Spandana Sphoorty Financial Limited a Mixed Bag Viewpoint

Spandana Sphoorty Financial Limited A mixed bag Viewpoint

Spandana Sphoorty Financial Services (SSFL) clocked a mixed set of Sector: Banks & Finance numbers for Q3FY2020, with operating numbers coming in line with Result Update expectations. However, a steep rise in provisions and slowing loan growth offset the benefit of improvement in cost efficiencies. Loan book Change growth was tepid q-o-q and a decline in total borrowers due to floods and political disturbances in few districts (in 4 states), affected collections and View: Positive  disbursements. Total exposure to the above districts was ~Rs. 41 crore (fully provided for, drove up provisions q-o-q). Loan book grew by 4.8% q-o-q to CMP: Rs. 1,034 Rs. 4,721 crore but assets under management (AUM) fared better, rising by Upside potential: 28-30% â 40% y-o-y and 9% q-o-q to Rs. 5,879 crore. The management indicated that disbursements have nearly normalized as of January. Net interest income á Upgrade  No change â Downgrade (NII, Calculated), at Rs. 259 crore, was up by 40.5% y-o-y and by 2.5% q-o-q (we expected a 1.4% q-o-q growth) and was largely in line. Total income declined by 2% q-o-q due to a rise in the (off-balance sheet) outstanding on Company details the assigned portfolio. Cost of borrowing declined by 170 bps y-o-y to 10.9%, improving sharply, but yields too declined by 140 bps y-o-y to 24% due to Market cap: Rs. 7,508 cr lower disbursements. Operating parameters were modest, with net interest margin (NIM) rising by 50 bps y-o-y to 16.4% in Q3FY20 but declined by 40 52-week high/low: Rs. 1,400/690 bps from FY2019 levels. Helped by the corporate tax rate cut, profit after tax (PAT) increased by 40% y-o-y and 184 y-o-y to Rs. 129 crore. In terms NSE volume: (No of of asset quality, gross non-performing asset (GNPA) ratio stood at 0.33%, 1.3 lakh shares) improving from Q2FY20 levels. Currently, SSFL has no presence in Assam, which is a positive. We believe there are several levers available in terms BSE code: 542759 of gearing ratio and branch efficiency, which can further augment return ratios. We retain our Positive view on the stock and expect a 28-30% upside NSE code: SPANDANA from current levels. Key positives Sharekhan code: SPANDANA GNPA and NNPA stood at 0.33% and 0.04%, respectively, improving Free float: (No of from Q2FY20 levels. The company has no presence in Assam and the 2.4 cr shares) management indicated that disbursements have nearly normalised as of January. Cost to Income ratio stood steady at 20% and is the best among Shareholding (%) comparable peers. Key negatives Promoters 62.7 Loan book growth was tepid q-o-q due to floods and political disturbances FII 8.3 in 4 states, which affected collections and disbursements. Hence, total borrowers declined and the loan book grew by just 4.8% q-o-q to Rs. 4721 DII 20.3 crore. Our Call Others 8.7 Valuation: SSFL currently trades at ~1.9x its FY2022E book value, which we believe is reasonable considering its strong capital position (CRAR of 51%), growth potential and steady operating parameters. A strong management Price chart and an efficient (and de-risked) business model with levers available for

1400 generating better returns make the outlook attractive. We maintain our

1300 Positive view on the stock and expect an upside of 28-30%. 1200 Key Risks 1100 A credit ratings downgrade and effect on collection efficiency may affect NIM 1000 and results of operations. 900

800 19 19 19 19 20 - - - - - Jan Oct Sep Dec Nov Valuation Rs cr Particulars FY19 FY20E FY21E FY22E Price performance Net interest income (Rs cr) 655.0 923.2 1,204.9 1,579.0 Net profit (Rs cr) 311.9 409.3 663.3 870.8 (%) 1m 3m 6m 12m EPS (Rs) 48.6 63.8 103.4 135.7 Absolute -9.0 -2.4 - - PE (x) 21.3 16.2 10.0 7.6 Book value (Rs/share) 294.6 349.5 437.3 552.6 Relative to -7.7 -6.5 - - P/BV (x) 3.5 3.0 2.4 1.9 Sensex RoE (%) 16.5 18.2 23.6 24.6 Sharekhan Research, Bloomberg RoA (%) 6.3 7.3 7.9 6.1 Source: Company; Sharekhan estimates January 29, 2020 21 Key Concall highlights January 29, 2020

TAT and operating costs, whereas SSFL has comparatively automated processes. It conducts fortnightly fortnightly conducts It processes. automated TAT comparatively has SSFL whereas costs, operating and loan. of the over period the spread be will but norms, IND-AS per as statement not recognised is Q3 in & loss which profit portfolio crore assigned 46 the from Rs. is same the borrowers. to benefits size meaningful to offer ticket to increase aims company The industry. the lower than SSFL’swhile 2,000-3,000 Rs. is outstanding new borrowers. lakh ~2 be would there March By issues. mentioned to due above- SSFL but from loans were fresh obtain not but loans their repaid borrowers 2lakh Almost due to floodsand politicalIn disturbances. January, the company wasable todisburse tomost borrowers. Flat Borrower numbers: Q3.. in portfolio crore towards 41.5 this of Rs. aprovision made SSFL total of portfolio). the crore (<1% 63 to Rs. amounted portfolio Karnataka in affected the where districts three the in branches 15 has SSFL well. performed of Karnataka rest Maharashtra the and while Maharashtra, in districts Karnataka two and in districts three included areas Affected of local leaders. interference and rains continuous by hit badly Karnataka in were districts Kerala. and coastal The Karnataka, Pradesh, Maharashtra Madhya in portfolios inQ3: portfolios Affected to 29%. 17% from increased of share DA PTC the plus portfolio, total of portfolio, the a percentage loans. their repaid had they even though to borrowers loans couldn’t disburse company The borrowers. were dormant many Dormant borrowers: were affected. Moreover, functions branch affected. also was activity Business turbulence. political and states: floods to owing affected four was collection) (72% Maharashtra in and Gujarat (97.6%), Pradesh (98.3%), Kerala lower October-December for efficiency Collection quarter) from the sister concern, which works as a no-profit, no-loss company. company. no-loss ano-profit, as works which concern, sister the from quarter) crper +rent (2 qtr) per (1cr expense %of ~25 travel gets SSFL Also payments. the collects and sells SSPL credit, are on sold Products to SSFL. expenses +reimburse product of value sale the the on commission a13% pay concern will sister the is SSFL with agreement working The concern (set 2000). in up sister its by of loans) rates. life the through enjoyed be will =15% which (24%-8.5% 8.5% at bank, top PSU aDA for crore in went recently with company 500 of Rs. asked hence is to and pay. know doesn’t borrower The level. borrower the at up followed not is it that Low costs: credit while competitorscollections, opt for weekly (higher cost). collections SSFL can’t conduct trading of consumer items and multi-brand retail, so this activity will be taken be care will of activity so this retail, multi-brand and items of consumer trading can’t conduct SSFL The yields. canattractive get SSFL free, and risk 100% is it that is Securitization for to opt rationale The 2years. for there is rates; yield interest maintains SSFL as are likely to sustain yields forward, Going 12 months last the new in cycle borrower lakh to 9-10 added has company The CRAR. ahigh to want take doesn’t despite it and risks sustainable rate is company’sThe growth 2-3 years. next the for plan fund-raising any outlined not has the forward, Going Employee costs are low because overheads are high for other microfinance(MFIs)institutions and a longer December. for were on income done upfront The transactions 595 Rs. crore of assignment gross Almost SSFL. with loans two have of borrowers 18% Only (industry), 26,000 Rs at stood Average ticket size outstanding loan earlier. average The lower was SSFL for crore. 2,505 Rs. at stood networth while 1.2x, at Leverage stood quarter. the 3crore during Rs. reimbursed products consumer in dealing company A group As crore y-o-y. 700 crore 1690 Rs. to from Rs. (PTC) increased securitized (DA) portfolio and assigned The rose count to 7,545Employee

SSFL wrote-off loans with over 90 days past due (DPD). But a write-off does not mean mean not does awrite-off But (DPD). due past days over 90 with loans wrote-off SSFL SSFL SSFL couldn’t lend due to Atfloodsthatdisbursements. the affected end of Q3,there During the months Q3 FY20were not able to disburse loans to existing centres centres to existing loans to able not disburse Q3 FY20were months the During An additional provision of ~Rs. 20 crore was made on account of affected account 20 on of affected crore made was of ~Rs. provision additional An Collection efficiency in Madhya Madhya in efficiency Collection 22

Viewpoint January 29, 2020 Source: Company;SharekhanResearch PAT Total Revenue fromoperations Tax PBT Operating expenses NII Finance cost Particulars Results Provisions Pre-Provisioning Profit

Bihar, Jharkhand and Haryana. Existing branches hold the potential to potential branches grow. hold the Existing Bihar, Haryana. and Jharkhand y-o-y. down gone rate has rejection bureau Credit MFIs. are acquiring companies loan Competition: yrs. 3-4 next The company does not plan to start businesses in Assam, but is look to increase reach in Rajasthan, Rajasthan, in reach to look increase is but Assam, in businesses to start plan not does company The to likely to 25-26% is years. rise coming ROE the in for to capital raise need the feel doesn’t and sustainable is AUM growth a35-40% that believes SSFL

The MFI industry is seeing consolidation and there are fewer new players. Banks & Gold Gold & Banks players. new fewer are there and consolidation seeing is industry MFI The 204.2 55.0 45.0 343.6 162.6 84.4 259.1 41.5 126.1 Q3FY20 290.5 92.4 48.8 192.8 44.5 148.3 9.2 97.7 139.1 Q3FY19 36.5 34.4 350.6 23.6 16.9 37.6 -7.8 18.2 -13.6 YoY% 258.9 204.6 358.5 99.6 99.6 54.3 183.6 45.7 21.0 145.7 Q2FY20 -0.2 -4.2 176.0 97.8 1.2 0.1 0.1 -15.2 -11.4 -69.1 QoQ% Rs cr 23

Viewpoint outlook attractive. We maintain our Positive view on the stock and expect an upside of 28-30%. upside an expect and stock the on view Positive We our maintain attractive. outlook the make returns better generating for available levers with model business de-risked) (and efficient an and management Astrong parameters. operating steady and potential of 51%), growth (CRAR position capital strong its considering reasonable is we believe FY2022E value, which book its ~1.9x at trades currently SSFL Valuation the company. of quality book and growth on etc) confidence to the add controls management and risk robust measures (standardised systems, real-time monitoring, automated checks and cost prudent management, of the expertise domain strong the that we believe AUMs, affected disturbances political and near-term weather Though SSFL. for of funds cost the ease further help will assets securitised of pool rising We and etc. agrowing believe banks from appetite healthy is there which for category, PSL the for qualify loans its as player, advantage MFI an an has being of SSFL, funds). cost access to cheaper ratio, increased securitisation potential (PSL qualificationhelps) and improving trend of ratingprofile (providing book and leverage. We believe there are significantpositive leversavailable tothe companywith its leverage upon built asset-quality accessby profile an andits rating helped toimproving a expanding has funds/capital, conservative SSFL risk positives. key strong are asset-quality efficiencies, managed cost well and operational SSFL’sbook diversified and term. management medium in traction normal gain to expected is and affected which states), four (in However, and disbursements. collections districts management the indicated is situation already normalising the that few a in disturbances political and floods to due mainly borrowers total in adecline and growth book loan sequential atepid saw (SSFL) Services Financial Sphoorty Spandana Outlook January 29, 2020 Spandana Sphoorty Particulars Peer Comparison Source: Company,Sharekhanresearch,Bloombergestimates Satin CreditCare CreditAccess Grameen Aavas Financiers

Rs/Share CMP 1034 1976 859 238 FY20E 0.9 P/BV(x) 3.0 4.4 7.4 FY21E 6.4 2.4 3.6 0.7 FY20E 59.4 16.2 27.7 5.1 P/E(x) FY21E 47.8 21.0 10.0 3.7 FY20E RoA (%) 5.3 4.0 3.0 7.3 FY21E 5.4 3.8 3.4 7.9 FY20E 18.2 13.3 17.9 17.0 RoE (%) FY21E 20.2 23.6 13.6 19.1 24

Viewpoint Top shareholders 10 Key management personnel Data Additional January 29, 2020 A credit ratings downgrade and effect on collection efficiency may affect NIM and results operations. of and results NIM affect may efficiency collection on effect and downgrade ratings A credit Key Risks quality. Asset strong the in is seen and term medium the in quality book the on confidence to the add monitoring, Automated checks and built controls on system,the Mandatory credit bureau checks) etc which measures Risk inthe (standardized real-time is robust reflected systems, quality management Strong further. trend of rating profile(providingaccess to cheaper cost offunds) all ofwhich canhelp its expand return ratios helps)improving and also leveragequalification its ratio, with (PSL increased potential securitization the MFI, a and profile rating conservative Asset improving quality book an and leverage. maintaining We while believe even that there arefunds/capital, significantto positive leversaccess available its to expanding upon built had SSFL years, the Over momentum. growth astrong indicating period over FY17-FY19 PBT (~200+%) and (~43%) Networth AUM in (~85%), growth CAGR strong reported has Ltd (SSFL) Financial Sphoorty Spandana theme Investment Return ratios. and margins of healthy boasts and crisis MFI AP the post stronger emerged successfully has but impacted was NBFC-MFI The of AUM. terms in India, in SFBs and NBFC-MFIs amongst income offers company largest The sixth the and NBFC-MFI largest fourth the was 2019, SSFL 31, of March As Rural Areas. in states. households 17 across presense India pan a generation loans under group joint the liability model (JLG), predominantly to women from low-income has It India. in presence diversified ageographically with NBFC-MFI focused rural aleading, is (SSFL) Limited Financial Spoorthy Spandana company About Padmaja Gangireddy Deepak CalianVaidya Source: Bloomberg 10 9 8 7 6 5 4 3 2 1 Sr. No. Source: CompanyWebsite Sudesh Chandrasekar Sharekhan Limited,itsanalystordependant(s)ofthemight beholdingorhavingapositioninthecompaniesmentionedarticle. HELION VENTUREPRTNR LLC VENDIDANDI VIJAYA SIVARAMI Bajaj Holdings&InvestmentLtd -UNKNOWN- Bajaj AllianzLifeInsuranceCoLt Goldman SachsGroupInc/The REDDY VIJAYA SIVA RAMI Helion Venture Partners LLC JM FININDIAFUN Valiant MauritiusPartners Ltd Holder Name

Chief FinancialOfficer ManagingDirector Chairman Holding (%) 5.2 6.0 2.4 2.3 1.5 1.0 1.4 1.7 1.1 1.1 25

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