Spandana Sphoorty Financial Ltd A diversified and strong business franchise Viewpoint
Spandana Sphoorty Financials Limited (SSFL) is a non-banking financial Sector: Banks & Finance company (NBFC) focusing on microfinance. The company has delivered New Idea strong growth in terms of AUM along with significant improvement in its profitability and return ratios. What’s more important is the fact that the Change balance sheet is sufficiently capitalised and the NBFC is structurally well placed in terms of reputed management team with rich domain View: Positive expertise, strong risk management and a diversified book to show CMP: Rs. 914 healthy growth over the next few years. On NNPA basis, the company’s asset quality is strong (at near zero levels), which along with strong Upside potential: 20-22% collection efficiency lends comfort on the present book quality. Thus,
we believe there are significant positive levers available for growth and á á Upgrade No change Downgrade á á re-rating of the stock. We initiate with a Positive view and expect 20- 22% upside over the next 6-9 months. Company details Diversified presence, levers available to improve performance going Market cap: Rs. 5,822 cr forward SSFL is a strong NBFC-MFI, better placed in terms of business quality 52-week high/low: Rs. 935/690 (strong risk management and diversified book), which provides comfort NSE volume: (No of on future asset-quality trends. SSFL has reported strong CAGR 4.8 lakh shares) (FY2017 - FY2019) in AUM (~85%), net worth (~43%) and PBT (~200+%), indicating strong recovery. Over the years, SSFL had built its business BSE code: 542759 by expanding access to funds/capital, while maintaining an improving rating profile and a conservative asset-quality book. We believe there NSE code: SPANDANA are significant positive levers available to the MFI, with its leverage ratio, increased securitisation potential (PSL qualification helps) and improving Sharekhan code: SPANDANA trend of rating profile (providing access to cheaper cost of funds). Strong Free float: (No of domain expertise of management is also a positive, reflected in prudent 2.4 cr shares) 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 Shareholding (%) the confidence on the book quality in the medium term. Promoters 62.7 Our call FII 7.0 Valuation: SSFL has delivered robust financials with strong growth over FY2017-FY2019. NIM of ~17% is higher than peers, while opex DII 16.3 ratio of 4.5% is below the industry average. SSFL’s efficient business model, resilience during hard times, NIM cushion and available levers Others 14.0 are positives in its favour. We believe PBV of 1.9x its FY2021E BVPS is reasonable, supported by its strong business model and there is a re- Price chart rating potential for the stock. We initiate with a Positive view with a 20-22% upside potential in next 6-9 months. 900 Key Risks
850 Any downgrade of credit ratings may increase borrowing costs and constrain access to capital and debt markets and, as a result, may
800 adversely affect NIM and results of operations. 19 19 19 19 19 19 19 19 19 ------Sep Sep Aug Aug Aug Aug Aug Aug Aug Valuation Rs cr Price performance Particulars FY18 FY19 FY20E FY21E Net interest income 345.2 655.0 949.8 1,377.2 (%) 1m 3m 6m 12m Net profit 187.9 311.9 445.0 580.0 EPS (Rs) 29.3 48.6 69.3 90.4 Absolute NA NA NA NA PE (x) 31.2 18.8 13.2 10.1 Relative to Book value (Rs/share) 216.7 294.6 416.5 493.3 NA NA NA NA Sensex P/BV (x) 4.2 3.1 2.2 1.9 RoE (%) 13.5 16.5 16.6 18.3 Sharekhan Research, Bloomberg Source: Company; Sharekhan estimates
September 05, 2019 7 Viewpoint
Diversified geographic penetration avoids concentration risk: Unlike most other MFIs, SSFL has been able to diversify its presence across states. Therefore, the company faces limited concentration risk. The company’s portfolio is spread across 17 states in India and top exposure for it is to the state of Karnataka (~22% of total loan book), which is comparatively the lowest amongst comparable peers. Management has indicated its intention to restrict contribution from any state to ~15% of AUM over a mid to longer-term time horizon. We believe, given the nature of the MFI business, there is a clear and significant risk to lenders if they have a concentrated presence in a localised state/geography given the fact that the business is prone to regulatory/political change in perceptions and, therefore, resultant dynamics. Hence, single state exposure is largely less than 20% of AUM, with no district contributing more than 2.5% of AUM and no branch contributing to more than 0.3% of AUM as of FY2019. Therefore, we find it positive that SSFL has maintained stringent exposure caps at the state, district and branch levels to contain risk.
Balanced liability franchise; Increased securitisation Positive: Notably, post Andhra Pradesh (AP) crisis, SSFL has consistently striven to not only diversify its overall liability franchise with a fair mix of sourcing of incremental borrowings from capital markets (through NCDs), but is also was very conservative on leverage on the balance sheet. Post the IPO, not only SSFL has seen a sizeable rise in Capital Adequecy and access to incremental funds, MFI has an opportunity to improve its return ratios by gradually using the leverage lever. At present, its capital adequacy has improved from 39.6% of pre-IPO levels to 40+% levels, allowing the MFI an opportunity to see improved return ratios by increasing leverage ratio, without worrying about credit ratings (which incidentally have also been steadily improving for the company).
Improving Credit rating
A - (Stable)
BBB + (Stable)
BBB (Stable)
BBB - (Stable)
Aug-17 Feb-18 May-18 Mar-19
Source: Company, Sharekhan Research
SSFL has recently become fairly active in securitised markets as well, where by virtue of being an MFI player, it stands an advantage because its loans qualify as PSL loans, which have a decent demand appetite from banks (Private/PSUs). With a rising pool of securitised assets, cost of funds for the company should ease further.
Well-managed asset quality with robust collection efficiency: Asset quality at GNPA at 7.9% is due to the legacy portfolio impact of AP crisis. Notably, on NNPA basis, the company’s asset quality stands robust at near zero, which lends comfort on the present asset book. Moreover, overall addition to Stage-3 NPAs in recent years has been fairly well managed and muted for the company. Overall collection efficiency trends are also fairly high in recent years (~99.7% in FY2019). SSFL is led by strong first-generation entrepreneur management with rich industry exposure and experience. Strong management quality is reflected in robust risk measures (standardised systems, real-time monitoring, automated checks and controls built on the system and mandatory credit bureau checks), which add to the confidence on the book quality in the medium term.
MFI sector has a high-growth potential: As per industry estimates, the MFI sector has immense potential to grow the client base as well as ticket size per borrower. It is estimated that the micro-credit opportunity is about Rs. 5 trillion-6 trillion, considering the addressable market of low-income households in India.
September 05, 2019 8 Viewpoint
Microfinance Opportunity Particulars Urban Households Rural Households Total Households (Census 2011; in Mn) 78 168 Total Households in 2018 (Est; in Mn) 90 180 Target Households 52 108 Total Credit Needs (Rs. trillion) 3.2 4.5 Credit Gap ~Rs 5-6 Trillion Opportunity Source: RHP, Company, Sharekhan Research
As per industry estimates, traction in disbursements is expected to sustain and the MFI industry is well on way to report portfolio growth of 20-24% per annum over the medium term. Further, ticket sizes are likely to go up in states where penetration levels are high. Overall client growth is expected to be 8-10% and loan outstanding per borrower is expected to increase by 12-15%. Thus, we believe the MFI industry, which has been posting high- growth trajectory of late, has potential to grow further in the medium term.
September 05, 2019 9 Viewpoint
Financials in charts
Gross AUM Growth Declining Cost to Income
9,000 45% 8,000 40% 7,000 35% 6,000 30% 5,000 25% 4,000 20% 3,000 15% 2,000 10% 1,000 5% - 0% FY17 FY18 FY19 FY20E FY21E FY17 FY18 FY19 FY20E FY21E
Source: Company; Sharekhan Research Source: Company; Sharekhan Research
Reduced Cost of Borrowings Well Diversified Borrowing Mix
16.5% 16.0% Others 15.5% 1% 15.0% Banks 35% 14.5% Debt 14.0% Securities 13.5% 46% 13.0% 12.5% NBFCs 12.0% 18% FY17 FY18 FY19
Source: Company; Sharekhan Research Source: Company; Sharekhan Research
Growth in networth RoE to improve
3500 19%
3000 18%
2500 17%
2000 16%
1500 15%
1000 14%
500 13%
0 12% FY17 FY18 FY19 FY20E FY21E FY18 FY19 FY20E FY21E
Source: Company; Sharekhan Research Source: Company; Sharekhan Research
September 05, 2019 10 Viewpoint
Outlook Diversified presence, levers available to improve performance going forward:SSFL is a strong NBFC-MFI, which is better placed in terms of business quality (strong risk management and diversified book), providing comfort on future asset-quality trends. SSFL has reported strong CAGR in AUM (~85%), net worth (~43%) and PBT (~200+%), indicating strong recovery since FY2017-FY2019. 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 has delivered robust financials with strong growth over FY2017-FY2019. NIM of ~17% is higher than peers, while opex ratio of 4.5% is below the industry average. SSFL’s efficient business model, resilience during hard times, NIM cushion and available levers are positives in its favour. We believe PBV of 1.9x its FY2021E BVPS is reasonable, supported by its strong business model and there is a re-rating potential for the stock. We initiate with a Positive view with a 20-22% upside potential in next 6-9 months.
Peer Comparison CMP P/BV (x) P/E (x) ROE (%) Particulars Rs /Share FY20E FY21E FY20E FY21E FY20E FY21E
Spandana Spoorthy 914 2.2 1.9 13.2 10.1 16.6 18.3
AU Small Finance 672 5.0 4.1 34.4 25.9 15.6 16.8
Bandhan Bank 449 4.3 3.6 21.6 17.2 21.7 22.5
Ujjiwan 303 1.7 1.4 13.5 9.9 13.3 15.6
Equitas 114 1.4 1.2 12.3 8.7 7.5 12.5 Source: Sharekhan Research; Bloomberg
September 05, 2019 11 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. As of June 30, 2019, the company had 7,062 employees (including 5,051 credit assistants) operating out of 929 branches in 269 districts across 16 states and 1 union territory in India.
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 Any downgrade of credit ratings may increase borrowing costs and constrain access to capital and debt markets and, as a result, 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 Rakesh Jhinjharia Company Secretary Source: Company Website
Top 10 shareholders Sr. No. Holder Name Holding (%) 1 KANGCHENJUNGA LIMITED 45.7 2 PADMAJA GANGIREDDY 16.0 3 VALIANT MAURITIUS PARTNERS FDI LIMITED 6.0 4 JM FINANCIAL INDIA TRUST II-JM FINANCIAL INDIA FUN 5.2 5 ICICI PRUDENTIAL LIFE INSURANCE COMPANY LIMITED 4.8 6 BAJAJ ALLIANZ LIFE INSURANCE COMPANY LTD. 1.5 7 GOLDMAN SACHS INDIA LIMITED 1.4 8 BAJAJ HOLDINGS AND INVESTMENT LTD 1.1 9 VIJAYA SIVARAMI REDDY VENDIDANDI 1.1 10 HELION VENTURE PARTNERS II, LLC 1.0 Source: BSE Filings
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September 05, 2019 12 Know more about our products and services
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