Spandana Sphoorty Financials Limited Well placed to tide over medium term challenges
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3R MATRIX + = - Summary
Right Sector (RS) ü We recommend Buy on the stock of Spandana Sphoorty Financials (SSFL) with a price target (PT) of Rs. 850. Right Quality (RQ) ü SSFL posted mixed results for Q2 FY2021 with Operational numbers coming mixed but disbursement and collections picking up was encouraging. Right Valuation (RV) ü Absolute collections stood at 110% for October. Absolute Collections (incl. prepayments) was at 129% which is positive; Management commentary was also more confident + Positive = Neutral - Negative Asset quality was largely stable with GNPA / NNPA at 0.54% and 0.11% respectively (from 0.64% and 0.12% in Q1 FY2021); SSFL currently trades at 1.5x / 1.2x FY2022E / FY2023E book value. Reco/View Change Spandana Sphoorty Financials (SSFL) posted mixed results for Q2FY2021 with mixed operational numbers. Disbursement and Collections picking up was encouraging. The Reco: Buy NII stood at Rs 253.8 crores, was up by 24.8%y-o-y and 16.3% QoQ and came in line with expectations. The Pre-Provision Operating Profit (PPOP) at Rs 208 crores, flat y-o-y CMP: Rs. 746 but up by 12.9% q-o-q and was better than expectations. However, provisions were elevated at Rs 121.9 crores; at around 4.8x Q2 FY2020 le vels and also up by 9.4% on Price Target: Rs. 850 á a q-o-q basis. Cumulative provisions of Rs. 396 crores which accounts for 7.1% of total on-balance sheet portfolio is a cushion. We expect ultimate credit cost to be ~4% for á Upgrade Maintain â Downgrade which SSFL appears adequately provided for. Business operations improved, and SSFL cumulatively collected more than Rs. 2,700 Cr till October despite the challenges due Company details to the pandemic. It has also Disbursed Rs.1,634 Crs in Q2 FY2021 which is at Pre Covid level. Absolute collections stood at 110% for October and Absolute Collections (including Market cap: Rs. 4,787 cr prepayments) stood at 129% which we believe is positive. Management commentary was more confident, and indicated SSFL’s expectation to reach AUM of Rs 8500-9000 52-week high/low: Rs. 1,343/403 crore by the end of FY21. Asset quality was largely stable with GNPA / NNPA at 0.54% and 0.11% respectively (from 0.64% and 0.12% in Q1 FY2021). A diversified book with no NSE volume: district having more than 1.7% of AUM and no branch more than 0.3% of AUM augurs well. 0.5 lakh A well-capitalised balance sheet (45% CRAR), stable ratings, and improving collection (No of shares) efficiencies indicate that SSFL is well placed to ride over medium-term challenges. We have fine-tuned our estimates and believe that the outlook on growth and asset quality BSE code: 542759 front has improved, albeit gradually for the MFI. That said, we believe credit cost and asset quality will be key monitorables in the medium term. We recommend Buy on the NSE code: SPANDANA stock with a price target (PT) of Rs. 850. Free float: 2.4 cr Key Positives (No of shares) NII witnesses a sharp growth of 38% y-o-y growth to touch Rs282crs; aided by NIM which expanded by 20bps y-o-y and 40bps q-o-q to 15.9%. GNPA &NNPA too witness marginal improvement on sequential basis by 10bps/1bps Shareholding (%) respectively to 0.54%/0.11% respectively.
Promoters 62.6 Key Negatives ROA & ROE drop by 200bps and 220bps on yoy basis to 10% & 26.4% respectively. FII 19.0 Our Call DII 4.6 Valuation: SSFL currently trades at 1.5x / 1.2x FY2022E / FY2023E book value, which we believe are reasonable considering its strong capital position (CRAR of 45%) and steady Others 13.8 operating parameters. A strong management and an efficient (and de-risked) business model with levers available for generating better returns offer support. However, for the near term, the asset quality and credit cost will be the key monitorable. We recommend Price chart Buy on the stock with a price target (PT) of Rs. 850. 1400 Key Risks 1200 1000 A prolonged recovery post opening of the lockdown, credit ratings downgrade, and effect 800 on collection efficiency may affect NIM and results of operations. 600 400 Valuation Rs cr 200 Particulars FY19 FY20 FY21E FY22E FY23E 20 20 19 20 - - - - Net interest income 655.0 849.9 768.7 909.6 1,315.6 Jul Nov Nov Mar Net profit 311.9 351.8 346.8 433.9 722.1 EPS (Rs) 48.6 54.8 54.0 67.6 112.5 Price performance PE (x) 15.3 13.6 13.8 11.0 6.6 (%) 1m 3m 6m 12m Book value (Rs/share) 294.6 409.4 455.2 512.7 608.4 Absolute 32.2 26.9 37.5 -51.5 P/BV (x) 2.5 1.8 1.6 1.5 1.2 Relative to RoE (%) 16.5 13.4 11.9 13.2 18.5 23.5 11.4 -1.6 -59.4 Sensex RoA (%) 6.3 5.4 4.0 3.3 4.6 Source: Company; Sharekhan estimates Sharekhan Research, Bloomberg Note: We now convert Spandana Sphoorty Financials into a Stock Update; it was earlier a Viewpoint under our coverage
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Key Concall Highlights Present scenario: Collection efficiency has improved. Disbursement to pre-COVID level will be achieved by Feb- March 2021. Customers are being educated to repay since moratorium periods is over. Disbursed loans only to existing borrower that paid up. Ratings: India ratings has recently rated SSFL one notch above current ICRA ratings. Collection efficiency: Collection efficiency stood at 92% for the quarter. During month of November efficiency stood at 117% including pre closure loan. Saw some resistance in few pockets in state of Maharashtra especially in South Maharashtra, and parts of Chhattisgarh & Punjab. Borrowers repaying: At present, around 24.2 lakh borrowers are such who have paid 1 or more instalment, and around 1.6 lakh borrowers have paid 1 (or part payment of ) installments. This is around ~6% of total borrwers and mainly concentrated in few states. In the last month SSFL saw substantial improvement in Collection efficiency in Bihar, Orissa etc, Issue and challenges in specific areas were seen due to political interference, lockdown impact etc. Abhiram’s role is now limited to sourcing and distributing of goods, and loans are now under Spandana book. Credit Costs: Credit cost stood at 4.5% for the quarter whereas 2% additional cost due to provision. PAR 0-PAR30: During quarter PAR0 –PAR30 was not reported due to moratorium announced by RBI. PAR 0 and PAR 30 are stable compared to Q1 FY2021. Resumption of loans officers: Around 220 loan officiers have already re-joined in October month. This is helping and now doing monthly collections and are in process of hiring as well as re-joining of ealier loan officers. Moratorium: Except 5.6% of customers who have fully availed moratorium and have not made any payment, a ll other borrowers have either paid all or at least two instalments. Provision: SSFL maintains the highest provision in MFI segment cumulative other than standard asset on AUM 6.1% on balance sheet and 4.5% on total balance sheet. AUM: SSFL saw AUM growth in southern states of Andhra Pradesh, Telangana, Karnataka . Guidance: Estimated to touch AUM of Rs 8500crs –Rs 9000crs by March 21. Average Balance: Average balance stood at Rs 26,000 whereas industry average stood at Rs 33,000. Borrowers: Who have not paid single instalments stood at 3,500 Disbursement: Disbursement has been lumpy on account for the non-repayment by a few customer whole EMI leading to stopping in further disbursal. Fund Raised: SSFL has received sanctions to the tune of Rs 5000crs while Rs 3000crs has been through SBI development scheme. During quarter raised closed to Rs1500crs via NCD route.
Results Rs cr Particulars Q2FY21 Q2FY20 YoY (%) Q1FY21 QoQ (%) Total Revenue from operations 337.5 352.6 -4.3 319.1 5.8 Interest Income 310.3 296.8 4.6 303.0 2.4 Commission and Incentive Income - 5.6 -100.0 - NA Net gain on fair value changes 23.8 48.3 -50.8 15.4 54.0 Others 3.5 1.9 80.6 0.7 429.6 Finance cost 83.7 99.1 -15.5 84.7 -1.2 Net Interest Income (NII) 253.8 203.3 24.8 218.3 16.3 Other Income 8.5 7.9 7.6 0.7 1,179.7 Total Income 346.1 360.5 -4.0 319.7 8.2 Net Total Income 262.3 261.4 0.3 235.0 11.6 Operating expenses 54.3 53.1 2.3 50.9 6.8 Employee benefits expense 41.0 39.5 4.0 40.5 1.2 Depreciation and amortization expense 1.6 2.4 -31.9 1.5 7.9 Other expenses 11.7 11.3 3.8 8.8 32.2 Pre-Provisioning Profit 208.0 208.3 -0.2 184.1 12.9 Provisions 121.9 21.0 479.8 111.4 9.4 PBT 86.1 187.3 -54.0 72.7 18.3 Tax 23.1 144.8 -84.0 18.0 28.8 PAT 63.0 42.5 48.1 54.8 14.9 Source: Company; Sharekhan Research November 17, 2020 9 Powered by the Sharekhan
3R Research Philosophy Update Stock
Outlook and Valuation n Sector view - Green shoots in the economy are encouraging; Rural economy showing resilience Post the unlocking of the economy most lenders are reporting an incremental pickup in credit demand, especially in the rural segment. The rural economy was resilient due to the limited spread of COVID-19 as well as buoyant agriculture output that was helped by normal monsoons. Leading indicators indicate recovery in economic activity, which will be a positive. Credit Bureau information is expected to be fully on stream by November, which should further aid volume momentum for lenders such as SSFL. Improving collection efficiencies, and gradual normalizing disbursements along with supportive monetary & regulatory environment augurs well for MFI segment players. n Company outlook - Strong and prudent management, company continues to be ready for future growth SSFL’s operational cost efficiencies, strong risk management, diversified book, and well-managed asset quality are key positives. We believe there are significant positive levers available to the company with its low leverage ratio, increased securitisation potential (priority sector qualification helps), and improving trend of rating profile (providing access to cheaper cost of funds. A growing and rising pool of securitised assets will help further ease the cost of funds for SSFL, even though at present, the stream is yet to regain full momentum. Factors such as well-capitalised balance sheet, stable ratings, and strong operating metrics indicate that SSFL is well placed. Though near-term challenges exist, we believe the strong domain expertise of the management, prudent cost management, and robust risk measures (standardised systems, real-time monitoring, automated checks and controls) will help SSFL tide over medium-term challenges. n Valuation - Near-term headwinds continue, but long-term outlook positive; Maintain Buy SSFL currently trades at 1.5x / 1.2x FY2022E / FY2023E book value, which we believe are reasonable considering its strong capital position (CRAR of 45%) and steady operating parameters. A strong management and an efficient (and de-risked) business model with levers available for generating better returns offer support. However, for the near term, the asset quality and credit cost will be the key monitorable. We have Buy rating on the stock with a PT of Rs. 850.
One-year forward PBV (x) band
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3.0
2.4
1.8
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Source: Sharekhan Research
Peer valuation CMP P/BV (x) P/E (x) RoA (%) RoE (%) Particulars (Rs / Share) FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E Spandana Sphoorty 744 1.5 1.2 11.0 6.6 3.3 4.6 13.2 11.9 Satin Credit Care 63 0.3 0.2 3.9 1.9 1.8 3.1 7.4 14.9 Source: Company, Sharekhan research, Bloomberg estimates
November 17, 2020 10 Powered by the Sharekhan
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About company SSFL is a leading, rural focused NBFC-MFI with a geographically diversified presence in India. The company has a pan-India presence across 18 states and has been operating as an NBFC since 2004 and NBFC- MFI since 2015. 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 June 30, 2020, SSFL was the third largest NBFC-MFI in India with AUM of Rs. 6,835 crore, 25+ lakh members, and 1,013 branches. The NBFC-MFI was impacted but has successfully emerged stronger post the AP MFI crisis and boasts of healthy margins and return ratios.
Investment theme SSFL had reported strong CAGR in AUM (~74%) and borrowers (~35%) over FY2017-FY2020; but the pandemic impacted its operations and disbursements. Of late, improving collections and disbursals are encouraging. Over the years, SSFL had built upon expanding its access to funds/capital, while seeing a gradually improving rating profile trend and a conservative asset-quality book and leverage. We believe there are significant positive cushions available to the MFI, with its low leverage ratio, increased securitisation potential (PSL qualification helps), and improving trend of rating profile (providing access to cheaper cost of funds), all of which can help support its long-term return ratios further. Strong management quality is reflected in the robust risk measures (standardised systems, real-time monitoring, automated checks, and controls built on the system, and mandatory credit bureau checks), which are key positives and will help the company tide over near-term challenges.
Key Risks A prolonged recovery post opening of the lockdown, credit ratings downgrade, and effect on collection efficiency may affect NIM and results of operations.
Additional Data Key management personnel Abdul Feroz Khan Chief Strategy Officer Padmaja Gangireddy Managing Director Mr. Satish Kottakota Chief Financial Officer Nitin Agrawal Chief Risk Officer Ch Murali Krishana VP:Information Technology Source: Company
Top 10 shareholders Sr. No. Holder Name Holding (%) 1 Valiant Mauritius Partners Ltd 6.0 2 JM FINANCIAL INDIA FUND II 2.5 3 JM FIN INDIA FUN 2.5 4 Helion Venture Partners LLC 2.4 5 REDDY VIJAYA SIVA RAMI 2.3 6 Bajaj Allianz Life Insurance Co Lt 1.7 7 Royal Bank of Canada 1.4 8 EDELWEISS ALT INVESTMT OPP 1.3 9 Goldman Sachs Group Inc/The 1.2 10 Bajaj Holdings & Investment Ltd 1.1 Source: Bloomberg
Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.
November 17, 2020 11 Understanding the Sharekhan 3R Matrix Right Sector Positive Strong industry fundamentals (favorable demand-supply scenario, consistent industry growth), increasing investments, higher entry barrier, and favorable government policies Neutral Stagnancy in the industry growth due to macro factors and lower incremental investments by Government/private companies Negative Unable to recover from low in the stable economic environment, adverse government policies affecting the business fundamentals and global challenges (currency headwinds and unfavorable policies implemented by global industrial institutions) and any significant increase in commodity prices affecting profitability. Right Quality Positive Sector leader, Strong management bandwidth, Strong financial track-record, Healthy Balance sheet/cash flows, differentiated product/service portfolio and Good corporate governance. Neutral Macro slowdown affecting near term growth profile, Untoward events such as natural calamities resulting in near term uncertainty, Company specific events such as factory shutdown, lack of positive triggers/events in near term, raw material price movement turning unfavourable Negative Weakening growth trend led by led by external/internal factors, reshuffling of key management personal, questionable corporate governance, high commodity prices/weak realisation environment resulting in margin pressure and detoriating balance sheet Right Valuation Positive Strong earnings growth expectation and improving return ratios but valuations are trading at discount to industry leaders/historical average multiples, Expansion in valuation multiple due to expected outperformance amongst its peers and Industry up-cycle with conducive business environment. Neutral Trading at par to historical valuations and having limited scope of expansion in valuation multiples. Negative Trading at premium valuations but earnings outlook are weak; Emergence of roadblocks such as corporate governance issue, adverse government policies and bleak global macro environment etc warranting for lower than historical valuation multiple. Source: Sharekhan Research Know more about our products and services
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