) 38.1 23.0 14.2 10.9 Book value (Rs/share) 216.7 294.6 424.6 511.9 Relative to 10.9 - - - P/BV (x) 5.2 3.8 2.6 2.2 Sensex RoE (%) 13.5% 16.5% 18.6% 20.1% Sharekhan Research, Bloomberg RoA (%) 5.0% 6.3% 7.4% 6.7% Source: Company; Sharekhan estimates November 01, 2019 19 Viewpoint
Key Concall Highlights Operational Guidance: Management has guided for credit growth of ~40% in the next three to four years; NIMs are expected to be sustainable at present levels. Network expansion: Target of reaching 1,000 branches from 941 as of Q2FY2020; branch efficiency is improving. Profit guidance: PBT target of ~Rs. 750 crore for FY2020E; PAT target (normalised) of ~Rs. 450 crore. Average ticket size (ATS) likely to increase in a phased manner from ~Rs. 19,900 as of Q2FY2020 to ~Rs. 22, 000 by Q4FY2020 to ~Rs. 25,000 by end of September 2020. Low leverage: Currently, leverage is low (1.3x); however, the max leverage the management is comfortable with is ~4.0x. Collection efficiency: Floods and heavy rains in Kerala, Maharashtra and some other states affected asset-quality performance during the quarter, and the collection efficiency was impacted. However, management was confident of reverting to normal in 2-3 quarters. There is huge demand for direct assignment from banks. Operational scenario: Have reduced operations in Orissa for now due to climatic events, and in Karnataka, the company is facing challenges from competition. The collection is difficult but is dependent on rigorous follow up/monitoring, confident on the long-term outlook. Liquidity position: The company is comfortable on liquidity and has pre-closed accounts worth Rs. 200 crore in September 2019. It has positive asset-liability gap and comfortable liquidity position (Unavailed Sanctions of Rs. 920 crore; Cash and Equivalents of Rs. 783 crore). In the recent quarter, the company has added six new list of lenders. Loans worth Rs. 715 crore were assigned during the quarter. RBI’s annual inspection observation: The RBI (in its annual inspection) had flagged off an issue that SSFL had overcharged interest rate to the extent or 0.66% on the loans disbursed. However, since the amount is small, ~Rs. 6 crore, it is not material. Moreover, the observation was pertaining to FY2018. Cost-to-Income (C/I) is expected to come down with scale. Loans worth ~Rs. 1,000 crore will be assigned to a large PSU in the next quarter. Growth: The company saw 29% of the clients are first-time borrowers. Diversified presence: Diversified geographic mix with no district contributing more than 1.9% of AUM. AUM per branch has seen a steady rise to Rs. 5.7 crore from Rs. 4.8 crore y-o-y.
Results Rs cr Particulars Q2FY20 Q2FY19 YoY % Q1FY20 QoQ % Total Revenue from operations 358.5 257.3 39.3 298.2 20.2 Finance cost 99.6 89 12 89.2 11.6 NII 258.8 168.3 53.8 208.9 23.9 Net Total Income 266.8 168.3 58.5 215.6 23.7 Operating expenses 54.3 41.9 29.5 50 8.4 Pre-Provisioning Profit 212.5 126.4 68.1 165.6 28.3 Provisions 21 12.9 63.2 22.9 -8.1 PBT 191.5 113.5 68.6 142.7 34.2 Tax 145.7 39.9 264.9 49.3 195.8 PAT 45.7 73.6 -37.9 93.4 -51.1 Source: Company; Sharekhan Research
November 01, 2019 20 Viewpoint
Outlook We find SSFL as a strong NBFC-MFI, well capitalised and well placed in terms of business quality (strong risk management and diversified book), which provide comfort on future asset-quality trends. SSFL has continued to report strong growth since FY2017 in AUM, net worth and PBT, thus, leading to strong recovery indicated by a history of strong performance. The company has also received rating upgrade in the past two years from leading rating agency in India; and we expect the trajectory to sustain, which will aid its re-rating potential. SSFL has built upon expanding its access to funds/capital, even while maintaining an improving rating profile and a conservative asset-quality book and leverage. We believe there are significant positive levers available to the MFI, with its leverage ratio, increased securitisation potential (PSL qualification helps) and improving trend of rating profile (providing access to cheaper cost of funds). Strong domain expertise of management is also a positive, reflected in prudent cost management and high-collection efficiency. Robust risk measures (standardised systems, real-time monitoring, automated checks and controls built on the system, and mandatory credit bureau checks) add to the confidence on the book quality in the medium term. Valuation SSFL currently trades at ~2.2x its FY2021E book value, which we believe is reasonable considering its capital position, growth potential and steady improvement in key operating parameters over the past two years. Management has indicated for ~40% loan growth over the next three to four years and expects sustainable NIM going ahead. The company has a strong management, an efficient (and de-risked) business model with levers available for generating better returns. Thus, we maintain our Positive view on the stock with an upside potential of 18-20%.
Peer Comparison CMP P/BV(x) P/E(x) RoA (%) RoE (%) Particulars Rs/Share FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E Spandana Sphoorty 1117 2.6 2.2 14.2 10.9 7.4 6.7 18.6 20.1 Aavas Financiers 1578 6.0 5.2 50.9 41.5 4.0 3.8 13.3 13.6 CreditAccess Grameen 639 3.3 2.7 20.6 15.6 5.3 5.4 17.0 19.1 Satin Credit Care 226 0.9 0.7 4.6 3.5 3.0 3.4 17.9 20.2 Source: Company, Sharekhan research, Bloomberg estimates
November 01, 2019 21 Viewpoint
About company Spandana Spoorthy Financial Limited (SSFL) is a leading, rural focused NBFC-MFI with a geographically diversified presence in India. The company offers income generation loans under the joint liability group model (JLG), predominantly to women from low-income households in Rural Areas. As of March 31, 2019, SSFL was the fourth largest NBFC-MFI and the sixth largest amongst NBFC-MFIs and SFBs in India, in terms of AUM. The NBFC-MFI was impacted but has successfully emerged stronger post the AP MFI crisis.
Investment theme Spandana Sphoorty Financial Ltd (SSFL) has reported strong CAGR growth in AUM (~85%), Networth (~43%) and PBT (~200+%) over FY17-FY19 period indicating a strong growth momentum. Over the years, SSFL had built upon expanding its access to funds/capital, even while maintaining an improving rating profile and a conservative Asset quality book and leverage. We believe that there are significant positive levers available to the MFI, with its leverage ratio, increased securitization potential (PSL qualification helps) and also improving trend of rating profile (providing access to cheaper cost of funds). Strong management quality is reflected in the robust Risk measures (standardized systems, real-time monitoring, Automated checks and controls built on the system, Mandatory credit bureau checks) etc which add to the confidence on the book quality in the medium term.
Key Risks A credit ratings downgrade would impact borrowing costs and constrain access to capital and debt markets, which may adversely affect NIM and results of operations.
Additional Data
Key management personnel Deepak Calian Vaidya Chairman Padmaja Gangireddy Managing Director Sudesh Chandrasekar Chief Financial Officer Source: Bloomberg
Top 10 shareholders Sr. No. Holder Name Holding (%) 1 KANGCHENJUNGA LIMITED 45.7 2 REDDY G PADMAJA 18.2 3 GANGIREDDY PADMAJA 16.0 4 VALIANT MAURITIUS PARTNERS LTD 6.0 5 JM FIN INDIA FUN 5.2 6 HELION VENTURE PARTNERS LLC 2.4 7 REDDY VIJAYA SIVA RAMI 2.3 8 GOLDMAN SACHS GROUP INC/THE 1.7 9 BAJAJ ALLIANZ LIFE INSURANCE CO LT 1.5 10 BAJAJ HOLDINGS & INVESTMENT LTD 1.1 Source: Bloomberg
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