Spandana Sphoorty Financial Limited Sailing steady despite mixed Q1 Viewpoint
Spandana Sphoorty Financial Limited (SSFL) reported mixed results for Q1FY2021, Sector: Banks & Finance as its operations were impacted by the lockdown and subsequent business Result Update disruption, leading to both disbursements and collections getting impacted. Net interest income (NII) came at Rs. 218 crore (in line with estimates), down 3.1% q-o-q, but was up 16.1% y-o-y. SSFL saw only Rs. 49 crore of disbursement during Change Q1FY2021, as against Rs. 8,004 crore done in FY2020, which resulted in near flat AUM of Rs. 6,835 crore q-o-q. Hence, total revenue came at Rs. 319 crore, down View: Positive 24.2% q-o-q. Net interest margin (NIM) declined to 15.5% for Q1FY2021, from 16.2% in FY2020, mainly because of lower disbursements growth as well as drag on CMP: Rs. 557 profitability due to higher liquid assets on the balance sheet. Asset-quality wise, GNPA stood at 0.64% and NNPA stood at 0.12%, which is stable, helped by the Upside potential: 12-15% á moratorium on loans given by the regulator. Collection efficiency picking up on m-o-m basis is a positive indicator. Collection á Upgrade No change â Downgrade efficiency (including moratorium) reached 92% by August 30, 2020. Currently, ~13% of the borrowers are under moratorium (those who have not made any payments); improved from Q4 when most of the borrowers were under moratorium. Company details SSFL has ~4.9% additional cumulative provision of Rs. 218 crore (of which Rs. 89 crore was done in Q1FY2021) for COVID-19 and others. Total ECL provision of 6.1% Market cap: Rs. 3,590 cr against GNPA of 0.64% and standard asset provisioning buffer (excluding GNPA, including COVID-19 buffer) of 5.5% also offer a positive cushion. Well-diversified 52-week high/low: Rs. 1400/403 book with no district more than 1.7% of AUM and no branch more than 0.3% of AUM augur well. Despite receiving moratorium from its lenders, SSFL was able to serve the instalments in entirety as per the original repayment schedule. Factors NSE volume: (No of 0.5 lakh such as well-capitalised balance sheet (53% CRAR), stable ratings, and improving shares) collection efficiencies indicate that SSFL is well placed to ride over medium-term challenges. However, lower disbursals will impact interest and fee income for the BSE code: 542759 medium term. We have fine-tuned our estimates and introduced FY2023 estimates. We maintain our Positive view on the stock and expect 12-15% upside potential on the stock. NSE code: SPANDANA Key positives Sharekhan code: SPANDANA Conservative leverage ratio of 1.16x, with strong capitalisation provides investor comfort. Free float: (No of 2.4 cr Total cumulative provision of Rs. 275 crore, implying total provision cover of 6.1% shares) and COVID-19 and other provision cover of 4.9% is cushion against exigencies Collection efficiency (including moratorium) reached 92% by August 30, 2020, and has improved consistently over the past three months; April-July have done Shareholding (%) Rs. 240 crore disbursement, but have collected Rs. 930 crore, which indicates the book quality and resilience. Promoters 62.6 Key negatives Cost-to-income ratio for Q1FY2021, at 21.5%, has increased from 19.9% in FY2020 FII 11.6 due to slower disbursements. NIM dropped by 100 bps y-o-y to 15.5% in Q1FY2021 from Q1FY2020 mainly due DII 4.7 to lower disbursements due to COVID-19 pandemic. Others 21.1 Our Call SSFL currently trades at ~0.9x its FY2023E book value, which we believe is reasonable considering its strong capital position (CRAR of 53%) and steady operating parameters. Strong management and an efficient (and de-risked) business model Price chart with levers available for generating better returns offer support. We have fine-tuned 1550 our estimates and introduced FY2023 estimates. We maintain our Positive view and 1350 expect 12-15% upside potential on the stock. 1150 Key Risks 950 A prolonged recovery post opening of the lockdown, credit ratings downgrade, and 750 effect on collection efficiency may affect NIM and results of operations. 550 350 19 20 20 20 - - - - Valuation Rs cr Jan Sep Sep May Particulars FY19 FY20 FY21E FY22E FY23E Net interest income 655.0 849.9 768.7 898.7 1,264.0 Price performance Net profit 311.9 351.8 346.8 422.4 674.3 (%) 1m 3m 6m 12m EPS (Rs.) 48.6 54.8 54.0 65.8 105.1 PE (x) 11.5 10.2 10.3 8.5 5.3 Absolute -11.0 2.9 -32.6 -31.2 Book value (Rs./share) 294.6 409.4 455.2 511.2 600.5 P/BV (x) 1.9 1.4 1.2 1.1 0.9 Relative to -13.3 -13.8 -56.1 -35.9 Sensex RoE (%) 16.5 13.4 11.9 12.9 17.5 RoA (%) 6.3 5.4 4.0 3.2 4.4 Sharekhan Research, Bloomberg Source: Company; Sharekhan estimates
September 14, 2020 20 Viewpoint
Key Concall Highlights
Present scenario: Collections etc. are improving, which reflects maturity of the industry and borrowers, helping collections etc. SSFL was able to open all branches by June end.
Collection efficiency: Collection efficiency for July was 75%; for August was 95%; and as of today, it stands at 110% (September 1-September 13). In the past 13 days, it has collected Rs. 300 crore; and from April 1 till date, it has collected Rs. 1,763 crore against Rs. 3,193 crore of demand, translating to ~55% collection efficiency. April-July have Rs. 240 crore disbursed, but has collected Rs. 930 crore, so collections were strong, even when there was very low disbursement. In the last week of September, the collection efficiency is 230% of cash.
Moratorium: Except 13.5% of customers who have fully availed moratorium and have not made any payment, all other borrowers have either paid all or at least two instalments.
Different geography behaving differently: Week wise collection has also improved week-over-week. Last three-week collection efficiency was 130%, Gujarat and Rajasthan were strong, whereas states such as Odisha and Kerala are seeing troubled collections.
Off-balance sheet transactions: Normal course of time would have done higher securitisation; and by October, it expects to do some off-balance sheet transactions.
Maharashtra lagging on collection efficiency: No connection between COVID-19 and collection efficiency. Even today, while incremental rise in cases is there, collection efficiency is unaffected.
Abhiram marketing: This is a third-party organisation, which helps procuring goods from manufacturers and Abhiram keeps the products on Spandana premises. Abhiram is doing multi-brand retail and a company doing that is not allowed to be done by NBFC, and Abhiram is cash and profit neutral company and is used only for supply of products. From April 1, all consumer funding is now in SSFL. No exposures of receivables on Abhiram. Loans on the SSFL books are classified as qualifying assets and not as consumer loans. So, products sold off such as sewing machines can sell 10-15% discount price of income generating products. At any given point of time, only about ~8% of borrowers have Abhiram products.
Technological usage: There is an important person connect that is crucial for MFI business and, hence, SSFL is able to improve technology but sees strong business case for person-to-person contact being important for the MFI business.
Digital collections: Today 100% collections are in cash; in April, there was ~2% digital collections. In Orissa, Jharkhand and Bihar saw smooth digital payment transition in demonetisation since SSFL had a long presence and lower leverage. In contrast, leverage is much higher in states such as Maharashtra, MP, UP and Delhi compared to earlier mentioned states.
Collections against disbursements: By October, it expects 98% collection efficiency for that month’s disbursements. Has Rs. 1,000 crore collection yet to be done. In September, the company is giving a revised schedule, where there is a delay/elongation of loan period.
Attendance levels on centre meetings: Attendance is 65-70% of borrowers as of now. It will take 2-3 months to get back to old 80-85% attendance levels.
Loans tenure: Last 3-4 months, all fresh loans are only monthly loans being disbursements. Going forward, almost all loans will be monthly loans. This is helping MFIs since the contact instances are being lesser.
Top-up loans: SSFL has such a product but <15% clients are availing it. Most loans being disbursed today are being given once loans have been closed.
September 14, 2020 21 Viewpoint
Results Rs cr Particulars Q1FY21 Q1FY20 % YoY Q4FY20 % QoQ Total revenue from operations 319.1 292.2 9.2 421.1 -24.2 Interest Income 303.0 271.7 11.5 290.8 4.2 Commission and Incentive Income 0 4.6 NA 16.7 NA Net gain on fair value changes 15.4 14.7 4.8 108.6 -85.8 Others 0.7 1.2 -44.7 5.1 -87.1 Finance cost 84.7 88.3 -4.1 82.2 3.0 Net Interest Income (NII) 218.3 188.0 16.1 225.2 -3.1 Other Income 0.7 6.7 -90.0 8.8 -92.5 Total Income 319.7 298.9 7.0 430.0 -25.6 Net Total Income 235.0 210.6 11.6 347.7 -32.4 Operating expenses 50.9 49.0 3.8 59.2 -14.1 Employee benefits expense 40.5 39.0 3.8 47.5 -14.6 Depreciation and amortization expense 1.5 1.9 -22.4 2.3 -34.3 Other expenses 8.8 8.0 9.9 9.4 -6.4 Pre-Provisioning Profit 184.1 161.5 14.0 288.5 -36.2 Provisions 111.4 22.9 386.5 187.4 -40.6 PBT 72.7 138.6 -47.5 101.1 -28.0 Tax 18.0 48.1 -62.7 23.6 -23.9 PAT 54.8 90.6 -39.5 77.5 -29.3 Source: Company; Sharekhan Research
September 14, 2020 22 Viewpoint
Outlook SSFL witnessed flat AUM performance during Q1 due to lockdown impact resulting in lower uneven collections and disbursals. However, management indicated that the situation is normalising gradually, and collections are picking up as well. 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 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. Valuation SSFL currently trades at ~0.9x its FY2023E book value, which we believe are reasonable considering its strong capital position (CRAR of 53%) and steady operating parameters. A strong management and an efficient (and de-risked) business model with levers available for generating better returns offer support. We have fine-tuned our estimates and introduced FY2023 estimates. We maintain our Positive view on the stock and expect 12-15% upside potential on the stock.
One year forward PBV chart
3.0
2.4
1.8
1.2
0.6
- 19 20 20 20 20 19 20 20 20 19 19 20 20 ------Jul Jan Jun - Oct Apr Sep Feb Sep Dec Aug Nov Mar May
PBV
Source: Sharekhan Research
Peer Comparison CMP P/BV (x) P/E (x) RoA (%) RoE (%) Particulars Rs/Share FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E SSFL 557 1.2 1.1 8.5 5.3 4.0 3.2 11.9 12.9 Satin Credit Care 65 0.3 0.2 4.0 1.9 1.8 3.1 7.4 16.4 Credit Access 719 3.3 2.8 32.2 16.2 2.4 4.1 10.9 18.7 Grameen Source: Company, Sharekhan research, Bloomberg estimates
September 14, 2020 23 Viewpoint
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; however, due to the pandemic, recently it has seen a slowing down of its operations and disbursements. However, the period has resulted in improving collections even as disbursals were much lower, indicating book quality and resilience. 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: Bloomberg
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.
September 14, 2020 24 Know more about our products and services
For Private Circulation only
Disclaimer: This document has been prepared by Sharekhan Ltd. (SHAREKHAN) and is intended for use only by the person or entity to which it is addressed to. This Document may contain confidential and/or privileged material and is not for any type of circulation and any review, retransmission, or any other use is strictly prohibited. This Document is subject to changes without prior notice. This document does not constitute an offer to sell or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Though disseminated to all customers who are due to receive the same, not all customers may receive this report at the same time. SHAREKHAN will not treat recipients as customers by virtue of their receiving this report. The information contained herein is obtained from publicly available data or other sources believed to be reliable and SHAREKHAN has not independently verified the accuracy and completeness of the said data and hence it should not be relied upon as such. While we would endeavour to update the information herein on reasonable basis, SHAREKHAN, its subsidiaries and associated companies, their directors and employees (“SHAREKHAN and affiliates”) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance, or other reasons that may prevent SHAREKHAN and affiliates from doing so. This document is prepared for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Recipients of this report should also be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. We do not undertake to advise you as to any change of our views. Affiliates of Sharekhan may have issued other reports that are inconsistent with and reach different conclusions from the information presented in this report. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject SHAREKHAN and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. The analyst certifies that the analyst has not dealt or traded directly or indirectly in securities of the company and that all of the views expressed in this document accurately reflect his or her personal views about the subject company or companies and its or their securities and do not necessarily reflect those of SHAREKHAN. The analyst further certifies that neither he or its associates or his relatives has any direct or indirect financial interest nor have actual or beneficial ownership of 1% or more in the securities of the company at the end of the month immediately preceding the date of publication of the research report nor have any material conflict of interest nor has served as officer, director or employee or engaged in market making activity of the company. Further, the analyst has also not been a part of the team which has managed or co-managed the public offerings of the company and no part of the analyst’s compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this document. Sharekhan Limited or its associates or analysts have not received any compensation for investment banking, merchant banking, brokerage services or any compensation or other benefits from the subject company or from third party in the past twelve months in connection with the research report. Either SHAREKHAN or its affiliates or its directors or employees / representatives / clients or their relatives may have position(s), make market, act as principal or engage in transactions of purchase or sell of securities, from time to time or may be materially interested in any of the securities or related securities referred to in this report and they may have used the information set forth herein before publication. SHAREKHAN may from time to time solicit from, or perform investment banking, or other services for, any company mentioned herein. Without limiting any of the foregoing, in no event shall SHAREKHAN, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind.
Compliance Officer: Mr. Joby John Meledan; Tel: 022-61150000; email id: [email protected]; For any queries or grievances kindly email [email protected] or contact: [email protected]
Registered Office: Sharekhan Limited, 10th Floor, Beta Building, Lodha iThink Techno Campus, Off. JVLR, Opp. Kanjurmarg Railway Station, Kanjurmarg (East), Mumbai – 400042, Maharashtra. Tel: 022 - 61150000. Sharekhan Ltd.: SEBI Regn. Nos.: BSE / NSE / MSEI (CASH / F&O / CD) / MCX - Commodity: INZ000171337; DP: NSDL/CDSL-IN-DP-365-2018; PMS: INP000005786; Mutual Fund: ARN 20669; Research Analyst: INH000006183;
Disclaimer: Client should read the Risk Disclosure Document issued by SEBI & relevant exchanges and the T&C on www.sharekhan.com; Investment in securities market are subject to market risks, read all the related documents carefully before investing.